Some people were really irritated when I started to write about the hedge fund industry being oversupplied. Usually when I'm irritating people, I am about to be really right.

Tom Cahill at Bloomberg wrote a solid story this morning titled "Hedge Funds May Post Worst Month In 5 Years." From what I am hearing from contacts in the industry, he doesn't look like he'll be far off in that prediction.

In his article he cites the Hedge Fund Research (HFR) Index "of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003."

Clearly the "meme machine" trades of shorting the Financials and buying everything Commodities caused some problems in July - suffice to say, these "Trades", as some “hedgies” like to call them, were a tad crowded, in retrospect.

The meltdown in the hedge fund industry remains one of the most misunderstood market risks. Many of these funds are managed as compensation structures, not real businesses. You won’t hear about the major blowups, until it’s too late. Stay hedged.


Wacky Wheat Moves: Polish drought, Iranian Rumors, and Putin Power

Wheat prices spiked overnight after a slew of bullish news reports from Eastern Europe and the Middle East were digested, only to give up much of the ground in the face of large volume sellers this afternoon.

The big three data points driving market action in the past two sessions are:
  • • The Government Statistical Office of Poland –the third largest EU wheat producer, has predicted this year’s harvest may be as much as 9% lower than last year’s after unseasonably dry weather in June and July damaged crops.
  • • The continued chatter in western media outlets that Iran is about to announce a large wheat purchase that will be spread amongst the US, Canada, Russia and the EU. For its part, the media in Iran has been reporting heavily on grain stock levels -last Monday’s edition of the newspaper E'temad-e Melli carried the headline "Wheat Import and Management crisis in Agricultural Sector".
  • • Russian Vice Prime Minister Viktor Zubkov was quoted in TASS today assuring farmers that "The Agriculture Ministry has been instructed to create an intervention fund of no less than five million tons of food grain and not less than three million tons of fodder grain by mid-August.” The fund is meant to alleviate price pressure resulting from higher yields in central Russia this season.
  • Andrew Barber
Volume Spiking Over the SEP 08' Contract Prices

KFT’s Prices Enter “Uncharted Territory”

KFT management stated today that their Q2 volume held up well “even in the phase of unprecedented pricing actions.” Despite these already significant price increases, the company raised prices as it entered 3Q in an effort to cover higher input costs and anticipates pricing will remain the primary driver of revenue growth in the near-term. Management highlighted that it has led the way with cost driven pricing actions and that its competitors are now starting to play catch up and narrow the gap so consumers will begin to face higher prices across the board.

Tyson management also alluded to more pain for the consumer’s wallet when it said earlier today, “The consumer really hasn’t felt the effect of the $6-$7 grain market yet. Either on beef, pork or chicken.”
  • Positive for restaurants: Increased prices at the grocery store can only help restaurants going forward.
  • Negative for restaurants: KFT also said that
    Mac & Cheese, which management called its “icon of value oriented mean solutions” grew nearly 20% in the quarter.

    Higher chicken and beef prices for the consumer also translate into higher costs for restaurant operators.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%


No need to run through the very favorable liquidity situation of Penn National and the very unfavorable leverage position of the rest of the industry. I’ve covered it in my last couple of PENN posts. Here I just wanted to put some math behind my contention that not only does PENN have the liquidity to take advantage of a buyer’s market, management has the track record to do so profitably. The following chart displays the major acquisitions/projects undertaken by the company in its history and the estimated return on investment (ROI). The returns look outstanding.

Investors are usually forced to pay up for management teams that generate these types of returns. With the company trading at around 6x 2009 EV/EBITDA, they won’t have to.

  • PENN has generated a decent to spectacular ROI on every material acquisition/project

  • Despite the recent industry downturn, LTM ROI is equal to or higher than the 1st 12 month (following acquisition) ROI in every instance. I guess PENN can operate casinos too.

  • PENN company EBITDA LTM ROIC of 17.5% exceeds industry by almost 5%

In case you missed it – from the KFT EPS call

I’m posting a key slide from the KFT earning call. Nearly every key commodity that is important to KFT accelerated from April 2008 to July 2008. As a result the company is raising prices again in 3Q08.

Restaurant operators will be happy to see prices rising in the grocery channel.

Charting China: Is The Bottom In?

Chinese stocks tacked on another +1.3% last night, taking the A Shares Index to 3045. The July to date performance is +9.5%, comfortably outperforming US indices over the same duration.

Is the bottom in? I am not sure - bottoms are processes, not points, but the chart attached begs the question as we head into what is ostensibly a positive macro catalyst with the start of the Olympics in August.

For now, I am long China for a "Trade".

*Full Disclosure: I am long China via the FXI index.
  • Shanghai Stock Exchange Composite Index
(chart courtesy of


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.