“So our virtues Lie in the interpretation of the time.”
This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.
The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?
Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.
Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.
Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:
*Note to Fed: this correlation risk is running extremely high
And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.
The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.
What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)
First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:
Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.
Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:
Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.
To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.
My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:
“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”
Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.
My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on February 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“As the shark lunged for his head, Louie bared his teeth, widened his eyes, and rammed his palm into the tip of the shark’s nose.”
-Laura Hillenbrand, "Unbroken"
That’s a quote from an outstanding non-fiction novel that I’m reading by Laura Hillenbrand titled “Unbroken: A World War II Story of Survival, Resilience, and Redemption.” It’s a story of a selfless American Olympian by the name of Louis Zamperini who sacrificed more than this modern day man can begin to comprehend. They’ll turn this into a movie – and if they do it right, it may win an Oscar trophy someday too.
The story of American Sacrifice is one that we all know well. Alongside our Trashing Treasuries and Housing Headwinds Macro Themes for Q1 of 2011, it’s also something that we talk about during each and every one of our research team’s Morning Meetings here in New Haven.
Fundamentally, we do not believe that this country’s political leadership (Republican or Democrat) has it in itself to deliver on American Sacrifice. Since the introduction of the 112th Congress, handshakes and promises to the American people of cutting deficits and debts have already been broken. The credibility of America’s currency is broken too.
What remains Unbroken is the passion and faith that Americans who aren’t tied to a Washington compensation structure hold in their hearts and minds. From Wisconsin to New Jersey, that’s what you see rising to a boil. If it takes punching these political sharks in the proverbial nose, so be it…
We recognize what Washington and Wall Street’s Easy Money Elite want. They want us to keep doing what we’ve allowed them to do since Nixon abandoned the gold standard. He, not unlike Charles de Gaulle, moved to a deficit and devaluation strategy so that he could win the 1972 election.
Washington wants us to roll over and take it in The Inflation. They want to fear-monger us. They want to sell us. They want to lunge at us with the price volatility born out of the crises that they created.
Well, that might work for a select amount of the compromised, conflicted, and constrained few. But it doesn’t work for me and it doesn’t have to work for you or The Rest of the World either.
China’s Premier announced to the world last night that he’s willing to sacrifice short-term growth for price stability. In the 12th Five-Year Plan, China outlined an economic growth rate expectation of 7% annualized from 2011 to 2015. Sure, if they wanted to drop free moneys from the Eastern heavens and perpetuate The Inflation that would consume their citizenry, they could. But they aren’t. The Chinese don’t have to be re-elected.
After all that America has been through to fortify its individual rights and civil liberties, it’s both frightening and sad to see a State-managed economy like China’s manage The Inflation with more respect than we do. Tomorrow you’ll have our Almighty Central Planner outline to the world that he sees no inflation – or at least he sees none in his conflicted and compromised calculation.
Ahead of The Ber-nank’s semi-annual report on US Monetary Policy tomorrow, the US Dollar Index is hitting a fresh 4-month low. Sadly, this is more of the same in terms of intermediate and long-term trends. The US Dollar Index was down another -0.5% last week. It’s been down for 7 of the last 9 weeks. It’s a mess.
Surely, the US Government will blame last week’s inflation on a nut-bar in Libya. But don’t disrespect for one minute that for the last 3 years The Rest of The World has started blaming us too. Standing as the world’s fiduciary of the world’s reserve currency isn’t the next entitlement that our professional politicians can abuse – it may very well be the last.
On a week-over-week basis, this is The Inflation and Price Volatility that The Ber-nank will ignore:
In the face of inflation and price volatility, growth signals continued to slow week-over-week:
But, have no fear, the US stock market remains Unbroken from an immediate-term TRADE perspective:
So, Bernanke is doing his job, inflating the stock market - and you have nothing to fear other than his fear-mongering itself. Right.
In the Hedgeye Asset Allocation Model, my teeth are barred with Cash and my eyes are wide open:
My immediate term TRADE lines of support and resistance for the SP500 are now 1309 and 1325, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
The following is a monthly look at restaurant trends, valuations, and key macroeconomic factors. For a complete look at my overview of the restaurant space for February, please click here for a pdf, or copy and paste the link into your browser: http://docs.hedgeye.com/Hedgeye Restaurant Perspectives February 2011.pdf
QSR VALUATION THOUGHTS
CASUAL DINING VALUATION THOUGHTS
TODAY’S S&P 500 SET-UP - March 3, 2011
Equity futures are trading above fair value as news emerged overnight that a peace deal, suggested by Venezeula's Hugo Chavez, had been agreed to by Libyian President Gaddafi and the Arab League's Secretary-General Amr Mouss. As we look at today’s set up for the S&P 500, the range is 28 points or -1.33% downside to 1291 and 0.81% upside to 1319.
MACRO DATA POINTS:
EARNINGS/WHAT TO WATCH:
We have 3 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries were weaker yesterday with the slightly better risk backdrop, stronger-than-expected ADP private payrolls data and somewhat more upbeat Beige Book.
February Final Services PMI:
In general, commodities continue to gain in price with this past week bringing a more broad-based gain in week-over-week growth. Many restaurant stocks are hoping for an abatement or moderation in prices ahead of 2H11 (having given up on 1H in many cases). That notwithstanding, prices march higher.
Cheese prices merit a mention once again this week not due to any major week-over-week move but because of both DPZ and PZZA reporting recently. Below, I provide some commentary on cheese from both management teams provided during their most recent respective earnings calls:
Yeah, so the forward curve and kind of looking at about three different sources right now have cheese actually easing a little bit through the rest of the year. We're at almost $2 right now. And so, our expectation is that we're going to see a little bit of easing, to give you on cheese. We've talked about this in the past, we've got a contract in place that basically reduces the volatility on cheese moves by about a third. So about two thirds of increases or decreases in cheese are passed through to our system.
I think the kind of consensus forecast out there right now for cheese are in the $1.70 to $1.75 range. And – you know so what you're looking at is kind of a $0.25 to $0.30 move and I think we've said in the past a $0.40 move in cheese is equal to a point at the store level P&L.
We expect the favorable impact of early year sales results to substantially mitigate the unfavorable impact of currently projected commodity cost increases, most notably cheese, throughout the remainder of the year.
DPZ is 95% franchised and, as such, management claims a degree of insulation from commodity costs. Of course, to the extent that price needs to be taken and royalties slow, the company is not immune from inflation. Add to that the inevitable impact of higher gas prices (up 6% week-over-week!) and inflation is meaningful to company and franchise revenues alike.
Looking at the chart below, the trend in cheese prices seems to be levelling out. Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, at it’s most benign, cheese price inflation would be 13%.
Beef prices are a concern for almost all restaurant stocks. Given the increasing demand for meat on a global basis, the impact of natural disasters, the increase of corn prices and, of course, the downward trajectory of the dollar, beef prices look set to continue downward. For steakhouse concepts like MRT, RUTH, and TXRH, this is a concern. The concepts that are most able to pass on price to the customer will best weather this storm, while the concepts most dependent on price point and traffic for top line growth will likely suffer.
Chicken wing prices definitely deserve a callout again this week. The 5% week-over-week decline in wing prices spells further good news for BWLD margins.
Oil prices have been capturing all of the headlines of late and with good reason. The obvious implications for retail gasoline prices in the United States impact consumer discretionary stocks and restaurants in particular. As the chart below clearly shows, the inverse correlation between CBRL’s stock price and Oil over the past couple of weeks has been extremely high. CBRL is especially sensitive to gasoline prices given that its customer is typically derived from highway traffic. However, I suspect that other restaurant chains such as TXRH, CAKE, SONC, and many others will be impacted by this gain in prices at the pump.
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