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WEEKLY COMMODITY MONITOR: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD

On average, the up moves were stronger than the down moves in the commodity prices we track in our commodity monitor.  Milk and Cheese, in particular, put on strong moves while wheat was the most notable mover to the downside (as shown in the chart below).

 

WEEKLY COMMODITY MONITOR: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD - commod 67

 

 

Dairy

 

Cheese and milk prices moved sharply higher last week, 12.8% and 14.1% respectively.  For DPZ, PZZA, CAKE, YUM’s Pizza Hut and other restaurant companies, this is an important data point.  Coming into the second quarter, dairy prices corrected sharply, allowing some respite for restaurant companies with exposure to dairy costs.   This also saved the management teams from answering the questions that the charts below pose.  As the charts below indicate, dairy prices are more volatile than they have been over the past couple of years.  Below are some select quotes pertaining to dairy costs from management teams’ most recent earnings calls.  DPZ may have been right on 1Q, but it seems that 2Q’s gain may take them by surprise.  While DPZ has a contact that effectively eliminates one-third of cheese market volatility, the current trajectory and amplitude of the move in cheese prices is negative for restaurant operating margins.

 

JACK (5.19.11): “Cheese also accounts for about 6% of our spend and we continue to expect a 15% increase for the year.”

 

DPZ (5.5.11):  “And really the one to watch as always is cheese and our best bet right now is that it's going to stay relatively close to where it is right now but cheese is the one that often gives the biggest surprises either up or down and that's the one to kind of watch but assuming cheese stays relatively flat from here on out then, the absolute food costs from – through the rest of the year are probably going to stay pretty consistent with where they were in Q1 which to your point means the percentage year-over-year increase will probably ease a little bit over the course of the year.”

 

CAKE (4.20.11):  “The first half of the year, we're expecting food cost inflation of about 4.5% plus and then in the last half of the year, about 2.5% minus. And a lot of that has to do with the fact that we expect to lap a lot of high dairy costs from 2010 and the fourth quarter of 2011, but also due to the fact that we expect to have slightly lower fresh fish costs, slightly lower cheese prices, than last year as well.”

 

CMG (4.20.11): As we move into 2011, we’re expanding our use of cheese and sour cream made with milk from cows.

 

WEEKLY COMMODITY MONITOR: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD - milk 67

 

WEEKLY COMMODITY MONITOR: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD - cheese 67

 

 

Corn

 

Corn prices took a dive over the last week, declining 1.5%.  Nevertheless, the grain remains up 119.4% year-over-year and it can be expected that protein prices will remain supported as long as these elevated prices remain.  In terms of the supply and demand data points, the preponderance of the factors seems to suggest that prices will remain high for the foreseeable future, the occasional correction notwithstanding.  According to Bloomberg, wet weather-related planting delays may send global inventories to their lowest level in 37 years.  More than one third of Midwest fields were planted after the mid-May target for optimal growth because of excessive rain.  Below, we outline some comments from restaurant (and food) company management teams pertaining to corn.

 

AFCE (5.26.11):  “This is up from our previous guidance of a 2% to 3% increase, primarily due to higher commodity costs in corn and soy, which impacts our bone-in chicken, as well as increases in the cost of flour and cooking oil.”

 

TSN (5.9.11):  “There is nothing really to stop us from buying back stock other than what's in front of us that's quite uncertain. What if corn goes to $10? Those kinds of things; we really maintain a lot of liquidity. It's $1.6 billion right now. We need to maintain a lot of liquidity.”

 

JACK (2.24.11): “And then 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. So I hope that that helps. 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: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD - corn 67

 

 

Chicken Wings

 

Chicken wing prices gained week-over-week as ample supply (broiler egg sets six-week average was up +1% year-over-year) offset rising substitute demand. 

 

WEEKLY COMMODITY MONITOR: JACK, DPZ, PZZA, CAKE, CMG, AFCE, TSN, JACK, BWLD - chicken wings 67

 

 

Howard Penney

Managing Director


THE M3: MPEL 1.2BN LOAN; SANDS EXPANSION PLANS; BALLY ASIA; TAIWAN

The Macau Metro Monitor, June 8, 2011

 

 

MELCO CROWN SAID TO ALLOCATE $1.2 BILLION LOAN TO 13 LENDERS Bloomberg

According to a source, the loan consists of an $800MM term loan and a $400MM revolving credit facility.  Australia & New Zealand Banking Group Ltd., Bank of America Corp, Bank of China Ltd., Commerzbank AG and Deutsche Bank AG were the five lenders hired to organize the loan.  Bank of China contributed $200MM, while the others each gave $75MM.

 

Banco Nacional Ultramarino SA, Citigroup Inc., National Australia Bank Ltd. and Royal Bank of Scotland Group Plc also put in $75MM for a total interest and fee payment of 208-308bps more than LIBOR, depending on whether they contributed to the term loan or revolver.  Banks contributing $50MM each for a total payment of 204-304bps included Bank of Nova Scotia, China Construction Bank Corp. and Credit Suisse Group AG, while lenders committing to $45MM were Banco Comercial de Macau, Banco Comercial Portugues SA, Commonwealth Bank of Australia, Tai Fung Bank and Wing Lung Bank.  Also, Bank of East Asia Ltd. contributed $25MM.


SANDS SEES STRONG GROWTH IN ASIA, IN TALKS TO EXPAND EMPIRE Reuters

Adelson reiterated LVS's interest in Japan, Korea, Taiwan and Vietnam.  Adelson confirmed plans to build a EuroVegas strip in either Madrid or Barcelona, detailing that it would be twice the size of Macau's Cotai strip with twelve 3,000-room properties.

 

SLOT MAKER BALLY EYES ASIA GROWTH, BETS ON AUSTRALIA Reuters

Bally Technologies said it hopes to secure 18-20% of Lots 5 & 6's slot machines orders when the property opens in 1Q 2012.  Cath Burns, vice-president of Bally's Asia operations said it is also in negotiations with Wynn Macau, SJM, and MGM China for their upcoming Cotai properties, and expects to be given the green light within the year, with around 18-20% of orders for each.

 

Burns mentioned that Australia would be the company's top growth market after Bally received approval to sell machines there in April. Bally aimed to lift its market share in New South Wales to 10% over the next 18 months.  Macau would continue to account for the biggest chunk of Bally's business at about 40% compared with Australia's about 20%.

 

Bally is also talking with MGM and Asian Coast on its Ho Tram Strip project in Vietnam and also with the management of the upcoming Belle Grande Manila Bay casino in the Philippines--both with 18-20% share targets.


TAIWAN CASINOS MIGHT AFFECT MACAU'S OPERATIONS
Macau Daily News

Taiwan recently held a discussion forum on its gaming law, and MPEL, LVS, WYNN were present.  Wynn indicated it wanted Taiwan casinos closer to Taipei and that if they are set up on an offshore island, investment scale and economic benefits will be greatly diminished.

 

It is believed that casinos will only be allowed on offshore islands.  Some scholars believed that Macau will be greatly affected, with Fujian guests being the first to turn to Taiwan.  Meanwhile, Mainland China and Taiwan are about to sign off the individual travel scheme giving Beijing and Shanghai as the two pilot cities to implement the scheme.


TALES OF THE TAPE: MCD, YUM, KONA, DIN

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • MCD global comparable store sales rose 3.1% in May versus consensus of 3.6%.  U.S. comps were up 2.4%, below the street’s estimate of 2.9%.  Europe comparable restaurant sales great 2.3% versus 4% consensus.  Finally, APMEA comparable restaurants sales great 4.3% versus 4% consensus.
  • YUM’s Taco Bell CEO Greg Creed insists that Taco Bell does not compete with Chipotle just as Hyundai does not compete with BMW.
  • KONA and DIN were notable underperformers during yesterday’s session, trading down -5.3% and -2.4%, respectively, on accelerating volume.
  • According To NRN.com, the foodservice industry is forecast to add 425,000 jobs over the summer, reflecting the healthiest summer employment picture since 2007. 

TALES OF THE TAPE: MCD, YUM, KONA, DIN - stocks 68

 

 

Howard Penney

Managing Director


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World Movers

“Whatever we are, it’s we who move the world, and it’s we who’ll pull it through.”

-Hank Rearden (Atlas Shrugged)

 

If that isn’t the quote of a self-made man, I don’t know what is. In Atlas Shrugged, Rearden Metal personified capitalism. Sometimes it’s harsh. Sometimes you win. Sometimes you lose. But you are always going to be held accountable to your own decision making.

 

Le Bernank showed that he stands for none of that last night in Atlanta. Since he’s never run a company, hired/fired employees, or assumed the responsibility of putting his own capital at risk – this should not surprise you. He is a Keynesian Central Planner.

 

Whether you are an Ayn Rand, Ben Bernanke, or Jaime Dimon fan is of no particular concern to me when I wake up to write this note to you every morning. I am concerned with making money so that I can confidently and gainfully employ a team of professionals that helps you manage risk.

 

If there are more than a few lines in Ayn Rand’s 1168 pages of Atlas Shrugged that resonate with me, that doesn’t mean I am an Ayn Rand lover inasmuch as I don’t have to love anything in this good life more than my wife and family. I like to read things that I disagree with. I like things that make me think.

 

I am a Risk Manager – and, unlike Le Bernank, that means I am tasked with considering multiple ideas across multiple risk management scenarios. Accepting anyone’s dogma in full, including the Holy Bible’s, lacks the intellectual honesty to question. I am tasked with not losing you money. That includes accepting when I am wrong. The goal is to be right.

 

What’s been right about cutting interest rates to ZERO percent and scaring the living daylights out of Americans in order to market the fear-mongering message? Has socializing losses made the capitalists in this country less or more confident in hiring? What’s the difference between jacking up short-term liquidity and eroding long-term demand?

 

These are critical questions that the Chairman of America’s Unaccountable Central Planning Board does not have an answer to. Last night he called GROWTH “frustratingly slow” and INFLATION “transitory.” In response, JP Morgan’s respected CEO, Jaime Dimon, asked Le Bernank, “do you have fear like I do?”

 

The context of Dimon’s question was also critical. He prefaced the question about fear by asking Bernanke if he thinks in “10 years someone will be writing a book about” how all of this Big Government Intervention was what perpetuated the slowdown itself. Atlas Shrugged is a 54 year-old fictional book. Jaime, get the paperback.

 

Back to the Global Macro Grind

 

Yesterday, when the US stock market was up intraday, I cut my US Equity exposure in the Hedgeye Asset Allocation Model in half, selling down our long (and wrong) position in US Healthcare (XLV) from 6% to 3%.

 

If the US stock market closes down again today, it will be down for 6 consecutive days and 6 consecutive weeks. If that’s Le Bernank’s definition of success, using a massive amount of financial and societal leverage, I’d hate to see what losing looks like.

 

Why do I continue to sell strength in equity and commodity market exposures?

  1.  The Market – real-time prices don’t lie; Keynesians do.
  2. The Data – I have yet to see sequential improvement in any of the high frequency data that we track
  3. The Fed – and Indefinitely Dovish Fed that can’t hike (or cut) has been a life preserver for Gold and UST Bonds

Away from the US, here’s The Market’s message:

  1. China (the world’s 2nd largest economy) remains bearish TRADE and TREND with the Shanghai Composite down -2.1% YTD
  2. Japan (the world’s 3rd largest economy) remains bearish TRADE and TREND with the Nikkei down -7.6% YTD
  3. Germany (the world’s 4th largest economy) just moved to bearish TRADE and TREND this morning with the DAX down a full -1%

In terms of The Data:

  1. South Korean GDP Growth slowed sequentially to +4.2% in Q1 (better than US, Japanese, or W. European Growth, but slowing)
  2. Brazilian Inflation (CPI) rose sequentially to +6.6% year-over-year in May vs +6.5% in April
  3. Philippines Inflation (CPI) rose sequentially to +4.5% year-over-year in May – a new YTD high

But The Fed (and I couldn’t make this up if I tried):

  1. Expects US employment to improve in the coming months
  2. Expects US Growth to re-accelerate
  3. Expects US Inflation to remain “transitory”

PROBLEM: The Market and The Data completely disagree with The Fed (as they have for the last 3-6 months).

 

That’s why Ben Bernanke having a smirk on his face when a Market/Data centric Risk Manager like Jaime Dimon was asking him THE question (what if your Keynesian Dogma is wrong?), made every red-white-and-blue capitalist in this country want to puke.

 

This is the beggar/bailout central planning that we ordered up folks. “Whatever we are”, it’s only we who can stop doing what we are doing to this country – so that we can start to pull it through.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $98.40-100.79, $1, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

World Movers - Chart of the Day

 

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Mega Dogma

This note was originally published at 8am on June 03, 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 century of megacities has already begun.”

-Lawrence C. Smith (“The World In 2050”)

 

I’m writing the Early Look from Los Angeles, California this morning. According to Lawrence Smith’s research in an excellent book I just finished reading, “The World In 2050”, Los Angeles-Long Beach-Santa Ana is the world’s 11th largest Mega City (a city with more than 10M people). Next to New York-Newark, which I’ll be on a plane to later this afternoon, that makes LA the only US city in the global top 19.

 

Most of you probably knew that.

 

What I didn’t know (from Lawrence’s data compilation in his chapter titled “A Tale of Teeming Cities”):

  1. The world had 2 megacities in 1950
  2. The world has 19 megacities now
  3. The world will have at least 27 megacities by 2025

“Of the eight new megacities anticipated over the next fifteen years, six are in Asia, two in Africa, and just one in Europe. Zero new megacities are anticipated for the Americas. Instead this massive urbanization is happening in some of our most populous countries: Bangladesh, China, India, Indonesia, Nigeria, and Pakistan.” (Smith, page 34)

 

Now there are obviously plenty long-term investment implications associated with a world that continues to move East. And I assume most of you probably know that too – but what we don’t know is what this balance of population-power is going to do to our Western Dogma of ZERO percent interest rates - and the associated pillaging of our savings (Asians and Muckers like to save).

 

Being on the road, I get into a lot of fascinating debates with some of the world’s sharpest investing minds. This has been the most intellectually fulfilling aspects of building Hedgeye. Meeting with people who run the buy-side is infinitely more interesting than having a sell-sider beg me for a bonus, bailout, or an II vote.

 

One of the current debates I have been getting into with buy-siders centers on how long America can sustain Japanese and Western European monetary policies?

 

Good question - with answers that continue to be tattooed with partisan politics (yes, being a Keynesian is partisan):

  1. US Monetary Policy – we have two views; what Le Bernank should have done (raised rates 6 months ago) and what he will do (nothing – he hasn’t raised rates since 2006 and he won’t start now). Our Q2 Macro Theme remains that the Fed will remain “Indefinitely Dovish” (no QG3 and no rate hikes), which is why we are long a UST Flattener (FLAT) and the long-bond (TLT).
  2. Western European Monetary Policy – we have one view; Les Eurocrats will remain socialist in their leanings even though they are pretending to be chicken hawks post their most recent rate hike (ECB raised rates before the Fed for the 1st time ever). Le Trichet will be gone by year-end and replaced by a left-leaning Italian (Mario Draghi). We think he could cut rates within his first 3-6 months.
  3. Eastern European and Asian Monetary Policy – they have one view; fight inflation with the weaponry allocated to the Fiat Fools. Russia shocked me early this week with another interest rate hike and obviously the Chinese and Australians have raised interest rates 6 times respectively since this short-cycle global “recovery” began.

More objective policy makers who use the blunt fiat instrument of interest rate decisions both ways (like yesteryear’s Bundesbank or today’s Reserve Bank of Australia), have learned over the years that there is one unique advantage to having the stones to raise interest rates – THEN YOU CAN CUT THEM!

 

Le Bernank et Les Japanonais… not so much. They have chosen to put their countries in de penalty box for many, many, time – deh will ultimately sit dere now… and feel shame…

 

Or maybe they won’t feel shame. Your run of the mill central planning groupthinker from the Keynesian Kingdom tends to think they’ve saved us from all of the problems that they’ve created with ZIRPS (ZERO interest rate policies). Have you ever seen an academic “economist” win his or her Nobel prize and have a change of heart?

 

Not so much…

 

“We are now on a trajectory to add nearly 40% more population by the year 2050, raising our number to around 9.2 billion. Who will we be in 2050? In that year, for every one hundred of our future children and grandchildren born, fifty-seven will open their eyes in Asia and twenty-two in Africa, and mostly in cities.” (Smith, page 35)

 

A few important words in Smith’s depiction of the Global Macro Markets in which interconnected factors will continue to collide: “our number”, “our future”, and “open their eyes”…

 

Do we really think that conflicted, compromised, and constrained monetary policies that serve 5-10% of Western populations’ compensation desires (never mind 1% of our world’s) are going to hold their dogmatic line?

 

That’s a mega question that I’d love to see Le Bernank host a Global Presser Conference on and answer in Chinese and Rusky, with a straight face. Particularly after this morning’s Jobless Stagflation report, which will continue to remind the world that the Greenspan-Bernanke era of cutting savers account returns to ZERO percent has equated to a decade of ZERO net jobs created in America.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1527-1546, $98.11-102.29, and 1303-1324, respectively.

 

Best of luck out there today and enjoy the weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mega Dogma - Chart of the Day

 

Mega Dogma - Virtual Portfolio


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