The Macro Show Replay with Energy Analyst Joe McMonigle | April 18, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.

Birds-Eye View: Key Call-Outs (AGU, CF, MON)

We presented the bear case on Agrium last Wednesday at 11:00 a.m. with a blackbook and conference call. To summarize, we believe the retail business is misunderstood and subject to short-termism from an analysis perspective. In our view operating margins in the retail business, which have been stable post-recession, will contract meaningfully as the sector continues its long cyclical downturn. Ping us back directly for the deck or related inquiry.

Aside from our core thesis, below we outline some important catalysts to watch from a global trade perspective that will have implications for the competitiveness and profitability of U.S. farmers:

  • EM FX Move: After a sharp EM currency move for the Brazilian Real and Argentine Peso, the currencies of the two largest soybean exporting countries have appreciated meaningfully against the USD since Jan-Feb lows, which should have implications for the profitability and competiveness of Argentine exports as they are now selling a record stockpile onto global markets in volumes not seen since 2012. Robust Chinese demand and a bout of rainy weather in Argentina is also helping support prices and bullish speculation on the CME.   
  • Brazil Factor: In Brazil, there is speculation on the direction of monetary policy and currency in particular should Rouseff be ousted (speculation for more hawkish policy from a new regime). With the lower house of congress voting to move forward with impeachment proceedings over the weekend, this appears more likely. Forward sales of commodities are reportedly being curbed significantly, and for soybeans specifically, this could shift some incremental buying to U.S. Markets: LINK
  • Long Bias in Soybeans: Aggregating net futures and options positioning from the CFTC shows a soybean market leaning +2.4x and +1.9x on a 6-mth and TTM z-score basis.
  • Fertilizer Rates: With muted application rates in the fall window, fertilizer prices and regional spreads have moved higher off the Jan. lows (urea and ammonia), with a jump in the Cornbelt/NOLA ammonia spread. Although volumes should come in strong Y/Y given the muted fall application season, prices are still down considerably Y/Y. As the last chart shows, we believe there is quite a bit of margin to lose on pricing after an unprecedented increase in money spent on crop input expenditures over the last several years. 

Birds-Eye View: Key Call-Outs (AGU, CF, MON) - FX


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Argentine Ending Stocks


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Argentine Exports


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - CFTC Position Monitor


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Cornbelt NOLA ammonia spread


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Ferts Expenses



REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Dale: ‘What Are You Buying’ (4/15/2016)



In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses the recent reflation rally and provides critical context about why we remain bearish. 


2. LinkedIn: ‘Proceed With Caution’ | $LNKD (4/13/2016)



Hedgeye Internet & Media analyst Hesham Shaaban removed LinkedIn from his Best Ideas Long list heading into fourth quarter earnings. Good call. The stock is down 50% year-to-date. In this brief excerpt from The Macro Show earlier today, Shaaban responds to a subscriber’s question about whether LinkedIn is now “too cheap to ignore” and gives a deep dive explanation as to why he’s cautious on the stock.


3. About Everything | When Less Is More (4/13/2016)



In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why "we’re entering a new era in which simplicity — not choice — is the hallmark of a cutting-edge brand."


4. McCullough: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’ (4/12/2016)



In a recent excerpt from The Macro Show, Hedgeye CEO Keith McCullough responds to a subscriber’s question about the latest permabull narrative that a weaker dollar will lead to “widespread earnings beats.”


5. Gen-X Weighs on Housing Market (4/11/2016)



In this brief excerpt from The Macro Show earlier today, Hedgeye Housing analyst Christian Drake discusses the demographic and structural headwinds facing U.S. housing.

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This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)




1. Past Peak (4/15/2016)

This Week In Hedgeye Cartoons - the cycle


Recent data continues to confirm our bearish thesis on the U.S. economy, like Friday's terrible US Industrial Production report which slowed to -2% year-over-year in March.  


2. Look Out Below! (4/14/2016)

This Week In Hedgeye Cartoons - recession cartoon 04.14.2016


"Unlike many strategists (who missed calling the cycle top in US Consumption, Employment, and Profits last year), we have stayed with The Cycle call we’ve had all along here in Q2," Hedgeye CEO Keith McCullough wrote recently.


3. The Central Bank Of Neverland (4/13/2016)

This Week In Hedgeye Cartoons - Draghi Peter Pan cartoon 04.13.2016


Central planners are increasingly pushing on a string as macro markets continue to move in direct opposition to the best efforts of policymakers at the ECB and BOJ.


4. Earnings: Dead In The Water (4/12/2016)

This Week In Hedgeye Cartoons - earnings cartoon 04.12.2016


In what is already expected to be an ugly quarter for corporate earnings, Alcoa kicked off 1Q earnings season with a bang last night. The aluminum producer missed revenue estimates, earnings fell by 92% and reduced guidance for the year. 


5. The Cycle (4/11/2016)

This Week In Hedgeye Cartoons - GDP cartoon 04.11.2016


The U.S. growth outlook is getting pretty grim. The Atlanta Fed's GDPNow tracker for U.S. economic growth in Q1 2016 just hit 0.1% after a spate of new negative data.


We've been making this bearish call for a while now and highlighted in our Q2 Macro themes that "the U.S. economy faces its toughest GDP comp of the cycle in 2Q16."

The Week Ahead

The Economic Data calendar for the week of the 18th of April through the 22nd of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 04.15.16 Week Ahead

McMonigle: A Freeze Is Not A Freeze Without Iran

Takeaway: "We believe there is no chance Saudi Arabia reverses its position and agrees to freeze production on Sunday," McMonigle writes.

Editor's Note: Below is a prescient research note published yesterday on the oil industry and ongoing OPEC developments from Potomac Research Group Senior Energy analyst Joe McMonigle. As you can see in this Bloomberg story from last night, McMonigle continues to stay ahead of the consensus herd. To access McMonigle's institutional research ping


McMonigle: A Freeze Is Not A Freeze Without Iran - oil image


Oil prices have experienced a moderate rally over the past two months since the production freeze proposal was unveiled in Doha on February 16 by Qatar, Russia, Saudi Arabia and Venezuela. So they will try to do it again on Sunday with about a dozen other producers attending the meeting.


One hitch: Saudi Arabia agreed to a production freeze only if all other producers agreed to participate, including and most especially Iran.  


On Friday, Iran's oil ministry released a statement saying the Iranian oil minister will not attend the Doha meeting but will instead send a delegation "to explain situation of Iran" that "it cannot join the plan to stabilize oil prices."


That is why Saudi Arabia's oil minister, when asked this week by a reporter about the freeze, he replied, "forget about it." Saudi Arabia's Crown Prince also very publicly declared in an extensive Bloomberg News interview that the Kingdom would not freeze production unless Iran did as well. We believe there is no chance Saudi Arabia reverses its position and agrees to freeze production on Sunday.


The freeze would only be meaningful with Iran's participation, which is the only producer capable of ramping up production. But Iran has made it clear that it won't participate and even freeze proponents now concede that any agreement will exclude Iran. Therefore, despite the freeze marketing, there is no control over production.


OPEC and Russia are currently producing near-record amounts of crude. OPEC members Qatar, UAE, Iraq, Nigeria and Ecuador are at maximum production; Saudi Arabia, Kuwait and Angola are at near maximum production. Therefore, a freeze will only continue the supply glut and add to record crude inventories.  


What we do expect to see in Doha is great public relations: positive talk about cooperation to stabilize oil prices. With a June 2 OPEC meeting just 45 days away, we suspect many speculators will be swayed by the Doha public relations. But we are highly skeptical that any meaningful agreement will be reached or that it changes the outlook for oil markets.


So what is the goal of the freeze talks?  You may recall that in a March 29 note to clients, we said the goal of the production freeze proposal is to establish an artificial price floor. Our assessment was confirmed on Thursday by an invitation letter to oil ministers sent by Qatar's oil minister. The letter dated March 23 said the freeze proposal "has changed the sentiment of the oil market" and "has put a floor under the oil price." The letter was obtained by Bloomberg news under a Freedom of Information request to Norway's petroleum ministry.


June OPEC Meeting - Don't Expect a Production Cut


In a little more than a month after the freeze meeting on April 17, OPEC will meet for its regularly scheduled meeting on June 2 in Vienna. Many observers point to cooperation on the freeze as setting the predicate for action at the OPEC meeting. We see it differently.


We are not expecting any change in production from OPEC at the next regularly scheduled meeting in June . We maintain our investment thesis that Saudi Arabia believes its market share policy is winning. Therefore, it's still too soon for a production cut that only serves to throw a lifeline to U.S. shale and other non-OPEC producers to increase production. The next meeting of any consequence will be the year-end OPEC meeting in December when there may be the first serious consideration of a production change. However, it is still too early to forecast any policy changes. We would expect the picture to be clearer in late summer after non-OPEC production declines are evident. 

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