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Credit Drought (Part 2): Trouble Ahead For The Ag Sector?

Takeaway: The agricultural economy hasn't bottomed and farmers are struggling to keep up with mounting debt.

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - farm storm

 

Is the agricultural economy troughing?

 

The answer is no.

 

As Hedgeye Commodities analyst Ben Ryan points out, the trends in the farm credit cycle are disconcerting to say the least. Below are four charts and brief analysis from Ryan as a follow-up to "Credit Drought: A Weary Road Ahead For The Ag Sector." (You can follow him on Twitter @Hedgeye_Comdty.)

 

As you may have guessed, all is not well on the farm.

#1

 

"According to the Kansas City Fed, more than 30% of financial institutions reported increasing collateral requirements for farmers in Q1."

 

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 1

#2

 

"Bankers noted greater than 18% of loans made to farmers in Q1 involved restructuring existing debt to meet short-term liquidity needs."

 

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 2

#3

 

"In Q1, farm real estate accounted for 22% of collateral on non-real estate loans greater than $250K, up from 13% two years ago."

 

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 3

#4

 

"So according to Farmer Mac, every single Ag. related commodity is 'low.' I'd be begging for bottom too."

 

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 4

Need more?

 

Here's a key takeaway from a recent Bloomberg story:

 

"The USDA has forecast farmer income will drop to $54.8 billion this year, the third straight decline and less than half of the record profit earned in 2013. The ratio of debt to income has more than doubled in three years to 6.8 percent, the highest since 1984, when the Midwest was mired in a farm crisis that saw the highest foreclosure rates since the Great Depression."

 


Capital Brief: Trump's Donor Deficiency... & What's On Bernie's Wish List

Takeaway: Sanders and Clinton Set to Sit Down; Contrasts in Circumspection; Donald's Donor Deficiency

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: Trump's Donor Deficiency... & What's On Bernie's Wish List - capital brief

SANDERS CLINTON CONFAB

Hillary Clinton and Bernie Sanders are set to sit down and discuss Sander’s policy wish list, his campaign, and the upcoming convention in July. Sanders has yet to suspend his campaign and up to this point felt that the longer he holds out, the more leverage he has to push Clinton and the Democrats in his direction, but he’s getting perilously closer to overstaying his welcome.

 

Look for Sanders to push his mainstay ideas like wage inequality, free healthcare and free college tuition, and Wall Street reform, while Clinton looks to press for issues she hopes will end up unifying the party - like climate change, immigration, and foreign policy. With Donald Trump threatening to ban ethnic groups and cancel the Paris climate deal, look for Sanders and Clinton to rally and unite the party with their eye on the November prize being more than just the White House.

CONTRASTS IN CIRCUMSPECTION

In times of turmoil, true leaders emerge and have stood to both console and rally our nation. The tragic massacre in Orlando comes as the first big test of the 2016 general election. Trump is using the situation to double down on his sentiment towards Muslims, immigration and went on to tweet an I-told-you-so statement, calling for President Obama to resign.

 

In contrast, Clinton canceled her first dual campaign appearance with Obama, delivering more somber remarks and outlining her goals to combat terrorism. Candidates will ultimately differentiate and further distance themselves from their opponent in their response to situations of this magnitude - expect this to prevail throughout the election.

DONALD'S DONOR DEFICIENCY

The Trump camp may have lost more sorely-needed donors after high profile patrons made no bones about shutting their wallets at Mitt Romney’s annual conference. Donors were vocal in their concern with Trump’s lack of discipline and his demagoguery.

 

The summit, which brings together Romney’s extensive network of wealthy contributors, further serves as a reminder of the hurdles Trump faces in corralling the monied crowd. If he’s unable to mend the wounds, look for these dollars to go elsewhere – we hear Gary Johnson is looking for help.


Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?)

Takeaway: The German 10yr Bund yield went negative and hit new all-time lows at -0.0047% on global #GrowthSlowing fears.

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - bond yields

 

Big news in bond markets today.

 

The 10yr German Bund yield went negative, hitting an all-time low, as investors flocked to sovereign bonds on global #GrowthSlowing fears. Take a look at the long-term chart of the yield on the German 10yr over the last 26 years.

 

A truly amazing rally.

 

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - german bund long term

 

The graphs below show the yield curves for select sovereign bonds today (green line) versus where they were at the beginning of the year (yellow line). As you can see, there's been a massive rally in long bonds around the world. 

 

GERMAN 10YR:

12/31/15: 0.627%

Today: -0.0047%

 

Click images to enlarge.

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - bund 6 14

 

JAPANESE 10YR:

12/31/15: 0.260%

Today: -0.169%

 

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - jpy 6 14

 

SWISS 10YR:

12/31/15: -0.091%

Today: -0.519%

 

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - swiss 6 14

 

U.S. 10YR:

12/31/15: 2.270%

Today: 1.6053%

 

Less Than Zero: German 10-Year Yields Go Negative (#GrowthSlowing Anyone?) - ust 6 14


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Chipotle Shares Have 35% Downside

Takeaway: Our Restaurants analyst Howard Penney remains bearish on Chipotle. He sees an additional 35% downside.

Chipotle Shares Have 35% Downside - nypost chipotle

 

In case you missed it, Hedgeye's Howard Penney captured the essence of the bearish case on Chipotle (CMG) in a recent New York Post article.

 

Since the E. coli outbreak was announced, Chipotle shareholders have taken a significant hit. The stock is down -34% since Penney added it as a Best Idea Short on 11/16/15 ... and over -18% year-to-date.

 

Here's Penney's update from the NY Post story (with data provided via our survey partner CivicScience):

 

"By another measure, the number of diners who say they 'don’t like' Chipotle increased to 24 percent in the second quarter of 2016 — from 18 percent in the fourth quarter of 2015, according to a Civicscience brand survey released on Monday.

 

'There’s going to be a permanent group of people who won’t go back,' said Hedgeye’s Howard Penney. 'And even after three years, when Chipotle may see some improvement, their competition will have improved by then, too. They may have had their run.'"

 

To be clear, Penney has been the bear on CMG for a while now. (For more, click here and here.)

 

Bottom line? Be careful if you're betting on a bottom.

 


An Update On The Great Debate: Deflation Vs. Reflation

Takeaway: Next catalyst in the #Reflation vs. #Deflation debate? Fed head Janet Yellen will give an update on the FOMC's latest thinking on Wednesday.

An Update On The Great Debate: Deflation Vs. Reflation - Deflation cartoon 11.10.2015

 

Got #Deflation?

 

That's the latest macro market read through, explaining why equity markets in Australia and Russia puked and the 10yr Treasury yield headed lower. In other words, it was a classic Dollar Up, Rates Down day.

 

Where do we go from here?

 

Is the evolving trend #Deflation or #Reflation? That's the question of the month...

 

On an immediate-term trade basis, yesterday's selloff triggered oversold in a number of shorts in Real-Time Alerts. Here's additional insight via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:

 

"U.S. Treasury 10yr yield at 1.57%. Yep. Closing in on 2015 lows but rates are oversold ahead of Yellen’s 4th pivot (hawkish to dovish to hawkish to dovish) in 6 months as #EmploymentSlowing becomes obvious."

 

Take a look at a chart of the tumbling 10yr Treasury yield. (Note: At the start of 2016, the 10yr Treasury yield was 2.25%.)

 

Click to enlarge. 

An Update On The Great Debate: Deflation Vs. Reflation - 10yr yield 6 14

 

Meanwhile in equity markets... 

 

"Dollar Up, Rates Down – that is the #Deflation Risk On – and that’s a big reason for the oversold signal in Global Equities this morning – Reflation sensitive countries (Russia -3%, Australia -2%) and Reflation Risk sector exposures have corrected, hard, from our USD oversold (Energy Overbought) signal last week."

 

 

Next catalyst in the #Reflation vs. #Deflation debate? Fed head Janet Yellen will give an update on the FOMC's latest thinking on Wednesday...

 

It's perverse, but it's reality. The Fed's pivots from hawkish to dovish throughout the year have perpetuated either reflation or deflation. 

 

More to be revealed.


Iran's Oil Production Is “Confounding Experts and Beating Expectations” – Incorrect

Takeaway: Our energy policy analyst Joe McMonigle made a big, non-consensus call on Iranian oil production. He was right. Credit where credit's due.

Iran's Oil Production Is “Confounding Experts and Beating Expectations” – Incorrect - z joem

 

A reality check is in order.

 

NPR ran a segment over the weekend saying Iran’s dramatic return to crude production and exports is “confounding the experts and beating expectations.” Well, not so much. Iran surprised virtually everyone but us. 

 

As you can see below, Hedgeye Potomac Senior Energy Analyst Joe McMonigle predicted this in his January 17 note, “Iran sanctions relief to trigger crude exports sooner and larger than expectations.” In the note, he advised our subscribers to expect 700,000 barrels per day by March. Iran is now at 800,000 barrels per day and growing.

 

Here's what NPR had to say

“When the nuclear deal between Iran and world powers was implemented in January, it was widely believed it would take at least a year for the country’s oil industry to get back up to speed after years of sanctions. But Iran is confounding the experts and beating expectations.”

 

Here's what we wrote back in January

“The same analysts who were surprised at how quickly sanctions got lifted are now underestimating Iran’s production capabilities, or incorrectly believe Iran will move slowly due to low crude prices. Our view is that Iran will increase production by larger amounts and sooner than most observers think. We anticipate that Iran, by itself, has the capability to produce approximately 700,000 barrels a day of additional crude for export by March 2016.”  

 

“As a result of sanctions, Iran reduced production across the board as opposed to shutting down major upstream fields. Therefore, increasing production in the short-term would be almost like pushing a button. Iran could easily reach 700,000 barrels a day by increasing production by a couple hundred barrels a day at its 2,280 producing wells.”

 

*  *  *  *  *

This is a big deal on an important call that we got right. We were virtually alone in making the call.

 

On a related note, our world-class cartoonist captured our contrarian call later that week on January 22 with this cartoon.

 

Iran's Oil Production Is “Confounding Experts and Beating Expectations” – Incorrect - Iran.Saudi.oil cartoon 01.22.2016

 

 


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