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Reactive Suppliers: MCD and COST Ain't Lovin' It?

McDonald’s and Costco are both flashing negative divergences today, trading down in an up tape. Why? Well, mostly because their margins are under assault by lagging effects of inflation. The stock market is trading up because reported inflation for July will show a sequential downtick from the June highs. These stocks are down because their suppliers are reacting to trailing data.

On their conference call right now Costco is saying that price increases they had assumed they would get from suppliers are larger and more frequent. The upshot is that in the near term, COST will have a much larger LIFO adjustment from inflation.

It’s important to understand that Macro wags the tail of many CFO’s. These guys are rarely early, and mostly late.

COST and MCD are trading down -10% and -2%, respectively.
KM
Its What's Inside That Counts!

Commodity Trends – EYE on Corn

Corn fell to the lowest in almost two months amid speculation falling energy costs will diminish the appeal of commodities as a hedge against inflation and as Japan plans to cut imports of the grain. In sympathy, wheat and soybeans also declined.
  • Japan, which imports more than 60 percent of its food requirements, the highest level among developed countries, wants to become less dependent on overseas grain supplies to protect it from soaring international prices and ensure long-term security of supply, Yuji Sawa, vice minister of Agriculture, Forestry and Fisheries, said in an interview.
  • South Africa, the biggest corn producer in Africa, may increase its forecast for this year's crop by 1.7 percent, according to a Bloomberg survey of grain traders.

Putin Getting A Headache...

Global stock markets are rising today, and Russia is falling. This is a very straightforward negative divergence that Putin cannot be enjoying. Since my “Fading Fast Money” (Commodities) note on 5/20/08, Russia has lost -15.1% of its value.

Long term support for the RTSI Index is 2133, and today we’re seeing that line broken. As a leading indicator, this does not auger well for energy prices.

It is global this time, indeed.
KM
Chart courtesy of StockCharts.com

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Spanish Inflation Consensus

Make no mistake, the “global inflation” Trend is a consensus one. Spain reported their June PPI numbers this morning at +9% year over year. That was a 23 year high. Given that stocks are discounting mechanisms of future news, it should be no surprise to the revisionists out there at this point that the Spanish stock market ended up losing almost 1/3 of its value from its October 2007 peak (when inflation was not consensus).

The “Trade” here in global equities is that inflation is abating sequentially from its June 2008 peak. Yes, inflation remains elevated, but that’s not the point. The point is that once you’re reading the July inflation reports, they’ll have come down from June.

Jean Claude Trichet and the ECB are going to start to look a lot smarter by the day. They stepped up, raised rates, and quelled inflation… for now.
KM

Asian Central Banking: Ben Bernanke, Take Notes...

Weakness in Asian currencies was one of the stealth leading indicators of their 2008 economic growth slowdown. This week that “Trend” has started to reverse itself. The Indian Rupee has recovered, predictably, since Singh surviving a political confidence vote. Meanwhile the Philippine Peso had its biggest one day move in the last 7 years overnight, trading +1.3% to back up to the 44 level.

Central bankers in Asia have been proactively hawkish, fighting the good fight on the inflation front. With commodities correcting this week, they’re getting rewarded for their travails. The head of the Philippines central bank came out with explicit comments overnight that he needs to raise rates further. His domestic stock market and currency liked that, and rallied. South Korea’s new President has recently done the same. Korean equities traded up another +2% overnight.

Ben Bernanke, I hope you’re taking notes.

KM

FOUR SEASONS MACAU DELAYED AGAIN

Las Vegas Sands will now try and open the Four Seasons Macau by October 1, 2008. The most recent date I had was August 28th, 2008. Hopefully, the impact of the delay on the budget is limited. No word yet on whether Sheldon’s August birthday party will still be at the property.

Four Seasons Macau under construction

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