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The Next Move in the Baltic Dry Index Will Be Telling

Conclusion:  While exogenous factors have driven the BDI index lower, the next move should be driven by growth, either an acceleration or deceleration, with the BDI likely being a leading indicator. So, keep your Hedgeyes on it.


We recently noted this, but wanted to highlight the point again.  The Baltic Dry Index is down to an 18-month low.  In fact, it most recently dropped 4.5% to 1693, taking out the July 2010 low.  The largest BDI vessels, Capesize, led the way declining more than 6%.


As we wrote this summer, the Baltic Dry Index is very a relevant global macro data point.  As was recently written in Slate, “Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.”  Further, “Because it provides an assessment of the price of moving the major raw materials by sea, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."


We actually looked at the correlation between the Baltic Dry Index and global growth on an annual basis going back to 1993 and didn’t find a strong correlation between the two.  This is primarily because while growth and demand for goods clearly and logically will lead to increased demand for shipping, there are other factors that drive the price of shipping contracts.  Specifically, the two key factors that drive the price of shipping contracts: the supply and demand of ships. 


The supply factor is obviously driven by the building of new ships (and likely to some extent the availability of financing and reasonable terms).  Currently, oversupply is an issue.  In fact, last year the supply of ships grew 17%, while demand grew only 11%.  This is widely known news though, and has likely been discounted into rates for the past couple of quarters.


Conversely, the demand side of the equation is driven by the economic activity and general demand for dry bulk goods.   Currently, there is an exogenous shock occurring on the demand side of the equation due to massive flooding in Australia.  According to news reports, floods covering areas the size of France and Germany in Australia have damaged crops and led to a shutdown of mines.  Due to the exogenous events, many Australia miners have implemented force majeure and cancelled contracts.  As a result, there are 66 dry-bulk carriers idle near Brisbane.  This too is widely disseminated news and likely priced into rates.


Clearly, with these exogenous events leading to a more than 45% decline in the BDI index, if global growth is going to accelerate in 2011, or even occur at high rates, we should see a pickup in the BDI. Keep your Hedgeyes on it.


Daryl G. Jones

Managing Director


The Next Move in the Baltic Dry Index Will Be Telling - bdi 1

It's Officially Unofficial Earnings Season

We’re officially in the “unofficial” earnings season for retailers with both Sales Day and the annual ICR Exchange set to take place over the next several days. History paints an interesting picture (and precedent) of pre-announcements over this two week period. As such, we’ve updated our matrix of companies with a history of pre-announcing at or around the annual pilgrimage to ICR. Those with positive releases are highlighted in green while those with less positive news are highlighted in red. This year should be no different than in years past, where we are likely to see 10-15 companies update guidance in the coming days. If history tells us anything, PVH seems as sure as any to report “unofficial” results early next week.


It's Officially Unofficial Earnings Season - icr pre announcements


Eric Levine


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Staring at The Sun

This note was originally published at 8am on January 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum


As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.


Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.


No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.


As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.


In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.


Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.


As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.


Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.


While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.


On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.


In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.


In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.


My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staring at The Sun - sun

Retail: Exhausting Positive Momentum

As we do every morning here at Hedgeye, we gather in our locker room (some people call it a conference room) pre-game and both discuss and debate key issues in our respective industries and contextualize them vis/vis changes in the global inter-connected web that we call Macro. 


Yesterday, we published a note on earnings revisions in retail, and our view that such revisions are likely to go negative sooner than most people think (see those charts below). Consider the timeline...

  1. We had Holiday sales, which most would agree came in ahead of expectations. 
  2. But remember folks... this is a 100% 'top-line' news item.  What we did not hear is the level of promotional activity needed to ensure such sales. 
  3. We'll start to get a hint of that this coming Thursday. It won't be a disaster by any means. But we look at everything on the margin at Hedgeye, and in that vein, we'll get more commentary as to inventories and Gross Margins on that $400 cashmere sweater you got from your S/O.
  4. Then just a few days later, we have the ICR conference in SoCal. Yes, this is where most companies that matter in small/mid cap retail and restaurants converge in a flock of sidebar conversations with the sell-side, buy side, bankers, and yes even with each other. While major press releases on the quarter are not likely to flow, you can bet your bottom dollar that management teams will spill the beans on the 'tone of business' in their double-secret one on ones.  
  5. Again, I'm not saying that these will all be horrible conversations. But simply that the chance they are BETTER than what was already dished out over the prior 6-weeks is exceedingly low.
  6. Also, one key component to our 'Cannonball' theme, is that it will be nearly impossible for any of the companies present at the conference to accurately articulate how their competitors will react to a clear reversal of what has been a 3rd standard deviation positive influx of margin dollars in 2010. Remember folks, 95%+ of product in this industry is sold at the end of each season. The steepness of the curve to get all the 'stuff' sold in environments like this tends to change over VERY short durations.  Things might seem 'ok' to a retailer at ICR -- at least good enough to keep a smile on their face. But that's not to say that there can't be meaningful downward revisions as the year progresses.

Let's take this full circle as it relates to how this note started.


Just before Christmas (the 23rd, to be exact) Keith made a statement about Gold, which rings true for retail today. He had been a bull on gold, and kept being asked when he was going to buy it back. But the reality is that he was more inclined to short it. Please check out his note below. Also, his levels on the RTH suggests downside/upside of 5 to 1.


See you out in Cali.



Retail: Exhausting Positive Momentum - 1 4 11 Note RTH MVR


The Golden Haze: Gold Levels, Refreshed
12/23/2010 01:51 PM



While we don’t currently have a position in Gold (GLD), we’ve been very active in foreign currency as of late. We did make the call to sell our entire long Gold position in both the Hedgeye Portfolio and Asset Allocation models on December the 6th. I’ve been following up with notes on why (Early Look note from December 17th, “The Golden Haze”) since.


The question in my mind right now isn’t where do I buy gold back? It’s where do I short it?


Gold is competing against rising bond yields. Gold is also fighting the Fed’s policy to inflate. Gold is always a lot of different things to a lot of different people, but the most important thing about gold is its last price.


If gold closes below $1379/oz this week, this will be the 3rd consecutive week of gold closing down on a week-over-week basis. That would be bad for the immediate-term price momentum in gold but, by our risk management score card, its already broken from an immediate-term TRADE perspective anyway.


In the chart below we show the refreshed immediate-term TRADE line of resistance for gold up at $1399. There’s significant resistance between $1, so you can also use that as a range of resistance.


There’s an immediate-term TRADE line of support down at $1368, but it’s a weak one. The more important line to manage risk towards is the mean reversion move down to gold’s intermediate-term TREND line of $1313.


Last year I gave my Dad gold bullion coins for Christmas – this year I hope he doesn’t give them back!





Keith R. McCullough
Chief Executive Officer


Retail: Exhausting Positive Momentum - Gold 1 4 11




SBUX’s battle with Kraft to gain control of its distribution is an important milestone for the company as it can gain control of a very important sales channel for the company, which will provide new avenues for growth. 


In my view, the recent article on Bloomberg regarding Starbucks, Kraft and the single serve segment misses the most important point.  The article rightly points out that the terms of the current deal with Kraft prohibit Starbucks from putting its coffee in the Keurig Home Brewer.  However, I believe Starbucks’ strategy is not focused on that area.  Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine. 


The best analogy I can use to describe what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.  By the end of FY2011, I believe we will be hearing that Starbucks is testing a Starbucks branded single serve coffee with new technology that is far superior that what is currently available.  The machine will likely be manufactured by a third party and sold in Starbucks stores, supermarkets and club stores.  For example, the company is working closely with Nuova Simonelli on a number of different types of machines.


I see Starbucks as posing a threat to Keurig’s 71% market share, not a benefit.  There is no doubt that growth of the single serve segment has cut into Starbucks’ grocery sales, but buying Green Mountain or aligning themselves to the Keurig brewer is not going to happen.  Starbucks has already made the mistake once of leaving control of the brand in the hands of Kraft, there are not going to make that same mistake with Keurig or Green Mountain. 


The recent success of VIA is a great example of Starbucks controlling and putting its marketing muscle behind it’s the instant single-serve product.  The introduction of VIA was about entering the “instant” coffee market and not the “single serve” segment.


In the short-term, the diatribes between Kraft and Starbucks will continue to fly around and the rumors about Green Mountain will continue.  Once Starbucks does get control of its distribution system, the opportunities for Starbucks will be made clearer.  At that time it will also make more sense as to why Starbucks should buy Peet’s Coffee & Tea. 


Howard Penney

Managing Director

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%