Thursday, November 4, 2010

UBS: "Betting against companies hit by rising raw material prices" (ANF; AEO; GPS) K; GIS; KFT

Uncle Ben wants you to see oil prices going up, get scared, run out to buy gas and get that money moving.
By-the-bye, oil futures are up $1.57 this morning. It takes 12 to 36 hours for that increase to flow through to the pump price so sometime tomorrow every dollar you have will be worth 98 cents in the eyes of the gas pump.
That's the theory anyway.
My best bet is we create inflation without generating any growth in "real" GDP and the inflation tax actually cuts into discretionary spending.
Although the examples given in this story are clothiers you can do the same exercise with Kelloggs, Kraft or General Mills.
From Agrimoney:
Shares, not futures, 'the way to play crop rally'
Betting against companies hit by rising raw material prices, rather than buying futures in the crops themselves, could be the best way to exploit firm soft commodity markets, UBS analyst John Clemmow has said.
Confidence is beginning to erode that big buyers of farm commodities can escape damage from the crop rally which this week has seen vegetable oils hit a two-year high, sugar touch its highest for 29 years and cotton and rubber prices set records.
This offers the potential for making money by going short in these companies' shares.
"Equity investors are beginning to realise that the astonishing price performance of a host of neglected commodities is beginning to cause real demand strain," Mr Clemmow said, noting the "huge mauling" that Goodyear shares had received.
Stock in the tyremaker have fallen more than 12% since it admitted last week that it was unable to pass on to customers all the rising costs of rubber.
'Left the realms of rationality'
Mr Clemmow singled out clothing groups as a potential target for short-selling, as an alternative to buying into cotton, which in New York set a record of 139.20 cents a pound on Wednesday.
"I am very reluctant to recommend going long [in cotton] at these levels as I am concerned that we have left the realms of rationality and have moved into hype territory," he said.
"I would far prefer to play the short-side of the cotton trade and that means looking at the consumers."
Clothing groups had initially been "rather blasé" about the risk to their margins from rising cotton prices, with UBS research in the summer estimating that an initial 50% rise in cotton prices, to 87 cents a pound, would raise total raw material costs by 5%.
However, with stock in clothing groups off recent highs, "it appears that the market is beginning become aware that whilst cotton prices of 80 cents a pound or even 100 cents a pound were bearable, those of 134 cents a pound are not".
Potential victims
Apparel companies with greatest exposure to cotton prices include American Eagle, Abercrombie & Fitch and Gap, according to UBS analysis....MORE