As the buck goes lower and lower, inflation is still an issue for consumers and corporations alike. 


Commodities continue to be a key focus for management teams as they react to significant downticks in gross margins due to inflation.  Some companies, in our view, are deciding to extend and pretend in the hope that the back half of the year presents a more favorable commodity environment where costs can be recouped.  Last week we noted the poor performance of MCD and CAKE following their respective earnings releases. 


This week, PNRA and TXRH are examples of companies that are moving their inflation targets higher in the face of rising food costs.  As we wrote yesterday, BAGL, CBOU and CPKI are two companies that we believe will increase their inflation outlook over the next few days.  Rice gained almost 5% over the last week but prices are up a mere 3.5% year-over-year.  PFCB has its rice needs contracted for the year. 


BWLD is currently escaping the effects of inflation and should continue to do so for the foreseeable future.  Tellingly, excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 44% versus last year while chicken wing prices are down 39% year-over-year. 





Below, I call out a select few commodities and the respective week-over-week moves, alongside some additional company-specific commentary.




Wheat is a commodity that is widely used in the restaurant space but generally does not take up a large percentage share of any one company’s basket, with the exception of PNRA.  The pizza concepts generally play down the significance of wheat prices for their overall basket (DPZ have it hedged out for the year) but, clearly, for PNRA wheat is a big driver of margin.  PNRA raised its inflation target to 5% for the second quarter and an average of 4% for the year, which is approximately 75 basis points higher than the full year estimate from the prior earnings call.







Coffee is a commodity that is generating headlines.  GMCR and PEET reported last night and PEET’s, in particular, had some interesting commentary on coffee inflation and the significant impact management expects on gross margin in the second quarter.  PEET also raised its beverage prices by between $0.10 and $0.15 in retail stores.





Chicken wings


Chicken wings continue to March lower week-over-week.  As I wrote earlier, BWLD is in a unique position as a restaurant company because its commodity costs are down 39% year-over-year.  Excluding chicken wings and broilers, the commodities in our commodity monitor table are up an average of 44%.





Howard Penney

Managing Director


Yesterday, we publish a series of quick notes on the balance of companies that are reporting this week looking specifically at inflation expectations.  A common theme for this earnings season is that top line sales trends remain strong, but nearly every management team has underestimated the impact of inflation on margins and earnings.  This has led to guidance being reduced, as we saw last night with TXRH, PEET and last week with CAKE.


CPKI, BAGL and CBOU all stand out as companies that will need to raise guidance for inflation expectations for the balance of this year.  Interestingly, if you search CPKI’s most recent quarterly earnings transcript for the word inflation, you will not find it even once.  This alone is an indication that the company may be underestimating the impact of inflation on the P&L, at least publicly. More importantly, the most recent guidance from the company, of 2.5% inflation for the year, was not even in the ballpark of reality, putting CPKI at risk of having to guide down. 


For BAGL, I believe that 2-3% overall commodity inflation guidance is more than likely conservative and will probably be revised higher.  Given surging coffee costs (not to mention that SBUX and PEET both increasing inflation expectations), CBOU will bring down guidance; it will be interesting to see by how much. 


Below is a run-through of the news from the restaurant space along with the price action from yesterday and our fundamental view on select names.

  • GMCR announced earnings post-close yesterday, beating the Street’s expectation of $0.39 in EPS by three cents. 
  • GMCR announced a 7.1m shares secondary offering (an additional 404k shares is for holders) through BofA.
  • GMCR’s price target was raised to $85 from $55 at KeyBanc.
  • DNKN filed a $400m IPO through JPMorgan, Barclays, Morgan Stanley, BofA, and Goldman Sachs.  Prior speculation was for the deal to be in the range of $500-750m.  
  • PEET reported a strong EPS beat of $0.41 versus consensus $0.34.  A cautious tone was struck by management regarding coffee costs and management lowered guidance by 10 cents.  The new guidance is for EPS in the range of $1.43-1.50 versus prior guidance of $1.53-1.60 and Reuters $1.56.
  • PEET was cut from “Outperform” to “Neutral” at Robert Baird.  The twelve-month price target is $48.
  • PZZA reported Q1 EPS $0.64 versus consensus $0.60.  Domestic SSS were +6.1% vs consensus +1.8% (company +6.7% vs consensus +2.4%; Franchise +5.9% vs SA +1.7%) and International SSS grew +5.6%.
  • DIN gained 5.7% on accelerating volume on the back of strong earnings released yesterday morning. 
  • YUM and Little Sheep have not yet reached a deal according to Business China, citing a Little Sheep spokesperson speaking yesterday.
  • CMG is far from in the clear with Immigration officials.  A Chipotle attorney has confirmed to the WSJ that ICE officials have visited 20-25 restaurants and the government intends to interview Chipotle employees. A former ICE lawyer says that the government's behavior suggests it is looking for something that goes beyond its investigation of the company's I-9 forms, which has already led to Chipotle's dismissing hundreds of workers.




Howard Penney

Managing Director


It’s important to take into account the fact that hold was low but we differ with management on the impact.



LVS was trading below $40 last night after hours following a disappointing earnings release.  If you trade at 14x EBITDA, your margin for error is slight.  We haven’t exactly been a cheerleader for this stock but we have to admit that a 15% total decline yesterday was a bit excessive.  April is off to a great start in Singapore and while LVS’s Macau market share was substandard in April, the market was off the charts.


To be clear, however, the stock should be down.  While hold was low in Singapore and Vegas, management’s estimate of a $40 million negative impact looks very aggressive to us.  In fact, we estimate the total impact across the properties was only $13 million.  Thus, this was a genuine miss due to Vegas and Singapore.




  • We don’t believe the negative hold impact across LVS’s portfolio was nearly as severe as management presented.  We estimate that net revenues actually would have been $3MM LOWER and EBITDA would have only been $13MM higher had hold been normal across their portfolio.  Here are our estimates by property.
    • Low hold only impacted Vegas EBITDA by $5MM and net revenue by $20MM
    • In Macau, high hold helped net revenues to the tune of $52MM and EBITDA by $18MM
    • At MBS, we estimate that hold impacted revenues by $29MM and EBITDA by $26MM
  • Costs were tightly controlled if not reduced everywhere but at MBS
  • Promotional expenditures were cut across the entire portfolio with good results everywhere but Vegas
  • While we can’t confirm that LVS is making much progress on growing its junket share in Macau, direct play as a percentage of RC certainly took a dive this quarter




LVS reported $305MM of net revenues and $65MM of EBITDA, missing our estimates by 15% and 44%, respectively and missing the consensus by 9% and 34%, respectively.


At least vs. our estimates, the revenue miss was entirely on the casino side.  Non-gaming revenues net of promotions and discounts were actually $3MM ahead of our estimate as lower room revenue was offset by a material reduction of comps.  While management tried to promote the success of their strategy of sharp reductions in promotional allowances, the results clearly speak for themselves… and frankly, they stink.

  • Net Casino revenues came in $58MM below our estimate
    • The average hold in Las Vegas for LVS has been 18.1% over the last 8 quarters.  If we use the 8 quarter average, table win would have been $23MM higher. If we use last year’s hold rate of 18.9%, table win would have been $26MM better. Either way to get to the $45MM impact LVS claims that hold had on the quarter, we’d have to assume 22.75% which is far from the 3 year average.  In fact, there have only been 2 quarters since 2008 that the company has seen a hold rate north of 22%.  We estimate that the EBITDA impact was about $6-7MM (gross table win – Nevada gaming tax – drop * rebate rate)
    • Drop fell 13% YoY but to be fair, 1Q2010 was a difficult comp as table drop grew 23% YoY.
    • Slot drop was clearly negatively impacted by the cut in promotional spending, plummeting  36% YoY on an easy -10% comp.  Slot results would have been even worse if not for high hold of 8.5% which benefited slot win by $2.6MM.
    • On the net, we think that low hold only hurt LVS by the tune of $20MM in gross gaming win and by less than $5MM on EBITDA
  • Total operating expenses increased by 9% YoY or $20MM in Las Vegas to $240MM



  • We’re not sure how much traction LVS is making on the junket front, but direct play as a % of RC declined to 19% of RC vs. 24.4% in 2010.
  • Fixed costs/commissions were lower than we expected and down YoY, despite last year being a year of cost cuts.
  • As in Vegas, LVS took a knife to promotional spending – although with clearly better results



Sands Macao’s revenues came in $9MM below our estimate.  However, property reported EBITDA of $92.6MM was $5MM above our estimate due to a combination of lower fixed expenses, lower taxes on lower win, and higher table win rate due to lower mix of direct play.

  • Gross and net VIP table win were $9MM lower than our estimate due to $500MM lower RC volume than our estimate
    • Direct play was only 10% of total RC in the quarter vs. an average of 14% over the last 3 quarters
    • Hold was 6 bps better than we estimated
    • The rebate rate was 91bps vs our estimate of 86bps (or 33% of hold)
    • Low hold impacted gross and net VIP win by $8MM and $6MM respectively and EBITDA by about $3MM.
  • Mass table win was $3MM below our estimate due to drop being $100MM less than we estimated. Drop grew 13% YoY.
  • Slot win was $2.5MM above our estimate due to higher handle and a higher win rate
  • Non-gaming revenue net of promotional expense was in-line with our estimate
  • Implied fixed expenses declined $6M or 7% YoY to $42MM

Venetian Macau

Venetian’s net revenue of $638MM was 2% below our estimate but a combination of lower commissions and lower fixed costs led to the property reporting EBITDA that was 9% better than we projected.  If table hold for both Mass and VIP was ‘normal,’ we estimate that net revenues would have been $14MM lower and EBITDA would have been $5MM lower.

  • Net gaming revenues were $5M below our estimate
    • Gross VIP revenue was $5MM below our estimate and net was $8MM lower than our estimate
    • RC was $400MM or 1.5% lower than we estimated
    • Direct play was 19% of RC
    • Hold was 3bps below our estimate
    • The rebate rate was 84bps or 31% of hold
    • Low hold negatively impacted gross VIP revenues by $20MM (net by $14MM) and EBITDA by approximately $10MM
  • Mass table win was $5MM above our estimate
    • Mass drop only grew 6% YoY however, table hold was a ‘healthy’ 27.9%
    • The 8 quarter average hold for Venetian is 25%.  Assuming a 25% hold rate, Mass win would have been $28MM lower and we estimate that EBITDA would have been negatively impacted by approximately $15MM
    • Slot win was $2MM below our estimate due to a lower win rate
  • Net non-gaming revenues was $8MM lower than we projected primarily due to lower room and retail & other revenue, partly offset by lower promotional spending
  • It appears that junket commissions were lower this quarter and that fixed expenses decreased to $85MM from a run rate of approximately $100MM
  • Non-gaming, net of promotional expenditures were $8MM below our estimate

Four Seasons


Four Seasons net revenues beat our estimate by $4MM and EBITDA by $8MM.  Direct play declined materially, and hence hold was a lot a better than we expected and fixed costs were lower.  High hold across Mass and VIP tables benefitted FS to the tune of $50MM and $16MM, respectively.

  • Net gaming revenues were $13.5MM above our estimate
    • Gross VIP table revenues were $1MM above our estimate and net revenues were $13MM better
      • Drop was $900MM below our estimate due to a much lower mix of direct play- 40% vs. our estimate of 50% (compared to 54% in 4Q10)
      • As a result of lower drop, we underestimated the win rate by 73bps
      • Despite the high win rate, the rebate rate was only 97bps
      • We estimate that high hold benefited revenues by $41MM and EBITDA by $11MM
    • Mass table revenues were in-line with our estimate but the win rate was much higher and drop was disappointing
      • Mass drop actually fell 17% YoY
      • Even if we use the property's high 12 month trailing average hold of 29.1%, we still get to a benefit of $9MM on net revenue and $5MM on EBITDA.
  • Net non-gaming revenue was $10MM lower
  • Implied fixed expenses declined 3% YoY to $19MM



MBS net revenues were in-line with our estimate but EBITDA was 11% lower than we projected due to higher costs as new amenities opened and had yet to fully ramp and higher receivable reserves. 

  • Net VIP revenue was $3MM better than we estimated due to better RC volume and lower rebates
    • RC grew a whopping 24.5% QoQ
    • Rebates were 1.24% in the quarter compared to 1.31% in 2H2010
    • Assuming 2.85% hold for MBS, we estimate that low hold negatively impacted revenue by $29MM and EBITDA $26MM (close to LVS’s estimate).  We would argue that 2.8% is a better ‘normal’ rate to use given the different mix of games and the lower average hold experienced by the property thus far.  Under this scenario the negative hold impact would have been $24MM and $22MM on revenues and EBITDA, respectively.    
  • Slot revenues were $3MM below our estimate due to lower hold – probably due to a higher mix of EGT machines
    • MBS added 333 slots QoQ
    • Slot handle increased 11% QoQ
  • Mass revenue was $7MM lower than we estimated due to lower drop growth, somewhat offset by better hold
    • Table drop grew 5% QoQ
  • Net non-gaming revenue was $6MM above our estimate due to lower promotional expenditures
  • Even after taking into account higher doubtful accounts, we estimate that implied fixed expenses increased to $182MM from $153MM.


Other stuff:

  • Sands Bethlehem was spot in-line with our revenue and EBITDA estimate
  • Other Asia ops are losing less money
  • D&A was $5MM higher vs. our estimate
  • Rental expense was $2MM higher vs. our estimate
  • Corporate & stock comp jumped to $46MM, up $6MM QoQ and 58% YoY
  • Net interest expense was $7MM below our estimate

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TODAY’S S&P 500 SET-UP - May 4, 2011

The mechanism driving most Correlation Risk across asset classes in the market remains the USD. So watching where the USD might stop crashing is a critical risk management exercise in play yesterday (USD flat on day = XLE (Energy stocks) down -2.5%; Brazil down -1.8%, etc…).


The Hedgeye immediate-term TRADE line of resistance in the USD developing at $73.52 – watching that very closely as resistance becoming support could easily trigger a much larger move in the hedge fund community’s largest net long position since 2007 - long the Inflation trade.  As we look at today’s set up for the S&P 500, the range is 24 points or -0.56% downside to 1349 and 1.21% upside to 1373.



Yesterday, Energy broke the TRADE duration leaving 7/9 sectors broken on TRADE and 8/9 broken on TREND.




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -911 (-400)  
  • VOLUME: NYSE 1003.11 (+7.26%)
  • VIX:  16.70 +4.44% YTD PERFORMANCE: -5.92%
  • SPX PUT/CALL RATIO: 1.84 from 1.38 (+33.87%)



  • TED SPREAD: 25.00 -0.200 (-0.794%)
  • 3-MONTH T-BILL YIELD: 0.03% -0.02%
  • 10-Year: 3.28 from 3.31
  • YIELD CURVE: 2.67 from 2.70 



  • Quarterly Treasury debt sales announcement
  • 7 a.m.: MBA Mortgage Applications, prior (-5.6%)
  • 7:30 a.m.: Challenger job cuts, prior (-38.6%)
  • 8:15 a.m.: ADP employment, est. 198k, prior 201k
  • 10 a.m.: ISM non-manufacturing, est. 57.5, prior 57.3
  • 10:30 a.m.: DoE inventories
  • 3:30 p.m.: SF Fed President John Williams makes first policy speech
  • 4 p.m.: Fed’s Fisher speaks in New Mexico
  • 4:15 p.m.: Geithner speech on economy in Washington
  • 7 p.m.: Fed’s Lockhart speaks in Atlanta


  • Treasury Secretary Tim Geithner speaks in Washington on the economy.
  • Conagra makes a $86/share cash bid for Ralcorp for a takeover that would acquire $2.5b of debt.
  • Applied Materials agrees to buy Varian Semi for 55% premium at $63/share.
  • Richard Branson says no deadline for decision on whether to sell airline.


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Silver Slumps on Higher Margins; Gold Drops on Report of Soros Fund Sales
  • Rice May Drop on ‘Abundant’ Thai Supply, Aiding World’s Poor as Corn Gains
  • Cocoa Poised to Tumble as Maersk Cargo Signals Price Peak: Freight Markets
  • Glencore Seeks $61 Billion Value in London, Hong Kong Initial Share Offer
  • Crude Oil Halts Two-Day Decline in London Before U.S. Employment Report
  • Copper Drops to Seven-Week Low on Concern China May Tighten Credit Further
  • Corn, Soybeans Drop for a Third Day as Price Rallies May Cut Into Demand
  • Sugar Falls for a Fifth Day on Thai Output, China Inflation; Coffee Drops
  • Cash-Copper Premium in China Signals Demand May Increase: Chart of the Day
  • Gasoline ‘Bubble’ May Grow Past 2008 Record on Supply Drop: Energy Markets
  • Palm Oil Drops to Two-Week Low as Demand for Soybeans Weakens, Crude Falls
  • Coal Stocks ‘Alarming Low’ in China, ‘Critical’ in India: Chart of the Day
  • Cocoa Arrivals From Bahia Boost Brazilian Production to Most in 16 Years





THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Euro approaches 18-month high versus dollar before interest-rate decision
  • Portugal financial rescue medicine may be just a first taste - euro credit
  • German 2-year notes drop on ECB tightening bets; Portuguese bonds advance
  • Spain’s thousands of illegal homes sour development minister’s sales pitch
  • BMW profit advances more than estimated on demand for 5-series, x3 models
  • new deutsche bank CEO turns on Krause vying with Weber for power with Jain
  • European stocks fluctuate; Holcim drops while shares of Actelion advance
  • Europe retail sales drop most in 11 months on rising oil, government cuts
  • UK house prices drop for first time in three months as cuts deter buyers
  • UK Mar mortgage approvals 47.6k vs consensus 48.0k and prior revised to 46.7k from 47.0k
  • Uk Apr Construction PMI 53.3 vs consensus 55.5 and prior 56.4
  • Eurozone April Services PMI 56.7 vs consensus 56.9 and prior 56.9
  • Germany April Services PMI 56.8 vs consensus 57.7 and prior 57.7







  • China and Hong Kong fell on fears of further monetary tightening in china.
  • Most Asian stocks decline as raw material producers, Australian banks retreat
  • Hong Kong home sales fall to two-year low on government curbs, loan rates
  • Shinhan profit little changed as Korea property slump drives up bad loans
  • Vietnam raises repurchase rate for fifth time this year in inflation fight
  • Philippines, Malaysia will consider rate rises as oil fuels Asia inflation
  • Asia seeks to boost use of local currencies in trade, reduce dollar’s role.
  • Japan was closed for Greenery Day and will remain closed until 6-May.












Howard Penney

Managing Director

Correlation Risk

“We are willing to accept almost any explanation of the present crisis of our civilization except one.”

-F.A. Hayek


That’s an important quote from page 65 of a chapter that Hayek wrote in “The Road To Serfdom” titled, “The Abandoned Road.” As I take a step back and think about what a tremendous opportunity our profession has had to learn about real-time risk management and the interconnectedness of Global Macro markets in the last 3 years, it’s somewhat sad to realize that consensus hasn’t been paid to learn much.


What we get paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero percent rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero percent short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero percent expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

The Disguise is the one that can really nip a perma-bull in the butt. That’s the one that, allegedly, “no one can see coming.” That’s the one that is being revealed real-time. In terms of making excuses for being willfully blind to it, this time is different because we have a modern day technological innovation in financial market transparency – it’s called Twitter.


Going back to Hayek’s aforementioned point, I think that’s the one thing our professional politicians do not get paid to understand. That would be called accountability. The Disguise in financial markets is The Correlation Risk – and while his original text was addressing a different kind of socialism and Big Government Intervention in 1944, I still think what Hayek goes on to say about explaining our perpetual financial “crisis” is very appropriate:


“… that the present state of the world may be the result of genuine error on our own part… and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”


With another 78 Billion Bailout Euros being extended to the government of Portugal this morning, Spain seeing unemployment spike to 21.3% (new all-time highs), and Americans staring down $5/gas at the pump with jobless claims re-accelerating, wasn’t that some advice our “independent central bankers” and fiscal spenders should have considered?


Independent research? Should we just never mind silly old school things like the American Constitution or what John Locke wrote On Liberty 80 years before Hayek penned his original counter-points to Keynes? Just buy-the-damn-dips, chase yield, and believe that it’s going to end well this time?


Back to The Correlation Risk and playing the game that’s in front of you…


Given that the US Dollar is the #1 factor we are talking about when we say Global Macro Correlation Risk (say it central planners -“who –ho-wns de Campaigner-in-Chief?”), let’s  get a real-time price check on how that looks on our intermediate-term TREND duration (3 months or more):

  1. Crude Oil = -0.92
  2. Gold = 0.94
  3. Silver = -0.94
  4. Coffee = -0.84
  5. Pork Bellies = -0.92
  6. CRB Commodities Index = -0.87

I know, I know – The Bernank calls this commodity stuff that you put in your cars, stomachs, and teeth “transitory”…


How about the intermediate-term TREND inverse-correlations between the US Dollar Index and relatively larger matters like countries?

  1. USA (SP500) = -0.82
  2. Brazil = -0.88
  3. Mexico = -0.82
  4. Germany = -0.93
  5. Spain = 0.94
  6. Russia = -0.85
  7. China -0.85
  8. South Korea = -0.90
  9. Australia = -0.91

How about the obvious, the intermediate-term TREND inverse correlations between the USD spot price and the world’s currencies?

  1. Euro = -0.99 (not a typo)
  2. Swiss Franc = -0.96
  3. British Pounds = -0.95
  4. Chinese Yuan = -0.92
  5. Japanese Yen = -0.87
  6. Singapore Dollar = -0.96
  7. Aussi Dollar = -0.94
  8. Brazil’s Real = -0.92
  9. Canadian Dollar = -0.85

Really? Yes, President Obama – really. This Correlation Risk math checks out from Hawaii to Havana. We get it. Anyone gaming Geithner and The Bernank get it. The Chinese get it.


In the Peoples Bank of China’s Q1 Monetary Policy Statement last night (published on China’s website – not to be politically pandered to on 60 Minutes this Sunday or at a US Federal Reserve Presser), this is what the Chinese had to say about all of the aforementioned real-time prices:


“Stabilizing prices and managing inflation expectations are critical… given the loose monetary policies of major economies and gradual recovery of the global economy, commodity prices and global inflation expectations are rising significantly.”


“Significantly” versus “transitory.” Academic dogma versus independent analysis. Government storytelling versus Correlation Risk. It’s all out there folks. It always has been – and, sadly, when it comes to US policy, so has Hayek’s “Abandoned Road.”


My immediate-term support and resistance lines for Gold are now 1525 and 1565, respectively. For oil I’m at $109.39 and $114.21 – and for the SP500, my immediate-term support and resistance lines are now 1349 and 1373, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Correlation Risk - Chart of the Day


Correlation Risk - Virtual Portfolio

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 80.46%
  • SHORT SIGNALS 78.35%