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Tales from Tunisia

This note was originally published at 8am on January 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The darkest thing about Africa has been our ignorance of it.”

-George Kimble


Tunisia is the northernmost nation in Africa.  This African outpost of some 64,000 square miles and 10.3 million people is bordered by Algeria to the west, Libya to the southeast, and the Mediterranean Sea to the north and east.  While religious freedom is widely practiced in Algeria, the Tunisian Constitution declares Islam as the official state religion.


By global economic standards, Tunisia’s economy is not meaningful.  The nation’s GDP is ~$43.8BN (official exchange rate), which is about 1/8th of the market cap of Apple (currently there are no Apple stores in Tunisia).   The Tunisian labor force is split by occupation as follows: 18% agriculture, 32% industry, 50% services.  Currently that labor force is unemployed to a tune of 14%.  Coincident with this unemployment is rising inflation (CPI from 2009 to 2010 accelerated from 3.5% to 4.5%) and slowing growth (GDP from 2008 to 2010 slowed from 4.6% to 3.4%).  At Hedgeye, we call this Jobless Stagflation.


In the West, endemic Jobless Stagflation is fought by the populous at the polls, as we saw in our most recent midterms in the United States.  In nations like Tunisia, the populous often uses other methods:    most recently it was massive rioting and protests, which began on December 17th with the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand) and ended on January 14th with current President Ben Ali fleeing the country for Saudi Arabia.


It seems that the people have spoken in Tunisia.  Now this could just be a Tale from Tunisia, or it could be an emerging Tail Risk from TunisiaOnly time will tell whether the so-called Jasmine Revolution becomes a key export of Tunisia, but there are many nations in the Middle East and Africa with similar characteristics - primarily Muslim, governed by a dictatorial family, slowing growth, rising inflation, high unemployment, and a young population. 


The last point on age is likely a key one.  In Tunisia, over half of the population is younger than 25 years of age.  Across the Middle East and North Africa, we see similar demographic patterns.  In demographic circles, this is called the “youth bulge”.  As healthcare broadly improved in these regions in the late 1960s, birth rates went up dramatically.  Currently, it is estimated that around 65% of the regional population is under the age of 30.  This is not a cohort that likes to be unemployed, appreciates costs of living rising exponentially, and, as evidenced by The Jasmine Revolution, is willing to stand idle while their leaders do them harm.


Ultimately, this revolution could start and end in Tunisia, and be of no greater impact, but there is certainly potential for much more, and as risk managers “the darkest” thing we could do is show “ignorance” of these facts. 


In the United States last night, we saw evidence of our most recent Democratic revolution.   In winning more than 60 seats in the recent midterms, the Republicans have certainly been acting like they have a mandate (even though we view that election as a repudiation of incumbency as much as anything).  Last night, as Keith noted in an email, “it began” with a vote on healthcare.  The House voted 245 – 189 to pass a bill to repeal President Obama’s health care plan.  Not surprisingly, the vote was unanimously supported by Republicans and the backlash from Democratic lawmakers was instant and aggressive.  The most noteworthy comment was from Representative Steve Cohen (D-Tenn), who said:


“They say it’s a government takeover of health care, a big lie just like Goebbels.”


It is likely no surprise that the US dollar is trading down on this news, with comments like Cohen’s, but also more broadly, as my colleague Tom Tobin noted this morning, “talking doesn’t get the job done.”  The new Republican majority in the House has aggressively gone after the Obama agenda, but in order for the dollar to respond favorably our elected representatives will have to do more than talk on the key economic issues facing the nation (namely the debt and deficit). 


On a more positive note, today at 1pm EST our Energy Sector Head Lou Gagliardi will be hosting a conference call on one of our most favorite long term investment regions, the Canadian Oil Sands.  His discussion is titled, “Digging Deep and Powering through the Canadian Oil Sands.”  Lou and his team have put together a 60+ page presentation that highlights the key attributes of the incredibly long term asset in Canada, with a focus on some of his best ideas in the region.  If you are looking for cheap ways to play energy and are a qualified institutional prospect, please email us at sales@hedgeye.com to join the call today.


Yours in risk management,

Daryl G. Jones


Tales from Tunisia - 3


Notable news items/price action moves over the past twenty-four hours.

  • KKD gained 6.5% on strong volume, outperforming the space on news that Robert Stiller, GMCR chairman and founder, was disclosing a 5% stake in the company.
  • BAGL gained 5.2% on accelerating volume yesterday.  News also hit the tape that CEO Jeffrey O’Neill filed to sell 8,200 shares on 1/18/2011.
  • MCD UK President and CEO, Jill McDonald, told the Daily Mail that the company is looking at expanding the range of hot drinks on offer at MCD stores.  She says that 90% of the firms increase in sales has been due to traffic rather than any increase in average check.   She stressed that there are savings MCD can make in their operational processes, but conceded that prices may have to be a “tiny little bit” more expensive due to higher food prices.
  • MCD estimates at Goldman Sachs cut today.
  • SBUX estimates cut at Janney Montgomery.
  • RRGB refuted Oak Street Capital Management’s demand for new board appointees and more shareholder-friendly management practices yesterday, stating, “We…have been working to incorporate the views of multiple key constituencies including our shareholders and franchisees”.
  • EAT reports today and investors will eager to hear how the company’s sales have performed during the most recent quarter and how its cost-cutting initiatives have been working.
  • PNRA underperformed on strong volume.
  • YUM stock performance has slowed slightly over the past month.   I was interested to observe the company’s 5 YR CDS blow out over the past couple of days (chart below).
  • DRI have opened a combination Red Lobster/Olive Garden in Flagler County, Florida (picture below).  The county has the highest unemployment rate in Florida, at 15.7%.







Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - January 25, 2011

Equity futures are trading below fair value in reaction to an unexpected decline in UK Q4 GDP, which has knocked down some European markets. Today's calendar shows a marked pick up in data releases with S&P/Case-Shiller House price index, Consumer Confidence, Richmond Fed Manufacturing index due out ahead of President Obama's State of the Union address tonight. As we look at today’s set up for the S&P 500, the range is 10 points or -0.45% downside to 1285 and +0.32% upside to 1295.



  • ICSC-Goldman Chain Store
  • Redbook Chain Store
  • Nov Case-Shiller Home Price Index
  • Jan Consumer Confidence
  • Nov FHFA House Price Index
  • API Crude Inventories
  • US ABC Consumer Comfort
  • President Obama delivers State of the Union Address


  • Companies due to report before the open: AKS, BHI, BTU, COH, DD, DGX, EMC, GLW, GWW, HOG, JNJ, KEY, KMB, MDD, 3M, NEE, RE, SHW, TLAB, TRV, VZ, WAT, X
  • Companies due to report after the close: ALTR, BXP, CA, DV, GILD, JNPR, MOLX, NSC, SYK, TSS, YHOO


The XLB remains the only sector that is broken on the Hedgeye TRADE - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.92%, S&P +0.58%, Nasdaq +1.04%, Russell +0.79%
  • Last Week: Dow +0.72%, S&P -0.76%, Nasdaq -2.39%, Russell -4.26%
  • Year-to-date: Dow +3.48%, S&P +2.64%, Nasdaq +2.44%, Russell (0.56%)
  • Sector Performance - (7 sectors up and 2 down): - Tech +1.40%, Materials +1.07%, Industrials +0.95%, Consumer Discretionary +0.40%, Utilities +0.56%, Consumer Staples +0.17%, Energy +0.37%, Healthcare (0.11%), and Financials (0.12%)


  • ADVANCE/DECLINE LINE: 1220 (+1609)  
  • VOLUME: NYSE 961.93 (-24.01%)
  • VIX:  17.65 -4.44% YTD PERFORMANCE: -0.56%
  • SPX PUT/CALL RATIO: 2.06 from 1.57 (+31.50%)


Treasuries were little changed.

  • TED SPREAD: 16.11 +0.811 (5.303%)
  • 3-MONTH T-BILL YIELD: 0.16%      
  • YIELD CURVE: 2.78 from 2.81


  • CRB: 332.70 -0.39%  
  • Oil: 87.87 -1.39% - trading -1.58% in the AM
  • COPPER: 434.85 +0.92% - trading -2.50% in the AM  
  • GOLD: 1,343.68 +0.02% - trading -1.41% in the AM  


  • Gold falls to a 2 month low
  • Coca tests the 1979 peak on Ivory Coast political unrest
  • Oil fell to the lowest level in five weeks as Saudi Arabian Oil Minister Ali al-Naimi signaled OPEC may bolster production to meet increasing fuel demand. 
  • French President Nicolas Sarkozy said regulation of commodity markets will be a priority as he leads the Group of 20 nations this year, and inaction may cause food rioting in the world’s poorest countries.
  • Natural gas producers increased bearish bets to the highest in almost three years, joining hedge funds amid forecasts that near-record output will swell a fuel surplus.
  • Hedge funds are unloading bullish bets on gold as a slide in prices sends the metal to its worst start to a year since 1997.
  • Copper output in Zambia, Africa’s biggest producer of the metal, jumped 17 percent in 2010, beating government forecasts, said Kanguya Mayondi, head of public relations at the Lusaka-based central bank.  The preliminary estimate showed production climbed to 819,159 metric tons compared with 697,700 tons in 2009, Mayondi said in an e-mailed response to questions on Jan. 21.
  • CORN - This past Friday the legacy (three-line) report showed commercials net-short 396,212 corn contracts, a 52-week low. 
  • Cotton prices have risen to a record as mills face extremely low supplies.  ICE March cotton, the US benchmark, rose by the 5 cent daily allowable limit to $1.6194 per pound on Monday, the highest in the 141-year history of the New York exchange and its predecessors. 


  • EURO: 1.3642 +0.15% - trading -0.18% in the AM
  • DOLLAR: 78.050 -0.21% - trading +0.16% in the AM 


  • FTSE 100: -0.62%; DAX: +0.29%; CAC 40: +0.05% (AS OF 6:30 AM EST)
  • European markets are mixed and in the case of the FTSE100 reversing gains after an unexpected contraction in UK economic growth in Q4.
  • The regions corporate results were broadly well received led by Siemens and Ericsson.
  • Declining sectors lead advances 10-8. Banks (2.3%) and insurers (1.0%) led fallers, with autos +1.2% and industrials +1.1% leading gainers.
  • UK Q4 preliminary GDP +1.7% y/y vs con +2.6% and prior +2.7%, (0.5%) q/q vs consensus +0.5% and prior +0.7%
  • Germany Feb GfK 5.7 vs con 5.4
  • France Dec consumer spending +0.6% vs con +0.4%


  • Nikkei +1.2%; Hang Seng (0.1%); Shanghai Composite (0.68%)
  • Asian markets are mixed after India raised interest rates, although the move had been expected.
  • Exporters, consumers rally on overseas demand outlook.
  • Techs climb after Texas Instruments earnings beat estimates.
  • Materials gained as metal prices rose earlier.
  • All 33 sectors went up in Japan +1.15%, with the mining sector performing best. Japan leaves overnight call rate at 0.0-0.1%.
  • Australia rose +0.46% when inflation came in below expectations, reducing the chance for a rate hike. Australia Q4 CPI +0.4% seq vs 0.7% consensus, +2.7% y/y vs 3.0% consensus.
  • South Korea rose +0.22%, with financial firms higher on bargain-hunting.
  • Hong Kong ended flat despite the fact that Tencent Holdings rose 5% on reports it will launch a CNY5B fund to invest in games.
  • China fell (0.68%) again on worries about a rate hike. Sinopec lost 1% and was the biggest drag on the market. Most banks rose in reaction to the central bank’s trying to put some liquidity into the system.


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McDonald’s is a great company but, alas, it is still a company – subject to the same factors as other restaurant companies.

I did not learn anything on the earnings call that alters my bearish thesis on MCD.  There was some noise in the quarter, but EPS was reported at $1.16 versus consensus of $1.16.  Global comparable restaurant sales came in at +5.0% versus consensus +5.1%.

MCD reported global comparable restaurant sales growth of 5% for the fourth quarter.  A more detailed breakout of the comparable restaurant sales results is shown in the table below.  The December numbers posed some as Global +3.7% vs. consensus of +3.9%.  US +2.6% vs. consensus of +3.8%, Europe (0.5%) vs. consensus of +3.0% and APMEA +8.9% vs. consensus of 5.6%.




Europe trends were adversely affected by weather in the month of December, as were trends in the U.S.  Management estimates that the impact of weather was 5% and 2% on the Europe and U.S. markets, respectively.  While restaurant level margins increased year-over-year, the trend is certainly not favorable heading into 2011 and what I believe will be a difficult inflationary environment for MCD.  From a sales perspective, comp compares will become progressively more difficult in 1Q, 2Q, and 3Q10.  Margin comparisons also step up next quarter, and remain difficult for the first three quarters of the year.  The quadrant chart below shows where we expect the company to trend operationally over the next four quarters. 


MCD: A CULTURE OF NO BAD NEWS? - mcd quadrant


Management is acutely aware of the current trend in input costs that several Hedgeye teams have been highlighting for months.  As such, they have raised their commodity inflation outlook.   For the full year 2011, the total basket of goods cost is expected to increase 2-2.5% in the U.S. and to increase 3.5-4.5% in Europe.  Prior guidance was for inflation of 2% in the U.S. and 3% in Europe.   On the earnings call, management expressed their capacity to raise prices as commodity and other cost pressures become more pronounced throughout the year.   Given how important value has been for MCD traffic growth, raising prices enough to significantly offset increases in input costs may be detrimental to comps.  MCD has obsessed over driving guest counts and maintaining 2010’s momentum while passing on inflation may be difficult.


Another measure that management presented to help buttress margins was 24 hour openings.  While the rolling out of 24 hour operations in some markets may have coincided with increase in margin previously, I am unconvinced that this initiative is fail-safe given the disparate results quick service restaurant operators have experienced through 24/7 opening hours. 


The beverage business can be a high margin business and much of MCD’s margin success in 2010 was due to the sales of frappes and smoothies in 2Q and 3Q along with commodity cost favorability.   Lapping these benefits in 2011 will prove difficult, in my view.  While management underlined the growth in coffee sales as a percentage of total sales, from 2% “a few years ago” to 6% today, it is important to remember, as I illustrated in the Hedgeye MCD Black Book earlier this month, that beverage marketing as a percentage of total marketing spend has increased to 43% in 2010 from 3% in 2008.   That is an unsustainable trend.


Variable labor costs increased in the fourth quarter and I believe that the company’s ever-expanding menu and focus on beverages and other small check items (dollar menu) are significant parts of the problem. 


Much of the sentiment around this stock continues to purport that MCD can defy gravity.  I would argue that the year-over-year margin compares, compounded by last year’s leverage to beverage sales and parabolic commodity price increases, together with slowing sales in the U.S. will eventually convince the investment community that a culture of “no bad news” is generally misleading!


MCD: A CULTURE OF NO BAD NEWS? - MCD ratings chart


Howard Penney

Managing Director

Supply Constraints in Commodity Land

Conclusion:  While we will continue to pick our spots across the commodity complex, broadly speaking supply data points continue to support elevated prices, which in turn drives higher inflationary readings globally. 


There is a well know adage when it comes to advice in the stock brokerage industry, which is:


“Advice is the only commodity on the market where the supply always exceeds the demand.”


While this adage no doubt is true, we believe that the commodity markets themselves may be an area where supply continues to be constrained, which is supporting higher commodity prices.


As we wrote on January 4th, 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.”


Since that note, the agricultural commodities have continued to increase in price.  In fact, the commodities we highlighted in that note specifically are up as follows since January 4th, 2011:


-          Sugar +0.9%;

-          Soybeans +1.8%;

-          Cotton +14.1%; and

-          Rice +4.6%


In the meantime, we continue to collect global data points that highlight supply constraints in the commodity complex, specifically:

  • Australian authorities expect coal production to be down 10% in the coming year due to the flooding in Queensland;
  • Corn inventories in the United States are the lowest levels since 2007;
  • Ivory Coast is limiting exports of cocoa;
  • Based on the latest reports, US cow and bull (non-fed) slaughter for the past seven days (Jan 13 - Jan 19) was 131,000 head, about 13,000 head or 9% lower than the same  period a week ago and also 10.9% lower than the previous year;
  • A looming shortage of milk stares Kenya in the eye. The North Rift region, which produces 80 per cent of the country’s milk for sale, has registered a 40 per cent drop in supply;
  • Indonesian exports of coffee are down year-over-year and Brazilian production fell sequentially from November (3.5MM tons) to December (3.15MM tons). As well, Colombia’s largest growing province is expected to post lower production this year due to less sunlight;
  • The Uzebekistanian cotton crop is expected to be down 5% year-over-year; and
  • Natural gas inventories in the U.S. continue to decline and are now only 1.9% above the 5-year average.

The last point on natural gas is an important one to highlight.  The bear case for natural gas is well known and, in the long term, we support it.  In fact, in the longer term we believe investors may not be bearish enough on natural gas supply growth (which is driven by an acceleration of horizontal drilling and shale projects) in the United States.  In the short term, price is driven by fundamental changes on the margin.


As it relates to natural gas, the primary change on the margin is rapid declines in the way of U.S. inventories, which we’ve highlighted in the chart below.  In the last month, natural gas is up almost 10%, which is the third best performing commodity we track.  (Only orange juice and milk are ahead of natural gas.)  The drive is colder than expected weather in the U.S. and as a result natural gas has gone from being well oversupplied to being marginally oversupplied.  Two weeks ago natural gas inventories were 5.8% above their 5-year average, which declined to just 1.9% last week.  Still oversupplied, but less so.


As always, what happens on the margin drives prices.


Daryl G. Jones

Managing Director


Supply Constraints in Commodity Land - natty 2

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%