On Thursday, August 21st, the Hedgeye Macro Team hosted a call with Judith Ganes-Chase, founder and president of J. Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001. A replay link to the call is included below with a brief summary:
Judy acknowledged that Brazil has a cyclical pattern of coffee production (one year up, one year down). However the scale of Brazil’s shortfall in the coming years will be unprecedented: She emphasized that this is the first time we are looking at a two-year production deficit.
Judy proceeded to outline three unusual weather scenarios that occurred earlier this year:
- Late Winter Frost: Brazilian winter (November-December) mild frost lowered crop quality
- Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
- Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest
- In her prediction prices could easily move much higher: Brazil will not produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee.
- Consensus expected 53-64 million bags of Arabica to be produced, but less than 46 million bags will come out of Brazil this year.
- Dire outlook into next year: Next year aggregate demand is expected to be around 34 million bags. However due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.
- Nobody to pick-up the slack: Not enough capacity from other countries to cover the expected crop shortage of Arabica coffee in Brazil.
- How High Can Prices Go?: $2.75 to above $4.00/lb. There will likely be a spike in prices for Arabica, and a higher basis for other grades of coffee. We can expect some read-through after the assessment of the third or fourth bloom in the coming weeks.
*h/t to The Macro Team's Ben Ryan for his work on this topic.
Feel free to reach out with additional questions.
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Takeaway: Retail sales reaccelerate when it matters. BBY crushes – but when does earnings quality matter again? WMT investing to avoid becoming TGT.
EVENTS TO WATCH
CHS - Earnings Call: 8:30am
TIF - Earnings Call: 8:30am
BWS - Earnings Call: 9:00am
GES - Earnings Call: 4:30pm
WSM - Earnings Call: 5:00pm
ANF - Earnings Call: 8:30am
DG - Earnings Call: 10:00am
Takeaway: Retail trends remain strong as the retailers are solidly into one of the most important seasonal spending ramps of the year for Consumers. We expected a pop in the numbers this week due to easy compares from last year, but even the 2-year run rate accelerated on the margin. Even if the underlying strength ebbs, the comparisons look favorable through October.
DSW - 2Q14 Earnings
BBY - 2Q15 Earnings
Another name that annihilated earnings, but with really bad earnings quality. BBY earned $0.44, crushing the Street's $0.31 estimate. But did so by way of comping -2.7% -- 50bp below the Street's forecast. Gross margins missed as well, but the company made it all up, and then some, on SG&A. Inventories also took a turn for the worse. On top of all that, BBY is stepping up investment levels to stem the weakness it is seeing in traffic in its stores. Does not sounds like a model we're comfortable we're investing in. We understand that there's more at play here than the basic P&L and balance sheet -- as the stock has outperformed the S&P by a factor of six since January 2013, and 2.5x for 2014 to-date. But increased investment on weaker gross margins and eroding working capital turns just looks bearish from where we sit.
WMT, TGT - For Smarter Security, a Smarter Walmart MasterCard
- "If you have a Walmart MasterCard, you can enjoy even greater security through a new chip-enabled card coming to your mailbox in the next few weeks."
- "Walmart is among the first retailers to implement chip technology as a more secure payment means for cardholders. Sam’s Club also introduced a chip-enabled MasterCard in June, and both cards prompt customers not to swipe – but to insert and briefly leave the card in the payment terminal, so the card’s embedded chip can be accessed."
- "Another new aspect of the Walmart co-branded MasterCard is savings. Cardholders will enjoy $5 back on every $500 they spend. They’ll also save 5 cents per gallon of gas at participating Walmart gas stations and 15 cents during Walmart’s 'Great Gas Rollback' promotion that’s running now through Sept. 8."
Takeaway: Not a single dollar WalMart spends on data security is wasted. A data breach at WMT would be a massive blow -- and would probably be the best thing that could happen to Target. Of course, one could argue that if there are data integrity issues at a company whose reach is as great as WMT's, then it could have a far-reaching impact on consumers' willingness to share any information whatsoever with any retailer.
AMZN - Amazon.com to Acquire Twitch
- "Amazon.com, Inc. announced that it has reached an agreement to acquire Twitch Interactive, Inc., the leading live video platform for gamers. In July, more than 55 million unique visitors viewed more than 15 billion minutes of content on Twitch produced by more than 1 million broadcasters, including individual gamers, pro players, publishers, developers, media outlets, conventions and stadium-filling esports organizations."
LUZ - Luxottica Group Board to Discuss Management Structure
- "Luxottica Group SpA is to hold a board meeting on Sept. 1 to discuss its management structure and Guerra’s position, followed by a conference call for analysts and investors. While not commenting on the rumors last week, the giant Italian eyewear manufacturer said that president Leonardo Del Vecchio and Guerra 'had for some time been discussing future strategies and managerial assets of the group.'"
LVMH - LVMH Said Eyeing Proenza Schouler Stake
- "According to market sources, LVMH Moët Hennessy Louis Vuitton has held talks about acquiring a stake in the New York-based fashion house. It’s understood discussions involve the 40 percent stake of Proenza Schouler that Andrew Rosen, John Howard and other investors jointly acquired in 2011 from Valentino Fashion Group."
One Stop stores to launch beacon service
- "Customers at Tesco-owned convenience stores will soon find their smartphones offering them bespoke discounts, in the first UK-wide rollout of Apple’s beacon technology."
- "A national British commercial campaign using the US technology group’s in-store beacon system will be launched next week by magazine group IPC Media in 740 One Stop stores. Thousands of other outlets are expected to be involved over the next year."
Hudson's Bay Company Announces Appointment of John Caplice to Senior Vice President, Treasury and Investor Relations
- "Hudson's Bay Company announced today the appointment of John Caplice to the position of Senior Vice President, Treasury and Investor Relations, effective September 2nd, 2014. Lucas Evans has been appointed Senior Vice President, Corporate Development, HBC, reporting to the Office of the Chairman."
Onestop to Run E-commerce for Juicy Couture's Web Site
- "Authentic Brands Group has outsourced its Juicy Couture digital e-commerce platform to Onestop Internet."
- "Onestop, backed by venture capital firms Bessemer Venture Partners and Fung Capital USA, works with 45 brands."
EXPR - Express launches mobile promotion with GQ
- "Express Inc. will be using Rich Media Messaging technology from Iris Mobile to drive the fashion retailer’s seasonal “Back-to-Business” sweepstakes campaign with GQ Magazine. A combination of both a participant-based sweepstakes and a voting-based contest, this campaign will award one emerging startup entrepreneur with a grant from Express based on public votes."
TODAY’S S&P 500 SET-UP – August 26, 2014
As we look at today's setup for the S&P 500, the range is 35 points or 1.15% downside to 1975 and 0.60% upside to 2010.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.88 from 1.88
- VIX closed at 11.7 1 day percent change of 2.01%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:30am: Durable Goods, July, est. 8% (pr 0.7%, rev 1.7%)
- 8:55am: Redbook weekly sales
- 9am: FHFA House Price Index m/m, June, est. 0.3% (prior 0.4%)
- 9am: S&P/Case Shiller 20-City m/m SA, June, est. 0.0% (pr -0.31%)
- 10am: Consumer Confidence Index, Aug., est. 89 (prior 90.9)
- 10am: Richmond Fed Manufacturing Index, Aug., est. 6 (prior 7)
- 11:30am: U.S. to sell $50b 4W bills
- 1:00pm: U.S. to sell $29b 2Y notes
- 4:30pm: API weekly oil inventories
- President Obama at American Legion convention, Charlotte, N.C.
- Senate, House out on August recess
- U.S. ELECTION WRAP: Primaries in Ariz., Fla.; Curtis Diary
WHAT TO WATCH:
- Buffett said to help finance Burger King’s tax-saving deal
- Ackman gains 30% in 2014 with Burger King, Herbalife wagers
- Muni assets said to be excluded for U.S. bank liquidity rule
- GM’s Chevrolet, Buick achieve sole gains in annual auto survey
- GMO crop curbs overturned by judge in Hawaii: WSJ
- Telefonica board said to discuss improving GVT bid this week
- U.S. surveillance planes fly over Syria: AP sources
- Putin set to meet Poroshenko as Ukraine border tension grows
- Bank of Montreal (BMO CN) 7am, C$1.66 - Preview
- Bank of Nova Scotia (BNS CN) 6am, C$1.41 - Preview
- Best Buy (BBY) 7am, $0.31 - Preview
- DSW (DSW) 7am, $0.32
- Movado (MOV) 7am, $0.54
- Sanderson Farms (SAFM) 6:30am, $3.80
- Tech Data (TECD) 6am, $0.77
- Analog Devices (ADI) 4:04pm, $0.63
- Aruba Networks (ARUN) 4:05pm, $0.23
- Bob Evans Farms (BOBE) 4:01pm, $0.10
- Heico (HEI) 4:23pm, $0.44
- Nimble Storage (NMBL) 4:05pm, $(0.16)
- Smith & Wesson (SWHC) 4:05pm, $0.25
- Solera (SLH) 4:08pm, $0.80
- TiVo (TIVO) 4:01pm, $0.07
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Hedge Fund Citrine Picks Zinc, Nickel as Best Base Metal Wagers
- Iron Ore Risks Extending Drop as Price Falls to Lowest Since ‘12
- Brazil Coffee Output Set for Worst Slump Since 1965: Commodities
- Gold Climbs Most in Almost Three Weeks as Decline Spurs Buying
- WTI Trades Near Seven-Month Low Before Supply Data; Brent Steady
- China’s 2014 Copper Imports to Sustain Last Yr’s Pace: Antaike
- Sanderson Profit Disappoints After It Misses Poultry Forecast
- Turkey to Belarus Gold Reserves Said by IMF to Decrease in July
- Raw Sugar Imports Rising 29% in Indonesia as Drinks Demand Booms
- Soybean Futures Drop for Second Day to Lowest Since Sept. 2010
- China Requires U.S. Govt GMO Certification for DDGS: Cngrain.com
- Corn Futures Seen Extending Decline to Year-End, UBS Says
- Wells Fargo Sees Energy Rebound as Crude, Gas Weakness Temporary
- Billionaires Lose Wealth as India Mine Permits Ruled Illegal
- Nexen’s Buzzard Field Said Not to Have Restarted as Planned
The Hedgeye Macro Team
Client Talking Points
The total U.S. Equity Market Volume was -7% and -35% vs its 3 month and year-to-date averages yesterday, but the consensus short “hedge” (SPY, which we have not recommended) hit all-time highs on that as the Russell got back to breakeven for the year-to-date.
Now that we have the centrally planned bounce to lower-highs out of the way, the DAX is down -0.3% this morning after failing @Hedgeye TREND resistance of 9642 – we’re not buying that bounce; European economic data continues to slow.
Boring, yes – but staying long the Long Bond (TLT +16% year-to-date vs Russell 2000 flat) with #Q3Slowing in the U.S. remains our Best Macro Idea. Both the Markit PMI for AUG (58.5 vs 60.6 last) and JUL New Home Sales slowed yesterday.
|FIXED INCOME||24%||INTL CURRENCIES||4%|
Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
The level of activism in the restaurant industry has never been more rampant. In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers. Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Three for the Road
TWEET OF THE DAY
On May 13 we identified 300 stores that $JCP needs to close - backed by detailed analysis.
JPM this week says 'JCP should close 300 stores'.
QUOTE OF THE DAY
It’s better to look ahead and prepare than to look back and regret.
-Jackie Joyner Kersee
STAT OF THE DAY
Coffee prices up another +0.6% yesterday to +65.1% year-to-date.
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