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Aging Cycles

This note was originally published at 8am on May 13, 2015 for Hedgeye subscribers.

“Growing old is not upsetting; being perceived as old is.”

-Kenny Rogers

 

It’s hard to believe that legendary singer-songwriter, Kenny Rogers, is 76 years old. I can still remember my Dad playing his 8-tracks in our pickup-truck on the way to a day on the worksite.

 

I’m 40 years old now, and I’m pretty sure that if my old man told me to get up and dig 18 post holes tomorrow morning I’d pull every muscle in my back. There are millions of hard working men my age who can still bang that out, no problem.

 

While I agree that age is an attitude, there’s one component to it that we can’t control: #time. I’ve been to Chicago, NYC, CT, and Boston in the last 48 hours – and that’s all I’ve been talking about. This economic cycle is running out of time.

 

Aging Cycles - z time

 

Back to the Global Macro Grind

 

I’ve spent a lot of time on the road, debating with investors and … in the words of one of my favorite Rogers songs (The Gambler) “readin’ people’s faces… knowin’ what the cards were, by the way they held their eyes…”

 

And, while I am sure I mis-read plenty of people, I don’t think that’s one of my weaknesses. After Darius and I slap our current 99 slide-deck on the table, the investor can see all of our aces – and I’m not bad at hearing what they say back.

 

The best cards the buy-side plays on us are bottom-up ones. Almost every great stock picker has an ability to communicate a corrolary from the perspective of a company they either just talked to and/or are invested in.

 

The least impressive cards they show us are in quantifying what that means within the macro cycle. In fact, many aren’t focused on cyclical risk management, and by their investing nature don’t consider a business being “good” as bad.

 

While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:

 

  1. When #LateCycle macro indicators go from good to less good, that’s bad
  2. When #EarlyCycle macro indicators go from bad to less bad, that’s good

 

In other words, if a company’s revenues and earnings have been accelerating to their all-time highs, then start to slow, sequentially – that’s less good. And it will likely go from good to bad if the macro cycle turns, at the same time.

 

But, but, business is good and it’s a “great company.” Roger that. And only the super-duper-great ones can trump cyclical slow-downs. The time to buy a great company like Starbucks (SBUX) was in 2009, at $5.76/share (split adjusted). Not now.

 

By the time a company tells you things are slowing, markets have usually front-run them. This is called discounting the future, and most of you who have been at this for a while get that.

 

In Boston today, I’ll be focusing on the #LateCycle data showing things like:

 

  1. US Corporate Profits as a % of GDP being “past peak”
  2. How the beloved “Earnings” consensus trumpets peak #LateCycle too
  3. And how SP500 Operating Margins look, in context (hint: rolling off peak)

 

You did not want to be the bottom-up investor who missed the peak-and-rolls off the 2000 or 2007 peaks (in either margins or the earnings that manifested from them).  

 

You don’t want to be assigning peak multiples to cyclical companies whose revenue growth rates and margins have peaked and rolled either (hint: the stock gets more “expensive” on the way down, when EPS get cut).

 

Unless, of course, it’s “different this time”… (which people pitch to me all the time). If that’s your bottom-up call, just know that that perception is as timeless as economic cycles themselves.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.91-2.32%

SPX 2079-2117
RUT 1209-1244
VIX 13.03-15.79
USD 94.09-95.89
EUR/USD 1.09-1.13
Oil (WTI) 55.62-61.12

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Aging Cycles - z 05.13.15 chart


May 27, 2015

May 27, 2015 - Slide1

 

BULLISH TRENDS

May 27, 2015 - Slide2

May 27, 2015 - Slide3

May 27, 2015 - Slide4

May 27, 2015 - Slide5

May 27, 2015 - Slide6

May 27, 2015 - Slide7 

BEARISH TRENDS

 

May 27, 2015 - Slide8

May 27, 2015 - Slide9

May 27, 2015 - Slide10

 


Avian Flu Continues to Spread, Causing Major Food Manufacturers and Restaurants to Look Elsewhere

Takeaway: USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds.

AVIAN FLU UPDATE

As of the last detection period on 5/21/15, the USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds. Iowa, the largest egg producing state is also the hardest hit by the flu with roughly 27 million birds affected, 5.7 million at one farm alone. This amount of loss has started to affect egg prices, and manufacturers are starting to rethink their supply chain and ingredient sourcing.

 

The big question is, how long will this last? The U.S. EPA sets strict guidelines on the disposal of infected birds, and states that it will take roughly 3 months from disposal to cleaning the facility. Then the birds themselves take 4-5 months to get to size at which they begin to lay eggs.  So, some of this facilities won’t be able to get back in full production mode for at least 7 months.  I would say that is an optimistic timetable given it doesn’t take into account the risk of infection re-occurring.  

 

ALTERNATIVE INGREDIENTS

Hampton Creek a company that focuses on plant-based egg alternatives is supplying General Mills (GIS) and many other food suppliers with their powdered egg substitute. A product Josh Tetrick, CEO of Hampton Creek claims is cheaper, healthier and far better for the environment than traditional eggs. Josh was recently quoted in saying that about a dozen major companies have contacted him trying to get their hands on Hampton Creek products.

 

Archer Daniels Midland (ADM) has also received many inquires about its plant-based egg substitute.

 

This is not an easy switch for food manufacturers, as they switch ingredients it requires testing, recipe changes and label changes, all of which take time and cost money.

 

INTERNATIONAL SUPPLY

U.S. based companies have also started to look abroad to meet their egg needs. The strong dollar is making it possible for U.S. based manufacturers to look over to Europe to find alternatives. This has never been an option before given how efficient the U.S. is at making eggs.

 

WHAT ARE COMPANIES SAYING

One of the biggest winners in all of this is Hampton Creek, who's product line began with egg-free mayonnaise and has begun to branch out into egg free baked goods and various mixes. Josh Tetrick CEO stated, “We are prepared for this moment…and we are going to take advantage of it…this is a moment to make this dang food system better.”

 

As we previously reported, Post Holdings (POST) has stated, “…the ongoing AI outbreak constitutes a force majeure event in respect to its Michael Foods egg business…” The flu will be at least a $20 million impact to them, and we expect this number to rise as a large number of company owned hens were infected in Nebraska after this number was reported.

 

Spokesperson for IHOP a unit of DineEquity (DIN) stated, “At present, we have not had any issues regarding the availability of eggs for our restaurants, but like the rest of the industry, we continue to monitor this situation closely.”

 

McDonald’s (MCD) spokeswoman spoke of her company’s preparedness, “we proactively developed contingent supply plans, and we do not anticipate an impact in our ability to supply eggs to our restaurants and serve our customers.”

 

Dunkin’ Brands (DNKN) said it will let franchisees decide whether to swallow cost increases or pass them on to customers.

 

THIS TREND HAS IMPLICATIONS FOR THE RESTAURANT INDUSTRY'S BREAKFAST SALES

Avian Flu Continues to Spread, Causing Major Food Manufacturers and Restaurants to Look Elsewhere  - Avian Flu Chart 2

Source: Restaurant Research


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Avian Flu Continues to Spread, Causing Major Food Manufacturers to Look Elsewhere

Takeaway: USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds.

AVIAN FLU UPDATE

As of the last detection period on 5/21/15, the USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds. Iowa, the largest egg producing state is also the hardest hit by the flu with roughly 27 million birds affected, 5.7 million at one farm alone. This amount of loss has started to affect egg prices, and manufacturers are starting to rethink their supply chain and ingredient sourcing.

 

The big question is, how long will this last? The U.S. EPA sets strict guidelines on the disposal of infected birds, and states that it will take roughly 3 months from disposal to cleaning the facility. Then the birds themselves take 4-5 months to get to size at which they begin to lay eggs.  So, some of this facilities won’t be able to get back in full production mode for at least 7 months.  I would say that is an optimistic timetable given it doesn’t take into account the risk of infection re-occurring.  

 

ALTERNATIVE INGREDIENTS

Hampton Creek a company that focuses on plant-based egg alternatives is supplying General Mills (GIS) and many other food suppliers with their powdered egg substitute. A product Josh Tetrick, CEO of Hampton Creek claims is cheaper, healthier and far better for the environment than traditional eggs. Josh was recently quoted in saying that about a dozen major companies have contacted him trying to get their hands on Hampton Creek products.

 

Archer Daniels Midland (ADM) has also received many inquires about its plant-based egg substitute.

 

This is not an easy switch for food manufacturers, as they switch ingredients it requires testing, recipe changes and label changes, all of which take time and cost money.

 

INTERNATIONAL SUPPLY

U.S. based companies have also started to look abroad to meet their egg needs. The strong dollar is making it possible for U.S. based manufacturers to look over to Europe to find alternatives. This has never been an option before given how efficient the U.S. is at making eggs.

 

WHAT ARE COMPANIES SAYING

One of the biggest winners in all of this is Hampton Creek, who's product line began with egg-free mayonnaise and has begun to branch out into egg free baked goods and various mixes. Josh Tetrick CEO stated, “We are prepared for this moment…and we are going to take advantage of it…this is a moment to make this dang food system better.”

 

As we previously reported, Post Holdings (POST) has stated, “…the ongoing AI outbreak constitutes a force majeure event in respect to its Michael Foods egg business…” The flu will be at least a $20 million impact to them, and we expect this number to rise as a large number of company owned hens were infected in Nebraska after this number was reported.

 

Spokesperson for IHOP a unit of DineEquity (DIN) stated, “At present, we have not had any issues regarding the availability of eggs for our restaurants, but like the rest of the industry, we continue to monitor this situation closely.”

 

McDonald’s (MCD) spokeswoman spoke of her company’s preparedness, “we proactively developed contingent supply plans, and we do not anticipate an impact in our ability to supply eggs to our restaurants and serve our customers.”

 

Dunkin’ Brands (DNKN) said it will let franchisees decide whether to swallow cost increases or pass them on to customers.

 



Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb)

*  *  *  *  *  *  *

The big move overnight in Japan is taking something that hasn’t been part of the 2015 macro narrative right back into the flow. Yen down -1.1% testing fresh YTD lows vs. USD at 122.87.

 

The Nikkei? It absolutely loves that, closing at another YTD high of 20,437. It's up +18% YTD.

Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb) - Yen cartoon 03.04.2015

On a related note, the U.S. Dollar… It was up +3.1% last week. That took the CRB Index down -2.5% as the 30-day correlation remains quite high at -0.90… A #StrongDollar morning here keeps the commodity correction in play, with Gold and Oil both pulling back to support levels that I would buy/cover ahead of Friday’s U.S. GDP bomb.

 

Dollars, Burning Yen and Commodity Correlation (Beware of GDP Bomb) - z c4

 

Editor's Note: This is an excerpt from Hedgeye morning research. Click here for more info on how you can begin harnessing our work for your gain.


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