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CAKE - UPDATING INFLATION EXPECTATIONS

With the volatility in the commodity elevated and corn hitting record highs today the comments from CAKE management team highlight the risk to EPS this year.  I know they can’t update guidance weekly given the volatility in the commodity markets, but we can.  Coming into this year CAKE had 60% of their costs contracted for, leaving the balance to float for the balance of the year. 

 

As of the last update in April, they talked about 3.5% food cost inflation for the year.  The trends would be heavier in the first half (4.5%), which what it was in 1Q and looks like it will in 2Q, but falling to around 2.5% in the second half of the year.  The reason for the slower rate of change in 4Q primarily because 4Q10 had very high dairy prices last year and dairy is a commodity that is not contracted for.

 

CAKE is not expecting commodity costs to fall off a lot, rather as management stated today, “we're just not expecting them to be at the economically high levels that they were in the fourth quarter last year particularly with respect to the dairy component.” 

 

As the charts below illustrate, dairy costs are currently higher than they were in 4Q10.  Of course, there has been significant volatility of late and there is potential for a snap-back.  However, management may be forced to revise its expectations with respect to the dairy component of food costs if prices in cheese and milk markets remain anywhere close to where they are currently trending.  While there is still time for management to revise its view, we are watching this closely. 

 

CAKE - UPDATING INFLATION EXPECTATIONS - cheese 69

 

CAKE - UPDATING INFLATION EXPECTATIONS - milk 69

 

 

Howard Penney

Managing Director


HEDGEYE MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?: DIAL IN & MATERIALS

HEDGEYE MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?  

AND WHAT ARE OUR TOP FINANCIALS LONGS AND SHORTS IN THAT SCENARIO

DIAL IN & MATERIALS
TODAY, JUNE 9, 2011, 11AM EDT

 

Valued Client,
 
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 848675#

Materials: http://docs.hedgeye.com/Macro%20Financials%202.pdf

                 
To submit questions for the Q&A, please email .

****************************************************************************** 

 

"WHATS NEXT FOR THE FED?"  

 

Some of the key topics we will be addressing in this presentation include: 

  • A refresher on our Q2 theme Indefinitely Dovish, which postulates lower interest rates much longer than consensus expects.
  • What are the trigger points for QE3? And does inflation matter?
  • Why the Fed's Indefinitely Dovish policy is about to go from a tailwind for the Financials to a headwind.
  • Not all Financials are positioned equally. We look at which Financials are best (and worst) prepared.
  • A look at hidden sources of interest rate exposure that aren't on most investors' maps.  

Please contact if you have any questions.  

Regards,

 

The Hedgeye Macro Team


JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD

We are hosting a call this morning at 11 am with the Hedgeye Macro Team:

"MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?"

Contact us for access to the slide deck 

Dial-in:

Code: 848675#

 

End of QE2 Presents Risks for Claims

At the end of QE1, claims stopped going down.  When QE2 began, claims started falling again.  While this model may be simplistic, it's shown to be effective over the last two years, as the chart below shows.  When the Fed has the spigots on, the market has climbed and claims have dropped.  In the drought between QE1 and QE2, claims tread water.   We have been watching the charts below for several weeks with a sense of unease, and we expect that the end of QE2 in a few weeks will present another choppy period for claims.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - fed and claims

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - s p

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - s p and fed

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - XLF

 

Claims Rise 5k

Initial Claims rose 5k to 427k last week (+1k against the upwardly-revised print from last week).  The 4-week rolling average dropped slightly, falling 3k to 424k.  According to our model, claims must drop into the 375-400k range before unemployment can begin to improve.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - rolling

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - raw

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - NSA

 

2-10 Spread 

We track the 2-10 spread as a proxy for NIM.  Thus far the spread in 2Q is tracking 11 bps tighter than in 1Q.  This week's spread level of 257 bps compares to 250 bps last week.  

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - spreads

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - spreads qoq

 

Financials Subsector Performance

The chart below shows the price performance of subsectors over four durations.

 

JOBLESS CLAIMS: EXPECT A ROUGH SPOT AHEAD - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


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TALES OF THE TAPE: MCD, CPKI, BOBE, DRI, BWLD, DIN, TXRH, KONA

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

  • MCD traded flat yesterday despite weaker than expected May sales results being released yesterday before market open.  Our view is that May’s results offer further evidence that the core business is waning and comps are being driven by beverages.  Europe’s soft performance is a focus for many as the E Coli situation continues on the continent with a potential negative impact for MCD’s June sales causing concern.
  • CPKI and Golden Gate Capital today announced that CPK Merger Sub Inc. has commenced the previously-announced tender offer for all of the outstanding shares of common stock of the Company at a price of $18.50 per share, according to a press release published by the company yesterday.
  • BOBE was raised to Buy from Hold at Miller Tabak.  Bob Evans gained 11.5% on accelerating volume yesterday. 
  • Casual dining traded poorly yesterday.  DRI, BWLD, DIN, TXRH and KONA all traded lower on accelerating volume.

TALES OF THE TAPE: MCD, CPKI, BOBE, DRI, BWLD, DIN, TXRH, KONA - stocks 69

 

Howard Penney

Managing Director


THE M3: HODW; SHOPPES AT MBS; JUNKETS

The Macau Metro Monitor, June 9, 2011

 

 

DANCING WATER TURNING A PROFIT Macau Daily Times

Sunny Yu, MPEL's VP for entertainment and projects, said The House of Dancing Water (HODW) so far has received over 500,000 spectators and that the attendance rate is still above 90%.  Yu confimed HODW's revenue is covering all operating expenses.  "If it continues doing great, within 10 years we will get our investment back," said Yu.


LAS VEGAS SANDS AIMS TO SELL SHOPPING MALL AT SINGAPORE CASINO Business Times, Reuters

LVS COO Michael Leven said, "We did over a billion dollars in our first year in EBITDA (for MBS). We expect that to grow. I think a four-to-five year payback in that situation, anybody would be happy with that return on investment. We should do that very easily without even selling an asset like our mall (The Shoppes at MBS), which we expect to sell maybe in 2013 or 2014, which can provide as much as US$4 billion back for our $6 billion investment just on the mall alone."

 

The Shoppes now has more than 250 stores and restaurants.  The Shoppes has been facing complaints of slow traffic from some retailers.

 

NO GOLDMINE Macau Daily Times

Samuel Tsang, the Century Legend Group chairman, said most investors don’t understand the risks of running a junket.  He stressed the percentage of the bets paid back to VIP gamblers is increasing to an average of 1%.  Meanwhile, the former executive vice president of Sands China, Luís Mesquita de Melo, wants more transparency and supervision of junkets. "The regulations somehow dilute the responsibility between junkets and operators, which allows for a lot of sub-junkets that don’t go through the licensing process...politicians need to discuss and decide if it makes sense to allow junkets to remain a subculture or if they should bring them into the gaming business," he remarked.



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