Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Position: We are long livestock via the etf COW in the Hedgeye Virtual Portfolio.
This morning Keith went long the etf COW at $31.02 as “cattle correlations and supplies look better than most things in the commodities complex.”
The largest (63%) component of COW is live cattle futures. Cattle futures and wholesale beef prices have launched higher in recent months as a combination of drought and high feed costs has led to the smallest calf crop in more than fifty years, with a smaller crop expected in 2012 (Cattle Network). This result has had an obvious impact on beef production: the USDA reported that production in November was 25,070 MM lbs – down 2% YoY and the lowest since 2004.
While domestic consumption comprises 80% of total demand for US-produced beef (Cattle Network), strength in the export market has been a tailwind to price, which shows no sign of abating as emerging market economies increase their per capita beef consumption. The US exported 2,775 MM lbs of beef in November, +22% YoY.
The minority component (37%) in the COW etf is lean hog futures; both cattle and hogs are flashing positive correlations with the US Dollar on the immediate-term TRADE and intermediate-term TREND durations. With the USD in a Bullish Formation we are encouraged by the positive relationship developing between the dollar and livestock.
Correlations with USD Index
From a quantitative view, COW is bullish on the TREND duration with support at $30.22; and the underlying live cattle futures contract is entering a seasonally bullish season.