Commodity Scorecard...The Good, the Bad, and Natural Gas

The confluence of increased geopolitical risk, easy monetary policy, slowing growth in emerging markets, and abnormal supply forecasts has whipped commodity prices about wildly in 2011.  Here is a quick recap of what’s driving the recent price moves (other than US dollar correlation) of ten commodities that we keep a close eye on.  For reference, the US dollar index (DXY) is down -2.80% YTD.


Cheddar Cheese: +47.67% YTD, -0.71 correlation w USD

  • Several factors have rocketed the price of cheese higher in short order.  First, higher feed costs (corn, oats) have made their way to the end product.  Second, attractive slaughter cow prices appear to be encouraging much heavier culling of cows from the herd.  And third, Australia and New Zealand, which account for 40% of the world dairy trade, have scaled back milk production forecasts for 2011 due to adverse weather negatively impacting pastures.

Cotton: +26.52% YTD, -0.57 correlation w USD

  • Cotton prices may have stabilized after hitting a 140 year high on February 17th, falling 15% since.  Cotton is still up 129% over the last year, which is hurting emerging markets.  Yesterday the Apparel Exports Promotions Council of India announced soaring cotton prices are likely to crimp India's apparel exports by at least 15% in volume terms this year.

Cocoa: +20.26% YTD, -0.76 correlation w USD

  • Alassan Ouattara, President of the Ivory Coast, has extended the country’s ban on cocoa exports until March 15, 2011.  As a result, cocoa prices are at a 32-year high.  The Ivory Coast produces 37% of the world’s cocoa.

Brent Crude Oil: +16.02% YTD, -0.55 correlation w USD

  • It appears that (at least for now) Brent crude is more indicative of global supply and demand for oil than is WTI, as the glut of supply in Cushing, OK has caused WTI to lag other light, sweet grades.  Brent crude is now at its highest level since September 2008 as violence in Libya and the fear of contagion has the market worried about future supply.  Currently, the Middle East produces 57% of the world’s oil.

Corn: +7.47% YTD, -0.53 correlation w USD

  • The US Department of Agriculture data shows that global corn inventories are at a 37-year low as producers are unable to grow enough grain to keep pace with consumption.  The global grain harvest for the past season was 2.18 billion metric tons, down 2.5% year-over-year.  The USDA estimates that the world will consume 2.24 billion metric tons of corn this year.

Gold: -0.61% YTD, +0.26 correlation w USD

  • Gold underperforms when real interest rates are positive and rising – that is why gold had its worst January in twenty years.  However, gold performs well when geopolitical risks escalate, which is why this safe haven is up 3% in the last five days.

Copper: -3.62% YTD, -0.27 correlation w USD

  • Weakness in copper is not bullish for global growth.  Copper stockpiles tallied by the London Metal Exchange are at the highest level since August 2010, while inventories monitored by the Shanghai Futures Exchange jumped to a nine-month high of 161,062 tons last week.

Wheat: -4.91% YTD, -0.65 correlation w USD

  • MENA buys 32% of global grain shipments and Egypt is the world’s largest wheat importer.  Violence and riots in the area will curb demand for soft commodities, which is why corn, wheat, and soy were limit-down on Tuesday.  On the supply side, India announced today that it may permit wheat exports as the country may harvest a record crop this season.

Natural Gas: -13.05% YTD, +0.32 correlation w USD

  • As the peak demand season for natural gas comes to a close, natural gas is stuck under $4/Mcf.  An extreme winter has US gas inventories 6.3% below the 5-year average, yet traders are confident that supply will come roaring back once the drawdown season ends.  Supporting this, BHP Billiton (BHP) plans to triple output from current levels in the Fayetteville shale in Arkansas, the assets that they acquired this week from Chesapeake Energy (CHK).

Coal: -15.38% YTD, +0.36 correlation w USD

  • China, the US, and India are the top three consumers of coal.  Growth is already slowing in India and China, and we don’t think that the US is far behind.  Coal down 15% YTD is not bullish leading indicator for economic strength in the US.

Kevin Kaiser



Management is confident from a top line perspective but is appropriately cautious on margins and earnings.  Long term, the growth potential seems strong but the risk of prolonged commodity inflation in 2011 and into 2012 may depress earnings power even if sales growth were to meet management’s expectations.


TXRH’s 4Q10 earnings of $0.14 per share came in slightly below the street’s $0.16 per share estimate despite stronger-than-expected company comp growth of +3.1%. The recent trend has been for companies to miss on the top-line and beat on the bottom line and TXRH was one of only a few names this quarter to report better-than-expected comp growth and fall short of consensus EPS estimates.  With inflation headwinds becoming more prevalent in the coming quarters, however, this will likely become more common.  Additionally, given that TXRH is trading down today, along with the broader market and most other restaurant names, it seems that investor focus is shifting somewhat toward potential margin and EPS performance and away from comp performance alone.


TXRH’s same-store sales growth improved 40 bps during the fourth quarter on a two-year average basis and 1Q11 quarter-to-date comp growth of +3.8% (vs. -1.2%  last year) implies that two-year average trends have accelerated another 100 bps since the end of the year.  Management guided to 10% full-year EPS growth (from its prior 5-15% range), which assumes 3.5% comp growth, 3% inflation and a 20-30 bp decline in restaurant-level margins.  Although the company raised its comp growth assumption to 3.5% from 2-3%, it also slightly increased its inflation outlook from its prior range of up 2-3%.  Management commented that it is now only targeting the mid-point of its prior EPS range because the high-end had assumed a +2% menu price increase and they have decided to be more conservative and only implement a 1% price increase by the end of the first quarter.


Like most of the casual dining names, there are risks to TXRH’s guidance.  Inflationary pressures could come in higher than anticipated and comp targets could be aggressive.  Specifically, TXRH has locked in 65% of its food cost needs for 2011, including more than 80% of its beef.  For the food items not yet hedged, however, most notably dairy, produce and some protein requirements for the end of the year, the company’s 3% inflation expectation assumes prices don’t remain at their current levels.  If prices stay where they are or move higher, commodity costs will be up more than +3%.


TXRH’s FY11 same-store sales growth target, like most other casual dining names, assumes a continued improvement in two-year average trends throughout the year.  The most important comp growth dynamic to watch going forward for the restaurant names will be the impact of price on traffic trends as most companies are taking price for the first time in a while.  TXRH’s current guidance only assumes a +1% price increase, but management said they could revisit their pricing strategy and raise prices again if the commodity environment warrants it.  It was encouraging to hear that TXRH management understands that it must be conservative with pricing in this environment and they highlighted that if traffic falls off as a result of higher pricing, that it will hurt them on the labor line. 


Traffic has been running positive for TXRH for the last three quarters with average check declining slightly.  As the chart below highlights, however, the traffic comparisons get increasingly more difficult going forward, particularly come 2Q11, so it will likely prove difficult for the company to hold traffic flat.  For reference, flat traffic growth in 2011 would imply almost 100 bps of acceleration in two-year average traffic trends from 4Q10 levels.




Inflation and tougher traffic comparisons will pose problems for most casual dining names in 2011.  Given that TXRH’s comp trends outpaced the industry in 2010 as measured by Malcolm Knapp by 2.5% to 3.5% on a one-year basis and 2-3% on a two-year average basis and trends have accelerated quarter-to-date, the company sits in a better position than many of its competitors to raise prices.  Additionally, the company has better  visibility on its commodity cost outlook than many other casual dining concepts since it has already locked in 65% of its food cost needs for 2011, most importantly, more than 80% of its beef.


That being said, the company’s 3.5% comp guidance could prove somewhat aggressive (I am currently modeling +3%), particularly when you consider the impact the menu price increase could have on already difficult traffic comparisons.  Along with my slightly lower comp growth estimate, I am modeling a 40 bp decline in FY11 restaurant-level margins relative to management’s guided -20 to -30 bp range.


At today’s Analyst and Investor Day in NYC, management struck a confident note that the company will be able to find new avenues of growth for investors.   The development team has found significant cost cuts in development costs and simply by comparing the number of TXRH units nationwide (346) versus Outback Steakhouses (778), the case could be made that there is some white space for expansion.  The fact that AUV growth has outpaced same-store sales growth for the last two quarters also implies that new units are performing well and makes the case for continued growth.  Kent Taylor, founder and Chairman, stressed that he visits each prospective site along with other top executives to ensure that each development is given due consideration and assessment prior to committing. 


From a sales perspective, TXRH is certainly taking a proactive approach in seeking to drive the top line in any way possible.  A call ahead service, designed to allow customers to “get in line” from home and arrive 10-15 minutes prior to being seated has seen strong growth in popularity and a text ahead service is also being considered by management.  Furthermore, the company is choosing to focus on local marketing rather than national advertising and other “noisy”, “undifferentiated” channels of communication.  One high-class problem the chain has is customers turning away from the door because of wait times.  Management is implementing several initiatives to combat this issue but it is unclear that they will make a significant difference.  The most compelling was a “pay-at-table ZIOSK” idea that is estimated to shave 2-3 minutes off the total time a party spends at a table. 



Howard Penney

Managing Director


Our Macro Quantitative team agrees with our favorable fundamental view on MPEL.



The Hedgeye Macro team today doubled down on its long MPEL situation.  From a trading perspective, the risk reward looks favorable with only 2.9% down to the trade line but 6.8% up to the resistance line.  From a fundamental perspective, the upside looks significantly greater with MPEL trading at a substantial discount to its peer group yet estimates look like they are going higher.  The Hedgeye Macro Quantitative view is depicted in the following chart.




MPEL beat the Street for the second straight quarter yesterday (a big deal for the gang that couldn’t shoot straight since the IPO).  More importantly, Q1 is trending above Street estimates and direct play appears to be growing as a percent of VIP which should be good for margins.  Numbers look like they are going higher, again. 

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Lower-Highs: SP500 Levels, Refreshed

POSITION: no position in SPY


This morning’s early morning selloff is another bearish signal that we may very well be in the process of establishing lower-IMMEDIATE-term highs.


For the last few weeks I have been talking about lower-LONG-term highs (vs OCT 2007), so this brings an entirely different (and more volatile) duration into risk management play.


I wrote about my core 3-factor model (PRICE, VOLUME, and VOLATILITY) in this morning’s Early Look, but it’s worth repeating – this immediate-term TRADE breakdown in the SP500’s PRICE is now being confirmed by both my intermediate-term term VOLUME and VOLATILITY readings.


While mixing durations in the same sentences may sound like a mouthful, markets aren’t exempt from operating with all durations in mind. Markets really couldn’t care less what our personal risk tolerances are – markets are going to do what they are doing.


In terms of the lines, I’m pretty comfortable that the immediate term TRADE line of support at 1307 holds. That’s why I have been, on balance, covering shorts in the Hedgeye Portfolio this morning with a plan to re-populate my shorts on the next bounce.


If 1307 holds, we can rally all the way back up to the immediate-term TRADE lower-high of 1330 and no part of this strategy will change.


Buy red, sell green – and manage your immediate-term risk proactively,



Keith R. McCullough
Chief Executive Officer


Lower-Highs: SP500 Levels, Refreshed - 1


The Macau Metro Monitor, February 23, 2011


MPEL DOES OKAY, FOR NOW Intelligence Macau

IM believes Galaxy Macau, when it opens in two months or so, will take a bigger share of first-time visitors away from CoD than Venetian, even though Venetian has recently been tightening up on its rebates and rewards.  IM also thinks Venetian's marketing of its rewards club in the coming months will further pressure CoD.


According to IM market data, Cotai is different than the peninsula in that proximity of casinos is not a factor.  If a visitor is bored after visiting CoD or Venetian, he/she will more likely get on a shuttle bus back to the peninsula than to walk across the road to a rival casino on Cotai.


But IM is optimistic on the longer term outlook for MPEL given Lawrence Ho's leadership and his wise decision to stay out of the Ho drama.


MGM China Holdings' IPO “is bubbling along,” said director Grant Bowie, denying a report by Apple Daily that mentioned MGM was delaying the listing.  The IPO “is progressing at a normal pace”, Bowie added.  MGM Macau’s president also revealed that he had talked with Hong Kong regulators yesterday, but gave no further details.



Las Vegas Review-Journal announced it had “mistakenly stated that according to court documents filed by Steve Jacobs' lawyers, USD 68MM was couriered between LVS's Las Vegas and Macau operation."

“Court documents do not say cash was shipped, and the company says no cash was ever transferred,” the newspaper said in a correction note.



Visitor arrivals totaled 2,076,064 in January 2011, up 1.4% YoY.  Visitors from Mainland China increased by 7.9% YoY to 1,220,534, mostly from the Guangdong Province, Fujian Province and Shanghai; those travelling to Macao under the Individual Visit Scheme totalled 538,306, up by 20.2% YoY.





S'pore Jan CPI rose 5.5% YoY and 1.3% MoM, faster than the market estimate of 4.8% and 0.6%, respectively.  Economists say the year-to-year rise is the fastest since December 2008 and that the month-to-month rise is the fastest since April 1981.



Over 4,000 gaming workers have signed a petition to ban smoking inside casinos, a member of the Macau Gaming Enterprises Staff Association told MDT.  The association will continue to collect signatures outside of local casinos for a petition that will later be delivered to the Macau government.

Hawkish Winds

This note was originally published at 8am on February 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am but mad north-north-west: when the wind is southerly I know a hawk from a handsaw.”

-William Shakespeare


You know when a French policy maker is more hawkish than you about inflation, that you’re a pretty dovish and left-leaning central banker. Despite all of the fiat Pig Paper flying around Europe these days, The Ber-nank’s Burning Buck continues to lose credibility versus the Euro by the day.


Ahead of the Almighty Central Planning meetings this weekend in Paris, France’s Finance Minister, Christine Lagarde, said this morning that, “we clearly need to keep inflation at bay”… and that “too much inflation is not going to be conducive to growth.” On the margin, European policy rhetoric continues to be more hawkish than America’s – and that’s saying something.


After hearing President Obama on his fiscal plans to amplify America’s Disaster Deficit and listening to Ben Bernanke profess to the world that he sees no inflation, we re-shorted the US Dollar this week. It’s already down a full 1% from where we shorted it. It remains broken across all 3 of our core risk management durations (TRADE, TREND, and TAIL). And, unnervingly, it has no long-term support to its post 1971 closing lows.


If you study the history of the US Dollar pre and post President Nixon abandoning the gold standard (1971), you’ll see that it’s become fashionable for US Presidents and their politicized heads of the US Federal Reserve to act in unison (both from a fiscal and monetary policy perspective) to attempt to debauch and devalue their way to political prosperity.


In trying to get re-elected in 1972, “Nixon wanted a large dollar depreciation to goose the US economy, but Pompidou feared that this step would saddle Europe with a larger loss of competitiveness.” (“Exorbitant Privilege” by Barry Eichengreen, page 76). And when Pompidou was the one criticizing Nixon on not being hawkish enough, the US definitely earned its currency credibility problem.


Preceded by Charles de Gaulle, Georges Pompidou was the President of the French Republic from 1969 until he died in 1974.  If Nixon wanted a tutorial on how to run a deficit and devaluation strategy, these French gentlemen had as much experience as any of the world’s post WWII central planners.


In 1972, Nixon had his modern day Ber-nank (Arthur Burns) cut interest rates and this caused the US Dollar to do exactly what it’s doing now – weaken. Sadly, Burns was then politically wedged into attempting to monetize the US Federal Debt thereafter (i.e. buying Treasuries) and The 1970s Inflation that was born out of these short-term political decisions was obviously President Jimmy Carter’s to deal with by the time the horses left the barn.


Now I’m not suggesting that the Obama/Bernanke team is as dovish and left leaning on the central planning front as the Carter/Burns combo was, but I am saying that if the US Dollar continues to be debauched that it’s going to be a tight race.


Yes, I think Bush/Bernanke had many of the central planning tendencies that Nixon/Burns did. And, yes, there’s been good reason why no Federal Reserve chief has tried to monetize the US debt since. Most of the Keynesians were evaporated by Paul Volcker. Now they’re back.


In Dollar Debauchery do Americans trust? Does the Rest of the World have any reason to trust America as the fiduciary of the world’s reserve currency? Is global trust an entitlement, or is it earned out there in this interconnected global economy every day?


These are important questions that Keynesian ideologues don’t need to help us with – because the answers are marked-to-market on your screens every minute of every trading day.


To be crystal clear on my Global Macro positioning here, I am hawkish and long of The Inflation.


As a Long/Short Global Macro Risk Manager who isn’t pigeon holed into being long-only French or American stocks, there are many ways to capitalize on these Hawkish Winds:

  1. LONG - Food Inflation (Wheat, Corn, Soy)
  2. LONG - Currencies of countries with hawkish central banks (Chinese Yuan, Canadian Dollar, Swedish Krona)
  3. LONG - Financials in socialized countries that have made banks too big to fail (JP Morgan, Goldman Sachs, CIT)
  4. SHORT - Sovereign Bonds of countries with deficit and currency devaluation central planners (US Treasuries, Japanese Government Bonds)
  5. SHORT - Currencies of countries with dovish central banks (USA, Japan)
  6. SHORT - Emerging Markets (India, Brazil, or countries in the Middle East)

Sure, US-centric, long-only, perma-bull strategists like Bob Froehlich and Don Luskin who I debated on Kudlow last night can belly up to the blow horn and howl “Dow 14,000” whenever they have a live wire on TV. But if you are Froehlich and you said “Dow 14,000” in January of 2008 and again in February 2011, have you really taken any lessons from the most recent crash and evolved your investment process? I think Americans have.


The British, the French, and the Japanese have learned this lesson of abusing entitlements the hard way. It’s taken many years and many charlatan politicians telling stories about Big Government Deficit Spending and Currency Devaluation being the way of the future. It’s taken many a Hawkish Wind to stand up to the tyranny of centrally planned economies and markets too.


But when the wind of a bond, currency, or stock market turns southerly, I think most of the people who have empowered these said fiduciaries with our hard earned moneys “know a hawk from a handsaw.”


My immediate term support and resistance levels for the SP500 are now 1328 and 1342, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hawkish Winds - MM1


Hawkish Winds - MM2

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