Some news items from the restaurant world:

  • EAT was initiated with a “buy” rating and traded up on strong volume
  • RT is scheduled to report Q2 (Nov) earnings tomorrow after the market close.  Yesterday the stock was upgraded and outperformed its peer stocks, finishing the day up 10%.
  • SONC is expected to report fiscal Q1 (Nov) earnings today after the close.
  • MCD traded down on a positive day for the market and the restaurant space.  Volume also accelerated which is a bearish indicator.  We will be publishing a Black Book on MCD next week; our outlook for 2011 is decidedly bearish for the stock.
  • MCD officially rolled out oatmeal nationwide as part of its breakfast menu
  • SBUX is now offering a $2 breakfast sandwich with any beverage as part of a special offer
  • SBUX: There is a story on Bloomberg this morning.  In my view, there is more to the Kraft deal than the single serve business.  Starbucks wants to control the distribution channel.
  • COSI traded up on strong volume as the company’s turnaround continues.
  • PEET was rated "Hold" at McAdams Wright Ragen 24-month target price is $48.00 per share.
  • Bar and Grill traded well yesterday, trading up on accelerating volume.



Howard Penney

Managing Director


US hotel transaction market snowballed in 2010, gathering momentum for 2011



Market M&A Trends for Q4 and Year 2010

  • 2010 US transaction volume shot above $8BN.  Global transaction volume also soared this year, not far from 2008 levels.
  • Q4 saw as many portfolio deals as Q3.
  • In Q4, there were several luxury non-US property sales that surpassed $1MM in average price per key (APPK).      
  • REITS (existing and newly formed) have dominated the M&A market this year.
    • Chatham Lodging Trust and Chesapeake Lodging Trust were the two hotel REIT IPOs.
  • Financing still weak but lenders coming back
    • For Q4, LTV for first mortgage debt trended between 40-55%, lower than the median LTV of 60% in 3Q, according to STR.
      • Most of the loans have a 3-5 year maturity.
    • According to Fitch, CMBS hotel loans continue to default at a relatively high rate.  November delinquencies reached 14.27%. 
    • Lenders—BofA, Deutsche, GS, Wells Fargo, and JPM—are returning, albeit slowly, to the hotel lending market.

Luxury Segment

  • Average Price per Key
    • $998,687 (9 transactions in Q4)
    • $529,161 (42 transactions in 2010)
      • US average: $383,831

Upper Upscale Segment

  • Average Price per Key
    • $257,295 (11 transactions in Q4)
      • US average: $291,945
    • $229,265 (42 transactions in 2010)
      • US average: $264,971



Q4 Transactions (Summary)



Staring at The Sun

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum


As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.


Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.


No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.


As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.


In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.


Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.


As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.


Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.


While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.


On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.


In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.


In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.


My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staring at The Sun - sun

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PRESS RELEASE: Hedgeye Names Bob Brooke as Managing Director of Business Development


TODAY’S S&P 500 SET-UP - January 4, 2011

As we look at today’s set up for the S&P 500, the range is 14 points or -1.01% downside to 1259 and 0.09% upside to 1273.   Economic data from around the world was bullish for equity markets as more evidence of continued improvements in the economy was seen. Equity futures are trading relatively in-line with fair value, despite gains in European and Asia.



  • 7.45am, ICSC weekly retail sales
  • 10am, Factory Orders, Nov., est. -0.1%, prev. -0.9%
  • 11am, U.S. Fed to purchase $1-$2b TIPS
  • 11.30am, U.S. to sell 4-week bills
  • 2pm, Minutes of FOMC Meeting
  • 4.30pm, API Inventories
  • 5pm, ABC Consumer Confidence, Jan. 2, prev. -44


  • Motorola Mobility is spun off today, trades under MMI on NYSE 
  • President Obama will sign $1.4b food-safety bill today that marks the biggest change to oversight of the food industry since 1938 and sets up a funding fight with Republicans poised to take over the House.
  • Google is considering building a payment and advertising service that would let users buy milk and bread by tapping or waving their mobile phone against a register at checkout, two people familiar with the plans say. Service may debut this year
  • Airgas (ARG) bought Conley Gas and separately two other businesses 
  • Annaly Capital Management (NLY) plans an offering of 75m shrs
  • Belo (BLC) completes split of G.B. Dealey Retirement Pension Plan with A.H. Belo Corp; sees loss $19m-$23m on split, $5m-$7m tax benefit
  • Constellation Energy (CEG) completed acquisition of Boston Generating power plants for $1.1b
  • Corning (GLW) said Peter Volanakis retired as COO, President
  • Dick’s Sporting Goods (DKS) rated new buy at Janney  


  • One day: Dow +0.81%, S&P +1.13%, Nasdaq +1.46%, Russell +1.90%
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +0.81%, S&P +1.13%, Nasdaq +1.46%, Russell +1.90%
  • Sector Performance - BULLISH (All sectors were positive) - Financials +2.19%, Consumer Discretionary +1.18%, Tech +1.11%, Healthcare +0.91%, Materials +0.81%, Industrials +0.72%, Energy +0.72%, Utilities +0.49%, and Consumer Staples +0.14% 


  • ADVANCE/DECLINE LINE: 1469 (+1220)  
  • VOLUME: NYSE 1060.24 (+78.96%)
  • VIX:  17.61 -0.79% YTD PERFORMANCE: -0.79%
  • SPX PUT/CALL RATIO: 1.41 from 1.97 (-28.68%)  


Treasuries were weaker with the curve steepening slightly

  • TED SPREAD: 16.89 -1.624 (-8.865%)
  • 3-MONTH T-BILL YIELD: 0.15%   
  • YIELD CURVE: 2.75 from 2.72


  • CRB: 333.02 +0.07%
  • Oil: 91.55 +0.19% - trading +0.12% in the AM
  • Oil Trades Near 27-Month High as Economic Recovery May Boost Energy Demand  
  • COPPER: 445.75 +0.24% - trading -0.55% in the AM
  • Copper Rises to Record for Fourth Day in London on U.S. Growth Speculation
  • GOLD: 1,420.05 +0.09% - trading -0.89% in the AM
  • Wien Forecasts Gold Above $1,600, Grains Surge in `Ten Surprises' for 2011 - He went 0 for 10 last year!


  • Hedge Funds Increase Bullish Crude Bets to Four-Year High: Energy Markets
  • Flooding May Threaten More Cotton Crops in Queensland, Growers Group Says
  • Rubber Futures Advance to Record as U.S. Production Raises Demand Outlook
  • Gold Falls for Second Day as Reports May Show Recovering Economic Growth
  • Soybeans Advance on Concern Dry Weather in South America May Cut Supplies
  • Sugar Output in India's Top Producing State May Miss Forecast After Rains
  • Molycorp May Double Planned Rare-Earth Metals Output to Meet Global Demand
  • Vietnam Aims to Ship `About' 6 Million Tons of Rice, Deputy Minister Says
  • Australia Forecasts More Rain as Floods Isolate Thousands, Shut Down Mines
  • Alcoa Recommended as `Top Stock' by CNBC's Cramer; Shares May Gain to $22
  • Noble Stock Advances to Record as Acquisitions to Drive Growth in Earnings


  • EURO: 1.3375 -0.07% - trading +0.20% in the AM
  • DOLLAR: 79.127 +0.13% - trading -0.07% in the AM


  • European Markets: FTSE 100: +2.12%; DAX +0.17%; CAC 40: +0.62%
  • Most European indices started the day slightly lower and are now trading in positive territory while the Footsie is up 2.12%, catching up with the rest of Europe following yesterday's strong session.
  • Notable divergence is Greece down 1.52%, Estonia up 2.90%
  • Energy shares are among today's best performers, helped by BP after the Daily mail reported Royal Dutch Shell thought about bidding for the company during oil-spill crisis.
  • France Dec Consumer Confidence (36) vs consensus (31) and prior revised to (33) from (32)
  • German Dec unemployment change, seasonally adjusted, +3K vs consensus (10K) and prior revised (8K)
  • UK Dec Manufacturing PMI 58.3 vs consensus 57 and prior 58
  • UK Nov mortgage approvals 48,019 vs consensus 47,000 and Oct 47,315


  • Asian Markets: Nikkei +1.7%; Hang Seng +1.0%; Shanghai Composite +1.6%
  • Most Asian markets rose today, except India -0.30% and Taiwan -0.31%
  • For several markets, this was the first trading day of the year.
  • Japan rose +1.65%, reflecting buoyant investor sentiment on gains throughout the world, with 32 of 33 sectors going up. Resource related stocks gained 3-5%. Exporters rose on strong ISM manufacturing data from the US. Megabanks followed their US peers up 2%, and consumer lenders Promise and Aiful soared 17% and 11%, respectively.
  • Property counters surged to lead China higher by 1.59%, with materials stocks providing strong support. China Shenhua Energy and Yanzhou Coal Mining rose 2% and 3%, respectively, on coal supply concerns arising from the flooding in Australia. Shippers rose 4% on optimism that export demand would be lifted.
  • South Korea found strength +0.73% from brokerages and shipbuilding stocks.
  • Property stocks led gains in Hong Kong +0.99% - Cathay Pacific rose 3% when its COO said the airline is reasonably confident about the year.
  • The floods in Queensland held Australia flat, as early gains were pared by falls for insurance companies. Insurance Australia Group, QBE Insurance, and Suncorp fell 2-3%.
  • The yen is trading at 82.07 to the US dollar


If Global Growth Slows, Could Commodities Still Charge Higher?

Conclusion: Supply constraints could drive many commodities higher, even if growth slows in 2011.

Positions: Long Oil via the etf OIL; Long Sugar via the etf SGG

We’ve been fairly vocal with our belief that global growth will slow sequentially in 2011, driven by the consumer slowing in the U.S., and emerging markets (China, Brazil, and the like) slowing due to monetary tightening as inflation rises.  Perversely (as some would suggest), we remain bullish and, in fact, long in the Virtual Portfolio certain commodities heading into 2011.  Normally, one would expect commodity prices to decline in line with slowing growth, but the key factor appears to be supply constraints for a number of key commodities.


Copper – According to the International Copper Study Group, world refined copper consumption exceeded supply by 436,000 tons between January and September this year.  In the same period last year, the world deficit was 56,000 tons.   In 2010, global consumption was the key factor, as it was up roughly 8%, while mine production was up a measly 0.8%.  The net results of this, as is highlighted in the chart below, is that LME copper inventories have seen a dramatic decline since the start of 2010.  So even if copper usage slows sequentially, low inventories combined with weak supply growth will likely continue to constrain the market and lead to higher copper prices heading into 2011.


If Global Growth Slows, Could Commodities Still Charge Higher? - 1


Oil – Oil is in a similar setup to copper heading into 2011: while the rate of demand growth should slow if global growth slows, oil appears to be supply constrained.  As our Energy Sector Head Lou Gagliardi notes:


“Turning to the Department of Energy, its energy agency (EIA) sees global crude oil demand growth outstripping supply in 2011: by roughly 630,000 b/d or supply falling short by ~0.7%. Although a slim margin, 2011’s forecast marks a sharp divergence from 2009 and 2010, when the EIA reported demand and supply in balance.  For 2011, the EIA, forecasts -0.5% supply/production decline from non-OPEC regions, unlike the 2.1% increase seen in 2010 from 2009.  Not surprising to us, the EIA sees declining supply in 2011 from 2010 worldwide across major crude basins; i.e. the U.S., U.K., Norway, Mexico, Russia, China, and Canada flat.”


The International Energy Administration echoes the point relating to non-OPEC production growth as they have cut in half from 2010 levels their 2011 production estimates, which will be primarily driven by declines form production in the Gulf of Mexico in the United States.  While the OPEC cartel still has spare capacity, to the extent they can keep their members in line, oil supply should be increasingly constrained in 2011.  The negative wild card for global supply could be if Russian production, which recently hit a new high, starts to slow.


Soft commodities – Soft commodities had one of their best years in recent memory in 2010 due to supply constraints and that looks poised to continue headed into 2010.  Some key soft commodity supply data points to focus on heading into 2011 include:

  • Sugar – Brazil, overwhelmingly the world’s largest producer at 23.7% of global production, saw its production estimate for 2010/11 revised down (-1.3M) metric tons to 39.4M due to dry weather;
  • Corn – The Argentine corn crop is developing slower than expected and Argentina is the world’s second largest exporter of corn;
  • Cotton – World cotton stocks are projected to decline in 2011 due to lower U.S. production;
  • Soybeans – Argentina’s soybean production is expected to fall as much as 17% to 43 million tons  in 2011 – 2012 due to the drought caused by La Nina;
  • Rice – Among other supply issues, an outbreak of cholera in Haiti’s rice fields will impact global supply heading into 2011.

Interestingly, despite our view of slowing growth into 2011, it seems that we are seeing evidence of supply constraints across the commodity complex that are poised to drive commodity prices higher in the face of a sequential slowdown in growth.  Higher commodity prices and slower growth mean one thing: stagflation.


Daryl G. Jones

Managing Director


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