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WEEKLY COMMODITY MONITOR

Wheat and corn lead the way as commodity prices, in general, rebound from last week’s slowdown.

 

If last week bucked the trends in the commodities we follow in our weekly monitor, this week reestablished them.  Wheat and corn were highly notable last week as the grains saw price declines of 7.2% and 8.5%, respectively.  Corn, in particular, is highly important for the broader food and restaurant industries as a feed for livestock.  While the week-over-week gain in live cattle prices was tame, at +0.7%, if corn prices can remain elevated I expect beef prices to follow suit. 

 

As the chart below shows, corn prices have rebounded sharply over the past week and remain significantly above the levels of 2010.  In terms of news flow, it seems that the grain is set to continue on its upward trajectory, supported by an expected increase in global demand.  In particular, China, which only last year became a net importer of corn, is expected to increase imports of the grain over the next couple of years.  For restaurant companies with high exposure to protein costs, increasing corn prices are a concern.  Below is some commentary from management teams on corn prices:

 

CMG, 4Q10 Earnings Transcript, 2/10/11:

“Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.”

 

JACK, 1Q11 Earnings Transcript, 2/24/11:

“There are some Act of God provisions that will get us north of our contract bands, but at a reduced rate from what the current market pricing is ... And then also grain, corn, wheat and soybean impact, and there are input costs for a number of the proteins. And that's really what's driving up beef at this point.”

 

WEEKLY COMMODITY MONITOR - corn 323

 

 

Wheat prices rose in step with corn over the last week, supported by dry weather in the plains of the United States and on signs that demand from Japan may be unaffected by the March 11 earthquake.  For companies like Panera, which does have wheat costs largely locked in for 2011 roughly flat versus 2010, prices remaining this elevated could result in a price increase in the back half of this year.

 

WEEKLY COMMODITY MONITOR - wheat323

 

 

Cheese prices declined 9.3%, week-over-week.  As the chart below shows, cheese prices have come down significantly over the last two weeks (~10% and 9%, respectively).  Below, I again provide some commentary from management teams from their most recent earnings calls with their views on cheese prices and the implications for their businesses. 

 

DPZ:

"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."

 

PZZA:

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.  The downward move of cheese over the past week will raise hopes that a price increase can be avoided. 

 

Looking at the chart below, the trend in cheese prices seems to be leveling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, inflation over the first half of the year, at least, would remain a significant headwind for restaurant companies with exposure.

 

WEEKLY COMMODITY MONITOR - cheese 323

 

 

WEEKLY COMMODITY MONITOR - commodities 323

 

Howard Penney

Managing Director


TALES OF THE TAPE: SONC, BWLD, SBUX, COSI, RRGB, MRT, PFCB, RT

Notable news items and price action from the past twenty-four hours.

  • SONC reported $0.02 adjusted versus $0.03 expectations.  Revenues also came in a little light, $113.5m versus $114.5m despite comps turning positive, as preannounced, and management guiding to positive comps in the back half of the fiscal year despite increasing difficulty in year-over-year compares.
  • BWLD, not surprisingly, is kicking off a “grass roots” movement to “save our season” so that the fans can enjoy the football season from which BWLD derives so much of its traffic.
  • SBUX has lost some of its “buzz”, apparently.  Market research firm, YouGov BrandIndex, are not clear on the cause of the recent swoons in public perception but suspect that news around higher packaged coffee prices may be impacting consumer view.
  • COSI traded up, on strong volume, after trading poorly for much of the last month.
  • RRGB traded up 2.4% on accelerating volume.  MRT, PFCB, and RT traded down on accelerating volume.

 

TALES OF THE TAPE: SONC, BWLD, SBUX, COSI, RRGB, MRT, PFCB, RT - stocks 323

 

Howard Penney

Managing Director


Instrument of Plunder

“It would be impossible, therefore, to introduce into society a greater change and a greater evil than this – the conversion of the law into an instrument of plunder.”

-Frederic Bastiat

 

Bastiat wrote that in his treatise on individual liberties titled “The Law” in 1850. If you are in the business of having an open mind and teaching yourself alternative economic frameworks to the Keynesian Kingdom of thought, I highly recommend taking the time to read it.

 

I certainly don’t agree with everything Bastiat wrote. Nor do I disagree with everything Keynes wrote. What I’ve tasked myself with in writing to you each morning is exploring my interests in markets out loud while maintaining some sense of a moral compass. My Mom inspired me to do that.

 

Anytime one uses the words “moral” and “interest” together in writing something to Washington/Wall Street, one must tread carefully. When one considers America’s Declaration of Independence and the principles embedded in the Constitution however, one must not contradict our high society’s self-interested group-think with the underpinnings of our citizenry’s morality.

 

It’s only fitting to ask this question today, because on this day in 1775 an American patriot by the name of Patrick Henry delivered a famous speech in defense of liberty to the Virginia Convention when he proclaimed, “Give me liberty or give me death.”

 

I’m too self-centered to ask for death over liberty this morning, but I will remind those who are begging for bailouts in order to get themselves paid that this country’s new Transparency & Accountability Tools (YouTube, Twitter, etc.) will most likely smoke you out of your hole of contradiction.

 

If only because he was born early enough to say it first, Bastiat nailed this fundamental point down early in “The Law” when he wrote:

 

“When the law and morality are in contradiction to each other, the citizen finds himself in the cruel alternative of either losing his moral sense, or of losing his respect for the law.” (Bastiat, “The Law”, page 7)

 

When I think about that quote and the timing of revolutionary event risk in this world, I just can’t stop thinking. I do not profess to have the answers to all of this, but I can definitely tell these Government People what not to do. Stop compromising the “fairness” and “free-ness” of market systems by making new laws that implicitly choose winners and losers.

 

Back to the grind…

 

As always, this morning’s Global Macro news-flow is multi-factor and multi-duration. In summary, I think the points I am about to rattle off speak pointedly to the Instruments of Plunder being used by Big Government Interventionists who fundamentally believe issuing Fiat Fool paper is the best path to prosperity:

  1. USA: The US Dollar Index continues to hit fresh YTD lows – down again for the week-to-date, and down for 10 of the last 13 weeks
  2. JAPAN: Japan announced that the damage is going to cost at least 25 TRILLION Yen – 25,000,000,000,000 – that’s a lot of Yens
  3. EUROPE: Portugal’s government is on the brink as Eurostat questions the credibility of their numbers and Portugal’s PM may resign

Of course, there is both causality and correlation being imputed into market prices on these factors across durations:

  1. USA: The bond market smells The Bernank considering QG3 (Treasuries up) and the stock market sees GDP Growth Slowing
  2. JAPAN: The stock market failed to overcome our immediate-term TRADE line of resistance (9,719), closing down -1.7% overnight
  3. EUROPE: British bonds continue to be the recipient of sobriety (implementing austerity with credibility) while Portugal earns a P for PIG

Then you have countries with pseudo-conservative fiscal and monetary policy getting less confident in US, Japanese, and European stock markets as Price Volatility ramps (so they invest more at home):

  1. CHINA: Continues to see capital pour into the Chinese Yuan (making new highs at 6.55) and flow-through to Chinese stocks (we’re long CAF)
  2. CANADA: Continues to benefit from low-geopolitical risks and high resource exposures to oil and precious metals (we’re long FXC and GLD)
  3. NORWAY: Continues to see its stock market trade in the green for the YTD as raising interest rates and long-exposure to Petro-Dollars helps

Finally, you have SP500 and WTI Crude Oil futures whipping around like Pac-Man attempting to absorb all of this and stay ahead of what some Central Planner With Tan Socks at the Fed is going to do next.

 

What I’m going to do this morning is at least consistent. That usually starts with what I am not going to do – and one of those things is not cheering on Big Government Intervention and using the US Dollar as an Instrument of Plunder. All that does is drive The Inflation and The Price Volatility higher. After seeing the globally interconnected “Black Swans” that were born out of the early 2008 US Dollar destruction, I’ve seen enough of that.

 

From an asset allocation perspective, this week I’ve sold all of my US Equity exposure (Energy and Healthcare – XLE and XLV), ramped up my allocation to Fixed Income to 9% (bought long term US Treasuries yesterday), and have taken my CASH position back up to 55%.

 

If you are a Central Planner looking to protect the liberties and properties of The People, Bastiat said “it is absolutely necessary that this question of legal plunder should be determined, and there are only three solutions of it:”

  1. When the few plunder the many.
  2. When everybody plunders everybody else.
  3. When nobody plunders anybody.

My solution remains. For starters, just stop. Stop what you are doing with The Inflation policy to enrich the few. The money isn’t worth it to me.

 

My immediate-term support and resistance levels for WTI crude oil are now $101.32 and $105.98, respectively. My immediate-term support and resistance levels for the SP500 are 1293 and 1310, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Instrument of Plunder - Chart of the Day

 

Instrument of Plunder - Virtual Portfolio


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THE M3: SIDE-BETTING; MACAU FEB VISITORS; S'PORE INFLATION; IMPORTED LABOUR; GRAND LAPA

The Macau Metro Monitor, March 23, 2011

 

 

SIDE-BETTING 'JUST SPECULATION' Macau Daily Times

US consul general for HK and Macau, Stephen Young, said that the claim made by the US Department of State of illegal side-betting in Macau being 10x higher than GGR is "just speculation or a guess".  “I’m not an expert. I can’t give you any more [information] on this idea that there is a lot of side-betting. I also read that a lot of this side-betting is maybe done off-shore, not in Macau,” he added.

 

Regarding junkets, Young commented, “I still find the whole junkets business a little puzzling. I don’t quite understand how they manage to bring Renminbi here. If the gamblers win, everything’s fine. If they lose, I wonder how they pay off that debt.”


MACAU VISITOR ARRIVALS FOR FEBRUARY 2011 DSEC

Total visitor arrivals increased by 5.2% YoY to 2,164,249 in February 2011.  Visitors from Mainland China rose by 5.1% YoY to 1,204,301.  Those traveling to Macau under the Individual Visit Scheme totaled 580,415, up 0.2% YoY.  Visitors from Hong Kong (657,355), Republic of Korea (39,332) and Japan (32,081) increased by 7.3%, 42.5% and 13.3% respectively, while those from Taiwan (86,293) decreased by 13.8%.

 

THE M3: SIDE-BETTING; MACAU FEB VISITORS; S'PORE INFLATION; IMPORTED LABOUR; GRAND LAPA - macau1

 

SINGAPORE'S INFLATION UP 5% YOY IN FEBRUARY Channel News Asia

Spore's February CPI rose by 5%, versus market expectations for a rise of 5.4%.  Core inflation measure, which is tracked by the Monetary Authority of Singapore (MAS) rose 1.8% YoY, versus 2.0% in January.  Costs of transport, housing and food rose slower than expected.

 

BIG JUMP IN IMPORTED LABOUR macaubusiness.com

In January 2011, the total number of non-resident workers in Macau stood at 77,900, an increase of almost 2,100 workers in just one month.

 

GRAND LAPA TO GO UNDER MAJOR RENOVATION macaubusiness.com

According to Vincent Studer, executive assistant manager of the Grand Lapa hotel, the Grand Lapa will undergo a major renovation project, including a face lift of the Tung Yee Heen restaurant.  Grand Lapa is part of Sociedade de Turismo e Diversões de Macau and is managed by the Mandarin Oriental group.


CHART OF THE DAY: Is the Keynesian Kingdom Running Out of Steam?

 

 

CHART OF THE DAY: Is the Keynesian Kingdom Running Out of Steam? -  chart


Bureaucrat Bulls

This note was originally published at 8am on March 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.

“The bureaucrats do not understand the quasi-automatic system of the market.”

-Henry Hazlitt

 

If you are bullish on Big Government Bureaucrats intervening in free markets, this morning is going to put a gigantic smile on your face. Overnight, the overlords of the G-7 intervened in currency markets in a way like they haven’t in over a decade – Central Planners of the world unite!

 

To be crystal clear on my view of the US Equity market, in the last 48 hours I have called it a Short Covering Opportunity. That’s a lot different than saying “buy-de-dip” or “buy-the-crash.” I do not want any part of being grossly exposed to riding these Bureaucrat Bulls or the Japanese Government pushing their debt over the QUADRILLION mark this morning (that’s ¥1,010,000,000,000,000).

 

The aforementioned quote comes from page 109 of Henry Hazlitt’s classic risk management book “Economics In One Lesson.” I’ve cited Hazlitt in 3 of our 5 Early Look notes this week because I think we need to get back to basics. Hazlitt wrote this book in 1946 and I suggest the talking heads of the Keynesian Kingdom take the time to read it. It’s time to get out of your textbooks boys and wake up to how bid-ask spreads work in the real world.

 

Not only do bureaucrats in the G-7 like US Treasury Secretary Geithner not get how Global Macro markets have become increasingly interconnected since 1946, they Perpetuate The Price Volatility in global markets by intervening in them.

 

“… they are always disturbed by it… they are always trying to improve it or correct it, usually in the interests of some wailing pressure group.”

-Henry Hazlitt (1946)

 

Now I don’t think it’s fair to lop everyone who has been bullish on Global Equity markets since the beginning of the year into a big bucket of being bullish on bureaucrats. I’m pretty sure most of our clients wouldn’t let a government person touch the P&L of their assets under management with a ten-foot Madoff pole. But they do try to front-run what these central planners are going to try next – that’s smart.

 

What’s not smart is being Timmy… sitting there in Washington’s “markets room” not thinking he is being gamed…

 

The problem with this global game of Gaming The Government is that it super-imposes massive correlation-risk into our markets. There is no greater impact a Fiat Fool in DC can have on global currency, commodity, and equity markets than by intervening in some way, shape, or form in the US Dollar. Almost everything that matters trades either in US Dollars or relative to a basket of US Dollars – both are burning.

 

Rather than confusing Geithner’s political skills with market ignorance, let’s run through some correlation math for his “markets” guys:

  1. The Debauchery = yesterday the US Dollar Index was DOWN -1% (down -7.5% since hope was lost in JAN of deficit/debt reform)
  2. The Inflation = Yesterday the CRB Commodities Index was UP +3% (up +7% since January after the USD lost its bid)
  3. The Correlation = USD and Commodity Inflation have an inverse-correlation of -0.81

Don’t worry Timmy, I’m not geek-ing out on you and diving deep into the tapestry of my multi-factor, multi-duration, model that’s built on the principles of Chaos and Complexity Theory. I’m keeping this point very simple so that the next time you look into the camera under oath you can improve upon your storytelling performance. The Chinese are watching.

 

If The Bernank absolves himself from all accountability pertaining to America’s Burning Buck, and Timmy wouldn’t know a strong US Dollar policy if it smacked him upside the head like a Chinese 50bps rate hike this morning, who on God’s good centrally planned earth is going to get this right?

 

Suffice it to say, I think you could win the Presidency of the United States of America by explaining that burning our currency at the stake and perpetually intervening in our markets is bad – very bad – for the long term prosperity of the American people.

 

That’s all I have to say about that…

 

What am I going to do about this frightening level of blind faith in Big Government Intervention this morning? I’m going to sell and raise my asset allocation to CASH again. I have no patience for this. I don’t trust these people. And I refuse to put my family and firm in the palm of their centrally planned hands.

 

Like I said, there are still plenty a stock market bull that is not a Bureaucrat Bull, and the bears are chasing them down too. For 2011 YTD, the average and median percentage change in the 65 global equity markets and nine S&P sectors we track has been (-1.3%) and (-1.1%), respectively. Only 38% of countries currently register a positive gain. I know – “bull market”…

 

What would get me bullish on US Equities?

  1. Stop Burning The Buck
  2. Deflate The Inflation
  3. Get me a bull market in Fiscal Conservatism

And, yes, I get it. That’s what I want for me. And the market doesn’t care about me. So while the Keynesian Kingdom of 1970s ghosts past move towards planning for Quantitative Guessing Part III, the best I can do is trade these markets with the Price Volatility these bureaucrats perpetuate.

 

My immediate-term support and resistance lines for WTI crude oil are $96.92 and $103.01, respectively. My immediate-term support and resistance lines for the SP500 are now 1254 and 1295, respectively.

 

Have a great weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bureaucrat Bulls - Chart of the Day

 

Bureaucrat Bulls - Virtual Portfolio


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