How IDEAglobal Moves Markets
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you have a clear vision of where the markets are heading and here we provide a
reecap of key calls over the last 6 months
1. Divergent Stories for Milk (Dean Foods) and Protein (Tyson)
10th May, 2010
Divergent Stories for Milk (Dean Foods) and Protein (Tyson)
we recommended positioning for divergence in protection costs between Dean Foods Co (DF: long CDS at 525bp) and Tyson Foods Inc (TSN: short CDS at 190bp). The main problem for Dean Foods was price competition and weak volumes within a highly competitive and capacity-glutted private label fluid milk business, and this contributed to a worrisome plunge in free cash flow generation (down sequentially for a fifth straight quarter and with trailing 12mo FCF down 44% year-to-year through March) and higher year-to-year debt leverage. We also noted that, with the company facing a requirement to amend and extend its credit agreement, a “thin covenant cushion will mean that refinancing comes at no small cost.
By comparison, Tyson Foods told a compelling credit story: “With pork progressions brightening and beef progressions holding steady, the company will press its bets on investment into the company, particularly its long-languishing domestic chicken operations. The fiscal 2010 capex forecast is an eye-catching $700m, topping the prior record high of $571m in 2005 and targeted up more than 90% from the fiscal 2009 total. This has already played into sharply weaker free cash flow generation with FCF in the latest quarter at -$200m vs +$188m in the year ago quarter. That lowered the heat on the trailing 12mo free cash flow sum to a still healthy $645m from a record $1.03bn through the January quarter. But it bears noting that Tyson made hay while the sun was up from a credit perspective... the sharp leverage decline continued through the latest quarter with total debt/LTM EBITDA down to a record low 1.78X from 2.48X in January and 7.22X a year ago, with total debt down 21% and net debt down 26% through the latest quarter.”
Dean Foods 5y CDS surged wider over the subsequent four weeks to a wide of 806bp on June 10, moderating only to 700bp by the end of July after a costly amendment to its credit agreement (costing the company $0.06 per share in the latest quarter). Tyson 5y CDS, meanwhile, trended tighter in fits and starts to 177bp at the end of July. The spread differential between the two widened from 335bp at the time of our recommendation to 523bp at the end of July (+56%) and with an interim peak on June 10 of 610bp (+82%).
2. Go short NOKSEK
6th June 2010
We highlighted the divergent growth prospects of the Norwegian and Swedish economies. It was clear to us that the Swedish economy was leading the European economy out of recession. By contrast all of the leading indicators of the Norwegian economy were suggesting that it was a clear laggard within Europe. Moreover given that the Norwegian central bank had already started on its rate hiking cycle while the Riiksbank was yet to begin, it was clear that to us that NOKSEK looked vulnerable to further losses. Hence we recommended going short at around 1.2150. We concluded that “As such going short NOKSEK trade would be a low volatility profitable trade over the coming months.”
NOKSEK fell sharply from $1.2150 to around $1.17 within a couple of weeks.
3. Coffee Futures Appear set to Rally
June 11th 2010
Sep Coffee Closed June 10th 2010 at 13855
The Technical Pattern in September Coffee futures argued for a bullish resolution to a multi-week trading range. Indeed, Coffee “appears poised for a challenge of resistance at 13955/14000”…however “ with weekly momentum indicators showing building positive momentum and weekly historical volatility poised to rise from low levels”…”Coffee has the potential to break-out and run through 14275 and target the 15340 December 2009 high”…
Sep Coffee opened at 13865 on June 11th and traded to a low of 13855. Coffee then exploded higher as a powerful breakout ensued and within 3 days it had exceeded the 15340 December 2009 high. In fact, within 2-weeks, Coffee experienced an unprecedented gain and probed to a high of 17650.
4. Outlook for EURUSD
17th June, 2010
Outlook for EURUSD
We identified that bond yield differentials in the EUR and USD were implying a significant rally in EURUSD was warranted. We suggested a rally form the $1.21 area to anywhere between $1.27 and $1.30 (or above) was warranted. Moreover we concluded that “In such an environment the commodity currencies tend to do particularly well and the USD particularly badly. EUR tends to do better by default”.
EURUSD rallied over July from $1.18 territory to over $1.31. Equally noteworthy was that the market eventually highlighted the factors we said would drive this rally as being behind it. Hence we not only got the move but also the rationale behind it.
5. Latin America Market Strategy: Long Colombia’s 2024 Global versus short Uruguay’s 2022 Global
July 16, 2010
Play a reversal in the spread widening between Colombia’s 2024 Global and Uruguay’s 2022 Global
Colombia’s 2024 Global has absorbed some of the sovereign positives dedicated to this credit by ratings agencies and general positive perception post-election. But on a relative basis versus Uruguay’s 2022 Global, the trend has been for narrowing to near flat surroundings, before a new very recent bounce, in which the 2024 Global is again trading outside of Uruguay’s 2022 by about 17 bps. Obviously, the mounting need for yield and improved appetite for riskier assets is driving this inversion of spread relationships between these credits, though on a ratings basis there’s a two notch differential in favor of Colombia, with bias towards a potential widening in this regard. Given our perception that the assumption of recovery on a global basis continues to come unglued, particularly from the US side, taking the risk averse side of this spread seems tempting, though we’re somewhat removed from the recent highs. Using the aforementioned 17 bps differential in favor of Colombia, buy the 2024 and sell Uruguay’s 2022, looking for spreads to trade flat, stop if we move above a 27 bps spread in favor of the Colombian 2024.
After rising slightly to about a 23 bps spread, still within our stop-out parameters, this differential turned lower, reaching an inversion of -4 bps on July 27th. Our expectation of flat yield differentials between these bonds was reached on July 26th, resulting in a gain of 21 bps on this relative value play.
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