TODAY’S S&P 500 SET-UP - July 26, 2011


Instead of making a decision, Obama reverts to the fear-mongering last night. The US Dollar falls. Treasuries move a beep. UK reports another stinky stagflation number – and upward and onward we go with our risk management day.  As we look at today’s set up for the S&P 500, the range is 27 points or -0.93% downside to 1325 and 1.09% upside to 1352.






THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -1809 (-1704)  
  • VOLUME: NYSE 763.67 (+3.44%)
  • VIX:  17.52 -0.23% YTD PERFORMANCE: -1.30%
  • SPX PUT/CALL RATIO: 1.58 from 1.16 (-35.41%)


  • TED SPREAD: 20.63
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.03 from 2.99   
  • YIELD CURVE: 2.61 from 2.59


  • 7:45 a.m./8:55 a.m.: Retail weekly sales from ICSC/Redbook
  • 9 a.m.: S&P/CaseShiller 20 City MoM% est. 0.0%, prior 0.09%
  • 10 a.m.: Consumer Confidence, est. 56.0, prior 58.5  
  • 10 a.m.: Richmond Fed Manufacturing, Jul, est. 5, prior 3  
  • 10 a.m.: New Home Sales, Jun, est. 320k (up 0.3%) from 319k
  • 11:30 a.m.: U.S. to sell $18b 4-wk, $20b 52-wk bills
  • 1 p.m.: U.S. to auction $35b 2-yr notes
  • 2 p.m.: Fed’s Hoenig testifies on monetary policy


  • The dollar sank to a record low versus the Swiss franc and Treasuries fell amid little signs of progress to resolve U.S. debt talks
  • Dunkin Brands prices IPO after the close
  • IMF chief Lagarde addresses Council on Foreign Relations



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Drought Withers Smallest Hay Crop in Century to Boost Beef Costs
  • Gold May Decline After Rally to Record Amid U.S. Debt Stalemate
  • Sugar Rises on Speculation Supplies Are Limited; Coffee Advances
  • Japan Corn Cargoes at Quarter-Century Low: Freight Markets
  • Morgan Stanley Raises Gold, Silver Targets Through to 2016
  • Gold Miners in South Africa to Join Strikes Hurting BHP, Anglo
  • Oil Supplies Decline for Eighth Week in Survey: Energy Markets
  • Grain Volatility to Stay on Low Stockpiles, Surging Demand
  • Global Natural-Rubber Demand May Grow 3.8%, Palanivel Forecasts
  • Cows-for-Bride Inflation Spurs Cattle Theft in South Sudan
  • Rice Husks Follow Solar to Power Indian Towns Off Utility Grid
  • Rice, Sugar-Cane Crops to Benefit From ‘Good’ India Monsoon Rain
  • India May Consider Additional Sugar Exports After September
  • Japan to Recall Tainted Beef as Cesium Contamination Widens


  • USD – the only good news here is that the USD is still making higher-lows; the bad news is that America has an opportunity to seize the moment and can’t, yet. The intermediate-term TREND line for the USD Index is $74.79 and needs to be recovered.
  • EURO – finally trades above Hedgeye's 1.43 line of intermediate-term TREND resistance, but can it hold? We’ll give this through August 2nd to make sure to not get sucked into a head-fake. We think Europe’s issues are much more severe than America’s for next 3 months.


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: stinky stagflation in the UK and big time failures in Spain/Italy/Greece to recover TREND lines (all bearish) with Finland following
  • SPAIN: Spanish stocks down small this morning, but the breakdown yesterday is what mattered. We have immediate-term TRADE downside in the IBEX to 9215 – that’s -6.5% lower and what our models consider probable.

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: rock solid recovery day across the board in Asia with every major market up but India who rightly raised rates to quash inflation pressure

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director


Below is an excerpt from the Dunkin' Donuts Black Book that we published today.


With valuations for the DNKN peer group having increased 56% over the past 12-months, the aggregated market caps of the few largest publicly traded coffee-centric companies almost equals the entire US coffee market’s annual revenues.


According to the National Coffee Association, the US coffee market represented $34 billion in 2009; the specialty coffee category generated $15-17 billion in annual revenues and the traditional category brought in $17-19 billion.  It would be a conservative measure to assume the high end of these ranges to estimate the present size of the market, bringing the current size of the market to $36 billion.  The coffee space is partly comprised of some very sizable companies with significant capital reserves that compete fiercely with one another for market share.  A front-runner in the corporate coffee war thus far is Green Mountain.  The company’s domination of the “at-home” coffee industry through Keurig machines and K-Cups has generated handsome returns.   The growth prospects for GMCR remain vast, at least if you share the view of investors; the stock currently trades at 29x EV/EBITDA and has a market capitalization of approximately $14 billion.  Green Mountain’s market cap equals roughly 40% of the estimated $36 billion US coffee market’s revenues or 117% of the “at-home” US coffee market’s $12 billion in annual sales.  While GMCR has recently expanded into Canada, the company is close to a pure play on the US market.


Turning to Starbucks, if we apply a 7x multiple to the company’s US EBITDA, the business would be valued between $10-11 Billion.  This hypothetical value, added to the Green Mountain market cap, implies that the cumulative market caps of the two companies equals roughly 70% of the entire US coffee markets annual revenues.  Lastly, MCD on Friday became the first restaurant company to grow its market cap north of $100 billion largely due to strong 2Q earnings results that were driven by success in selling coffee and other beverages.  Could coffee stocks be in a bubble at the moment?  We certainly think so.







Howard Penney

Managing Director


Rory Green



One day before managements holds their earnings call, the NFL and the players have come to an agreement, thereby eliminating a whole host of questions.   The sales trends this quarter are supportive of an improvement in fundamentals.  Although, I thinking we are nearing the end of the run, but I don’t want to pull the plug just yet.  I think that BWLD can report a comp that is between 3-4%.


Below are some of the more important forward looking statement from the 1Q earnings call. 







“Our 2011 annual goal is to remain at 13% unit growth and over 18% net earnings growth. We anticipate opening 50 to 55 company-owned locations including several in Canada and expect that about 8 of our older locations will relocate or closed during the year. In addition, our franchisees should open about 60 new restaurants.”


“We're excited that our first international location will open next month in Oshawa, Ontario, a suburb of Toronto, and we've signed leases for three additional locations in the Greater Toronto Area. Our international team is also actively exploring other countries for future expansion.”


“Our second quarter is a 1.9% menu price increase. If we don't take any additional price increase, that will roll down to 1.3% in third quarter and for the fourth quarter as well. So we will be looking at that this summer and making a decidion on whether we take any menu price increase.”





“We expect a combined potential menu price benefit for the second quarter for food and alcohol price increases taken in prior quarters to be about 1.9% for the company-owned restaurants. We expect to open 16 company-owned restaurants in the second quarter with 6 opened to date and 4 older locations were closed.”


“And I would expect that throughout the second and third quarter, we'll see some of our franchisees adopt some of the sales building programs that we've put in place. In addition, it's very hard for us tell when they're taking pricing. They have certainly a bigger base. But we believe that our pricing is probably a little stronger, that we took more pricing recently then they have.”


“I believe we are finding pent up demand as we're entering new markets, particularly when I think of California and the high volumes that we've opened up out there.”


“We're coming into the summer months where we'll have our Unlimited Wing promotion going on during the lunch hour in company stores and in select franchise locations. So I don't think we're seeing a day part shift. Just continued focus, I think, on optimizing or taking advantage of some of our slower times.”


“Well, on happy hour is in most of the stores that are in it, it represents about 65% or 75% of our company stores, if we're legally allowed. And most of the promotions – we tested it and saw some very nice results. We tested it with advertising and without advertising. We're offering a certain dollar, the stores or the market can choose what dollar beer to offer as well as – not $1, but at what price level, and then pairing that with $3 appetizers during our happy hour in the – and during the 2:00 to 7:00 timeframe and I believe late night, that's only in the bar.”





“We will continue to focus on providing a great guest experience and deliver on our initiative of speed of services at lunch, which may cause hourly labor to be slightly higher in Q2. Our management labor should continue to leverage if our current same-store sales trends continue. Overall, labor costs as a percentage of sales are expected to be similar to second quarter last year.”


“Overall, labor costs as a percentage of sales are expected to be similar to second quarter last year”


"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. And the remainder of our commodity basket is contracted at an increase of about 3% to prior year."


"We expect operating expenses to leverage slightly compared to second quarter last year. We anticipate that our G&A expenses in the second quarter exclusive of stock-based compensation will be approximately $13.6 million. Second quarter stock-based compensation expense will fluctuate based on the level of net earnings achieved year-to-date and assumptions based on net earnings expectations in future years."


"Currently, the second quarter expense is estimated at $2.8 million to $3 million. In second quarter of 2010, stock-based compensation expense was $1.3 million. For the full year of 2011, we estimate stock-based compensation could increase from our previous estimate to approximately $10 million depending on the continued strength of same-store sales and low wing costs."


“With 16 company-owned openings scheduled for the second quarter and a preliminary estimate of 15 openings in the third quarter, our pre-opening expenses will be heavily weighted in the second and third quarters. Please remember that our net earnings growth goal is an annual goal and we would not expect that all quarters will individually achieve this goal.”



“For the year of 2011, we anticipate total capital expenditures to be between $120 million and $125 million, which include about $100 million for new company-owned restaurants, $17 million for our ongoing remodel and facility projects and technology improvements, and $6 million from maintenance capital expenditures.”




Howard Penney

Managing Director


Rory Green




We don’t like UA around tomorrow’s print – either into it or out of it. Let me be crystal clear on duration…

TAIL (3 years): Luv you long time, UA. These guys are pulling one right out of Nike’s playbook. The growth profile is unquestionable to us. Though they have yet to get any ancilarry categories right – such as Women, Footwear, and International – they will. Of that, I am near certain. But that is also one of the reasons why the team and I don’t like this name on a TREND (3-month) duration.


TREND: The fact of the matter is that even through all the ebbs and flows of revenue, UA has been printing an operating margin of 10-11%. It could have easily been printing something in the mid-high teens. But no, instead it opted to plow the capital into the model to stimulate top line growth. I like that. But’s a double edged sword…

  1. On one hand , I am extremely confident in the top line trajectory. When Plank stands up there and says that the company will double in sales over 3-years, I believe him (and I’m a natural cynic).
  2. But the reality is that there have been several initiatives that simply have not panned out yet. Footwear has been a zero. Granted, the original structure of the company was insufficient for anything but failure in this category), and the current team will tread slowly (no pun intended). They probably won’t mess it up, but we’re very very close to the point where people won’t simply give the Gene McCarthy organization the benefit of the doubt. If footwear does not work, this company won’t double.
  3. Charged cotton was a good launch. Definitely better than footwear. But it was a shadow of its core performance product. This is not a savior for UA.
  4. UA is spending like a drunken sailor. That’s probably a bit dramatic. But with growth in retail stores accelerating, endorsing Michael Phelps, Lindsay Vonn, Kemba Walker, Derrick Williams (#2 NBA draft – ahead of Kemba at #9) and some dude named Tom Brady, the reality is that UA is in investment mode. They’ll play this like Nike in that they will make it work – but will spend more along the way to ensure their success.

If you have a 3-year+investment time horizon, then you have nothing to worry about. They’re doing the right thing.

But we’re paid to point out the potential landmines along the way.


With the stock at $78, 40x+ earnings, 16x+ EBITDA and very little controversy on the name, we’re simply wary – if not flat-out negative given that cash flow is headed the wrong way.








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%