November 10, 2008


US poultry affected by stock prices


Everyone knows bulls are struggling, but chickens have issues of their own these days.


John and Jane Consumer are saving money by eating less frequently at casual restaurants selling tonnes of chicken wings and breasts. After a big rally from June to late September, Buffalo Wild Wings's stock has tanked, offering investors opportunities to sell out-of-the-money calls against weakening shares.


It is a variation on the same story at the grocery. J.P. Morgan's Ken Goldman says consumers are buying dark meat, rather than white, to save money, and sometimes switching over to pork. He told clients Friday, 7 November 2008 that chicken breast prices are about US$1.07 per pound, or 15 percent below the five-year average for this time of the year.


A stronger dollar is dulling foreign appetites. US products are more expensive, while the credit crisis keeps emerging nations, especially Ukraine and Russia from buying chicken. That is leaving a glut.


Goldman lowered fiscal 2009 earnings estimates for Tyson (TSN) by 49 percent, Sanderson Farms (SAFM) by 66 percent, and Pilgrim's Pride (PPC) by 97 percent.


The difficulties facing these companies underscore the strains in consumer spending, and the opportunities for traders to sell calls against troubled stocks. Chicken shares have laid an egg, and likely will decline more. This makes them prime candidates for overwriting, or selling calls against existing stock positions.


Tyson's December 7.50 calls, for example, were bid midday Friday, 7 November 2008 at a US$1.35 when the stock was at US$7.50. Shareholders can sell the calls and earn a 20 percent return if the stock stays above the strike price, and if the stock declines they are hedged at US $6.26.


In this market, investors have to pluck returns where they can.


The clock is ticking on the Chicago Board Options Exchange's initial public-offering plans. A Delaware court ruling on tortured litigation over certain CBOE ownership rights retained by Chicago Board of Trade members is expected as early as December 17, which would clear the way for a stock offering in January or thereafter.


Unfortunately, the time for an exchange IPO may have passed, even one as desirable as CBOE. Investors have lost interest in exchanges as the glut of previous deals has made them wise to the wily ways of investment bankers.


Once hawked as legalized-monopolies, exchanges have disappointed investors. Post-IPO multiples have mostly collapsed as the much-hyped exchange consolidation era has failed to bring about any real bankable benefits in the absence of regulatory approval for knitting together international clearing firms.


Regulatory authority effectively ends at national borders, and multiples will likely remain depressed until stock and derivatives regulators address these issues. Of course, few US investors are interested in directly buying European or Asian shares when those economies are faring worse than the US.


The exchange's future is not dull, though it may not be as profitable, at least in the near-term, as many wish.