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WEEKLY COMMODITY MONITOR: PEET, SBUX, GMCR, MCD, CMG, BWLD

As the dollar has gone down week-over-week, the up-moves in agricultural commodities were more pronounced than the down-moves. Coffee, sugar, corn, and chicken wings all led the way, while rice and pork declined week over week.  Heading into earnings season, it will be interesting to take stock of companies’ updated full-year commodity inflation guidance versus what it was at the time of the last earnings call.  Some companies, like CAKE, are not guiding to realistic levels of inflation, in our view.

 

WEEKLY COMMODITY MONITOR: PEET, SBUX, GMCR, MCD, CMG, BWLD - commod 630

 

 

COFFEE

 

Coffee prices are up 6.8% over the past week as rising demand and higher fuel costs continue to impact the price of the commodity.  For the coffee concepts, SBUX, PEET, GMCR, MCD, DNKN, CBOU, and THI, rising commodity costs are a serious concern.  While some of these companies have prices locked in, to the extent that contracts may be coming up for renewal, prices are likely to burden restaurant-level margins sooner or later.  Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls:

 

WEEKLY COMMODITY MONITOR: PEET, SBUX, GMCR, MCD, CMG, BWLD - coffee 630

  • PEET (5/3/2011): We believe we're better off lowering our earnings guidance by $0.10 this year and continuing with the plans we have in place than we would be curtailing spending activity or taking extraordinary pricing action that would be inconsistent with our long-term business interests, and the more sustainable long term cost of coffee we foresee.  As a result, you will see throughout our call today that we have a very strong performing fundamental business, but we have to buy some unusually high priced coffee in the short term, then we're not going to do unnatural things in reaction to an unnatural market environment short term. Hedgeye: prices were sliding as the dollar caught a bid but, over the last couple of weeks prices have swung higher again.  While it seems that prices may have been “unusual”, this elevated level of pricing may persist for longer than expected.
  • GMCR: (5/3/11): Before closing, I also want to touch on rising coffee costs and the effect of our business. Like others in the industry, we are closely watching coffee prices. When we announced our last price increase in September of 2010, coffee prices had increased roughly 30% from $1.45 to $1.90 per pound over the course of roughly three months. Since then, costs have continued to escalate, recently hitting historic highs of more than $3 a pound, a nearly 60% increase since September.  In attempt to offset rising green coffee costs, as well as increases in other input costs, we are currently in the process of raising prices for all packaged types. We expect that consumers will see an increase of approximately 10% at the point-of-purchase as the result of this price increase. We expect to see the full benefit of this price increase during our fiscal fourth quarter of 2011.  We generally fix the price of our coffee contracts three to nine months prior to delivery so that we can adjust our sales prices to the marketplace.  Hedgeye: Coffee has backed off the “historic” high of more than $3 per pound but is still at $2.60 plus and up over the last couple of weeks.  Demand remains strong; without a rising dollar, expect price to continue to pressure retailers.
  • SBUX (4/27/11): Regarding coffee costs, as I have indicated previously, we have fully locked our coffee costs for 2011 and are price-protected for a couple months into fiscal 2012.  As we progress through the balance of 2011, we will progressively take actions to secure our coffee needs and lock coffee costs for additional months into 2012. While we expect that the costs we pay for coffee may be higher in '12 than they are in '11, we remain confident that we can offset those increased costs and preserve our long-term earnings growth targets.  Hedgeye: SBUX is confident that it can pass on price and offset coffee inflation with other efficiencies.  It is interesting that it expects higher coffee prices in 2012 than in 2011, which would somewhat contradict PEET’s assertion that in May that prices at the time had been unusual.  SBUX expects worse prices to come.

 

CORN

 

Corn prices have bounced significantly of late as the dollar has declined, expectations of harvests in 2011 have dipped, overly moist fields have deterred farmers from planting, and ethanol production continues has depleted supplies.  Corn is an important commodity for the broader restaurant industry because it is used as feed by meat producers.  As prices in corn accelerate, it supports prices in beef, chicken, pork, and other meat markets.  Below is some recent management commentary pertaining to corn prices:

 

WEEKLY COMMODITY MONITOR: PEET, SBUX, GMCR, MCD, CMG, BWLD - corn 630

  • CMG (4/20/11): The only things we have locks on corn for most of the year, rice for the entire year, our tortillas and beans for most of the year as well.  Hedgeye: CMG will likely have to renew any corn contract at a level far higher than the one it currently holds. 
  • MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. Hedgeye: Looking at where the prices of these commodities have gone since this quote, one would have to think guidance for commodity costs are going higher.

 

CHICKEN WINGS

 

Chicken wing prices are ticking higher, as we have expected them to do – summer generally brings an uptick in prices as demand picks up.  See the chart below.  BWLD is certainly in the clear for 2011 but, the question mark as we progress through the back half of 2012, will be on prices in 2012. 

WEEKLY COMMODITY MONITOR: PEET, SBUX, GMCR, MCD, CMG, BWLD - chicken wings 630

  • BWLD (4/26/11): For cost of sales, the traditional wing market continues to be favorable and the price of chicken wings for the first two months of the second quarter is averaging about a $1.02 per pound, which is lower than any quarterly price since 2003. It compares to last year’s average price for the second quarter of $1.51. Our Boneless Wings contract is extended through March of 2012 at flat pricing to 2010. Hedgeye: Traditional wings count for 20% of restaurant sales and boneless wings count for 19%.

 

Howard Penney

Managing Director

 

 

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 30, 2011

 

As we look at today’s set up for the S&P 500, the range is 15 points or -1.03% downside to 1294 and 0.12% upside to 1309.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 630

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1128 (-618)  
  • VOLUME: NYSE 913.00 (+13.5%)
  • VIX:  17.27 -9.91% YTD PERFORMANCE: -2.70%
  • SPX PUT/CALL RATIO: 1.40 from 1.43 (-1.60%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.54
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 3.148 from 3.05
  • YIELD CURVE: 2.67 from 2.57 

 

MACRO DATA POINTS:

  • 8:30am: Quarterly USDA reports
  • 8:30 a.m.: Acreage planted (cotton, corn, wheat, soybean)
  • 8:30 a.m.: Jobless claims, est. 420k, prior 429k
  • 8:30 a.m.: Net export sales
  • 9 a.m.: Treasury Secretary Geithner attends Clinton’s CGI America in Chicago
  • 9:45 a.m.: Chicago Purchasing Manager, est. 54.0, prior 56.6
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-45.2) prior (-44.9)
  • 10 a.m.: Fed’s Bullard gives speech on QE in Missouri
  • 10 a.m.: NAPM Milwaukee, est. 59.0, prior 62.0
  • 10:30 a.m.: EIA natural gas
  • 1 p.m.: Fed’s Hoenig speaks in Des Moines

WHAT TO WATCH:

  • Germany’s biggest banks and insurers, the government said to agree on a draft proposal to roll over Greek debt holdings
  • Bank of America, Goldman among financial firms cutting jobs as equity, bond trading slows
  • American Airlines is discussing an order of as many as 280 new narrow-body jets, a deal that may worth at least $22.6b based on list prices

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Rice Supplies Tightening in China May Increase Imports, Bolster Inflation
  • Texas Cotton Farmers Abandon Record Acres on Drought as Gap’s Costs Rise
  • Crude Oil Falls, Heads for Quarterly Decline, Amid Signs of Ample Supplies
  • Corn Gains on Concern USDA Will Reduce Estimates for Acreage, Inventories
  • Copper May Climb on Reduced Concern Greek Debt Default Might Affect Banks
  • Cocoa Rises to Eight-Week High on Shortage Speculation; Sugar Prices Drop
  • Gold May Decline as Reduced Greek Default Concern Curbs Investment Demand
  • Silver ‘Euphoria’ Drops as India Buyers Return to Gold, Spot Exchange Says
  • Scrapping Record Fails to End ‘Nightmare’ for Shipowners: Freight Markets
  • Mining Boom Makes Truck Tires Pricier Than Porsches, Condominiums in Miami
  • Sugar Australia Buys Thai, Brazil Supplies for Second Time in Three Years
  • Lynas’s Malaysia Rare-Earth Plant Faces Delay on Government Safety Review
  • Dutch Poultry Bacteria Linked to Superbugs in People, Researchers Report
  • CBH Raises Western Australia Grain Harvest Forecast as Rains Boost Crops

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European equity markets trade higher; peripheral markets led the gains.

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • Asian market are generally higher..

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING

We track initial claims as an early read into bank credit, as initial claims are a good indicator of frequency for delinquencies.  This morning, we are adding bankruptcies to our weekly report.  Bankruptcies help predict net charge-offs (since a consumer who declares bankruptcy sees card debt move straight to charge-offs without necessarily passing through delinquent buckets).  The chart below shows bankruptcies from January 2009 through May 2011.  On a year-over-year basis, bankruptcies continue to improve, dropping 16% in May. This is a positive sign for bank credit in 2Q as well as for the health of the consumer.  

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - bankruptcies

 

Initial Claims Remain Flat - Again - As QE2 Ends

Initial claims were close to flat last week, dropping just 1k to 428k.  This is the fifth week in a row that the 4-week moving average has been almost exactly flat.  We have been noting for some time that claims stopped going down and started going sideways when QE1 ended.  We'll begin to see the effect of QE2's end over the coming weeks, but the early read is not positive.  Claims have now been higher than they were at the start of the year for nine consecutive weeks.  

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - rolling

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - raw

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - NSA

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - fed

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - sp

 

2-10 Spread Close to Flat Week Over Week

We track the 2-10 spread as a proxy for bank margins.  This week's level of 264 bps is up slightly from a level of 261 bps.

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - spreads

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - spreads QoQ

 

Financials Subsector Performance

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

 

BANKRUPTCIES CONTINUE TO DROP IN MAY AS INITIAL CLAIMS STILL NOT IMPROVING - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

TALES OF THE TAPE: DNKN, WEN, CBOU, RUTH

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

 

MACRO

 

Unemployment continues to be a concern as Initial Jobless Claims came in at 428,000, leaving the rolling number at 426,750.  Considering that the level of claims needs to drop to ~375,000 before a reduction in the unemployment rate can come about, this is another reminder of the gravity of the employment situation in the U.S.

 

Commodity prices are not moving in tandem, as they have – straight up – over much of the past nine months, but there seems to be considerable inflation in many foodstuffs. For instance, rice supply in China, the world’s biggest grower and consumer, may decline after drought and floods damaged crops, potentially boosting inflation and increasing imports. 

 

Corn rose in Chicago, reducing the decline seen in 2Q, on speculation that the government will reduce its estimate for national acreage and stockpiles of the grain.  Delayed planting, poor weather and flooding may limit crop yield potential, according to some commentators.

 

For the week ended June 24, gasoline demand dipped 1.8% below year ago levels as pump prices were 32% higher than in 2010, according to Mastercard.  We are short CBRL in the Hedgeye virtual portfolio.

 

 

QUICK SERVICE

  • DNKN is said to be setting its IPO price range as soon as next week.
  • WEN spoke at the Oppenheimer Consumer Conference and provided guidance for same-store sales of +1 to 3% and food inflation of 5 to 6%.  The stock gained 1.4% on slightly-higher-than-usual volume.
  • CBOU declined 4.6% on accelerating volume.  Over the past month, the stock is by far the best performing in QSR.

 

CASUAL DINING

  • RUTH declined on accelerating volume.

 

TALES OF THE TAPE: DNKN, WEN, CBOU, RUTH - stocks 630

 

 

Howard Penney

Managing Director



Optimistic Pessimists

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

-Winston Churchill

 

Earlier this week, I appeared on BNN, which is the Canadian equivalent of CNBC to discuss some of our key recent macro thoughts (the clip can be found here: http://watch.bnn.ca/#clip491722 ).  Shortly after the appearance, our COO Michael Blum emailed and said I need to smile more.  I then was told by one of our top Canadian subscribers that I could use some rose colored glasses.  These comments made me wonder: am I too pessimistic? Further, is Hedgeye too pessimistic?

 

Admittedly, our morning missives at times can come across with a pessimistic tone.  This is a function of the early mornings, our legitimate concerns regarding the global economic outlook, and, candidly, some disdain for the decision making and leadership currently coming out of Washington, DC.   Now some might argue we could simply ignore Washington, DC, but the reality is that we are in an economic and market environment in which Washington decision making is critical to investment decision making.

 

Despite our tone in the Early Look some mornings, as a firm I can ensure you we are incredibly optimistic. The simple fact that we started this firm in the middle of 2008 shortly ahead of one of the most dramatic equity sell-offs in our lifetimes is probably the best validation of our optimism.  We continue to be optimistic about the future of our business, the businesses of our subscribers, and our collective ability to continue to find interesting and alpha generating investment opportunities.  Moreover, we are also optimistic about our ability to help shape and inform economic policy.

 

We currently share our thoughts and research with decision makers within the Obama administration, with certain Presidential hopefuls, and with members of Congress on both sides of the aisle.  Our goal is not to someday become rich selling research to the government, but rather to do our part to get this fine country to a better fiscal, monetary, and economic place by providing input and ideas where we can.  While there are certainly economic storm clouds on the horizon, as Churchill said long ago there is “opportunity in every difficulty.”

 

Currently, the Hedgeye research team sees a number of interesting opportunities on the long side.   Below I’ve outlined a number of our team’s top investment ideas that were circulated in May’s version of the Hedgeye Edge on May 27th 2011:

  1. Visa (V) – We remain strongly of the view that Durbin will be softened, and that this will remove a meaningful source of overhang on the stock. While MasterCard has already had a major run, Visa has lagged considerably behind. Update: Durbin was softened and V is up +8.5% since May 27th.
  2. Buffalo Wild Wings (BWLD) - The last quarter was very difficult to poke holes in and it remains one of our favorite ideas as its primary food cost, chicken wings remain suppressed. We see sales continuing to accelerate and a focus of management on deploying further cash into the business which should fuel further growth. Update: Chicken costs have remained soft and BWLD is up +5.8% since May 27th.
  3. Nike (NKE): Over the intermediate and longer terms this is McGough’s favorite big cap long idea. He thinks that it grows from doing $20 billion in sales to $28 billion in 3 years. Update: NKE reported strong earnings earlier this week and is up +6.1% since May 27th.

Since May 27th, the SP500 is down -1.8%, so these ideas did quite well on relative basis.  Now to be fair, not all of the ideas in Hedgeye Edge fared this well (and some such as KONA fared much better), but the point is really to emphasize that even when our Macro view can sometimes be pessimistic, our research can still find interesting opportunities on the long side.  If you are an institutional subscriber and would like to connect with a Sector Head on these ideas or other stock ideas, please email .

 

Today is both quarter end and month end for the investment management community.  The SP500 as of the close yesterday is down -2.8% for the month and -1.4% for the quarter, which is depressing even for an Optimistic Pessimist like myself.  The end of the quarter also signals the end of the Federal Reserve’s program of Quantitative Easing II, which is certainly a positive for anyone other than those still clinging to the ideology of Keynesian economics.

 

The key potential impact of the end of QEII is a strengthening U.S. dollar, which will perpetuate the continued deflation of commodity prices.  Far be it for me to call out too many positives this morning, but commodity prices deflating will be positive for corporate earnings (eventually) and incrementally positive for consumer spending. 

 

Now as for Standard & Poor’s warning this morning that it will cut the U.S. to its lowest rating of “D” if the government fails to increase the debt limit, I would recommend disregarding Standard & Poor’s with impunity.  The 10-year yield for U.S. Treasury is trading at 3.097%, which means that the U.S. is not defaulting on its obligations any time soon.  While we may not particularly like the debt ceiling resolution, a default is not imminent.

 

Our job as market operators is not to be pessimistic, optimistic, bearish, or bullish, but ultimately it is to be right.  Trust me, even if we sometimes sound dour, the Hedgeye Research Team is always finding nuggets of optimism somewhere.  As the famous Persian proverb goes:

 

“I had the blues because I had no shoes until upon the street, I met a man who had no feet.”

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Optimistic Pessimists - Chart of the Day

 

Optimistic Pessimists - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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