From The Farmers Almanac we have a prediction for a Frigid Canada:
Canada’s Frigid Winter Outlook – How Cold will it Be?
After a late start to summer, and a soggy one in many areas, the new, hot of the presses, 2010 Canadian Farmers’ Almanac is here, and within its pages is a prediction for an “Ice Cold Sandwich” winter.
“Frigid” and “Ice Cold Sandwich”? OK, so for GISS that will be “Hottest EVER Canadian Winter – Like The Tropics!!!!!” ;-)
How Cold Will this Winter Be?
The latest edition of the Canadian Farmers’ Almanac warns that this winter’s frigid forecast offers no respite in sight, especially for provinces in the center of the country. “Colder than normal” and “bitterly cold and dry” is how the Canadian Farmers’ Almanac describes the winter in for provinces above the Great Lakes, the Plains, and the Canadian Rockies, while temperatures on the East and West Coasts will be more in line with average to normal winter conditions.
Hmmm… That’s not good.
But these folks are not “The OLD Farmers Almanac”. TOFA has an eerie knack for getting long range predictions right. Rumor has it they use the positions of planets and sunspots (shades of Solar System Barycenter theory!) but somehow they get it right more often than not. I didn’t find a Canadian button on their free 2 month forecast, but took a look at Fargo, North Dakota (about as much like Canada as you can get in the lower 48 ;-) and this is what they had to say:
Annual Weather Summary: November 2010 to October 2011
Winter will be colder than normal, especially in the west, where temperatures will be 2 to 3 degrees below normal, on average. Most days in January will be cold, especially in the west, with other cold periods in mid-December and early to mid-February. Precipitation and snowfall will be near normal, with the snowiest periods in mid-December, late February, and mid-March.
April and May will be much cooler and a bit drier than normal, with a chance for significant snowfall in mid-April.
Summer will be hotter and drier than normal. The hottest periods will occur in mid- to late June, early July, and mid-August.
September and October will be much cooler and slightly drier than normal.
More of that “cold and dry” stuff. OK, looks like Canadian and northern plains weather is likely to be, well, cold and dry. Not good for crops. So we can expect a likely hit to grains from that region. After the Russian wheat failure, this means little joy from us to help them out. So it all comes down to the added moisture in Australia and whatever happens in Argentina.
This chart has JJA (an ag commodity basket), JJG (a grains basket), DBA (an agricultural ETF that includes some non-commodity components), and the S&P 500 as a benchmark. Looks to me like grains are on a rocket ride up. So the trade would be to go long grains and things that make money when grain prices are up (like DE Deere who sell equipment to farmers with newfound cash) and short things that pay for grain (like cattle operations and Macaroni makers and even places like Olive Garden).
A Bit Of Trade School
OK, as an example of how to work through one of these ‘trade thesis’ processes, we’ll start with a look at Olive Garden. First you have to find out what company it really is. I was able to do this pretty quickly as I already knew is was part of Darxxxx Drixxxx Dr…. something. The Ticker is DRI and the company is Darden Restaurants. Basically, you put a known restaurant “ticker” in the bigcharts page then ask for the “industry” on the list of links just above the graph and start looking at the profile of each one in turn; OR, you hit Google and ask for things like “Olive Garden parent company” that gave as the top hit:
Olive Garden Italian Restaurant – Company – Contact Us – FAQ Quick …
You may download an annual report by visiting the Investor Relations section of our parent company’s website, Darden Restaurants (www.darden.com). …
http://www.olivegarden.com/company/contact_us/faq.asp – Cached – Similar
Putting in their ticker gave this chart:
The top panel at bigcharts (that you don’t get with the graphs I paste in here) says it has a PE (Price to Earnings ratio) of 15.6 and a 2.8% dividend. Not overpriced at all.
Looking at their profile, we find:
Darden Restaurants, Inc. is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc. The Company operates in the full-service dining segment of the restaurant industry, mainly in the United States. At May 31, 2009, it operated 1,773 Red Lobster(r), Olive Garden(r), LongHorn Steakhouse(r), The Capital Grille(r), Bahama Breeze(r), Seasons 52(r), Hemenway’s Seafood Grille & Oyster Bar(r) and The Old Grist Mill Tavern(r) restaurants in the United States and Canada
A whole lot of Red Lobster and other restaurants. Seafood and wine are probably a bigger cost item to them than the macaroni for Olive Garden… OK, probably not a good target for a grain price induced fade. The “economic recovery play” is probably going to dominate. But we did get to see a decently performing restaurant that’s still making money and selling at a decent multiple with a dividend higher than bonds. Maybe not a ‘fade’, but a ‘recovery’ thesis applies here…
So instead, lets look at Panera Bread. PNRA.
No yield (so no dividend to protect it against shorting operations) and a PE of almost 27. High priced. It has to be growing pretty good to justify that valuation.
Nice rising lower left to upper right chart… But what is this we see at the right side? Price has dropped below the Simple Moving Average lines, which have begun a ‘weave’ pattern, and has tried three times to get through the $85-88 level and failed each time. Looks like “failure to advance” to me. We have RSI as ‘near 80’ and the blue DMI+ line is crossed under the black ADX line in the lower panel. MACD also has the blue line gone flat after a run and looks like it is setting up for a crossover to the downside. I won’t put the chart i here (this posting is a bit ‘busy’ already) but the Slow Stochastic has rolled over to a ‘trade out’ indication and WIlliams %R has a line dropping rapidly toward the midline ‘trade out’. Also, volume is dropping and has two ‘eyes’ of white space below the trend line (I call those ‘two spooky eyes’ and it usually means ‘down’ is the next direction).
All in all, this looks like a very good shorting candidate. Add in some price pressures on their main ingredient with a combo of rising costs and lower sales as they try to raise prices….
So, see how that analysis works? If we owned this stock for the run up, now is at a minimum a time to ‘get out’. If we wanted to act as a ‘hedge fund’ we could buy DRI and short PNRA in a ‘pairs trade’. In that case, general market movements and even sector movements of restaurants in general would be ‘hedged out’ and neutralized. We would be left with a bet that the guy making money and with less of a cost basis issue was more likely to rise while the guy with a big cost issue and already over priced was likely to falter. We are betting only on the relative performance of these two tickers. Only thing left to check would be the ‘news flow’ and annual reports to see if there is any bad news on Darden or any news of massive new restaurant openings and lots of growth for PNRA. (Things that would spoil our comparative performance thesis). I’m not going to do that ‘homework’ as I’m not going to be putting on that pairs trade (I can’t short stocks in the account where I do most of this trading) but it’s only about 5 to 10 minutes of reading to do.
Finally, I’ll just mention that DE John Deere has been running up nicely and is not overvalued. It’s likely to continue doing that and with good prices for grains (as long as they get some harvests in…) sales of equipment to the farmers that don’t have a crop failure ought to be quite good. One could easily do a “Long DE Deere short GM pairs trade” on the assumption that rising consumer costs will cut enthusiasm for new cars… (and that trade would need a similar analysis before proceeding…)
Even if you don’t actually do any of those trades, working through them and the ‘homework’ gets you thinking about how the big trading houses will be manipulating those stocks. Somewhere some hedge fund with a $Billion will be shorting PNRA against DRI. And if you just sit there holding PNRA because it went up recently and you like the sandwiches, well, it’s not just the bread that will get toasted….
So here we see another example of how weather news impacts stocks. Everything from industrial goods makers like DE to your local restaurants. It pays to watch the weather and have some idea what’s coming… We could extend this line of reasoning to include the ‘inputs’ companies like MON, MOS, POT, AGU (seeds and fertilizers) as folks will pay up for fertilizer if the crop prices are higher (they will make back the added costs with more price for the goods – when prices are low they don’t cover the costs of the added ‘inputs’ so you just take what is available with minimal fertilizer) and various intermediaries like ADM and final goods makers like Kellogg K and GIS General Mills, etc. Though it looks like K has already ‘rolled over’:
So hopefully this will help folks learn to think like a trader. Even if you don’t do things like shorts and pairs trades, it lets you understand what’s being done TO you, so you can get out of the way before the bus hits…