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TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY

How Low Will Moneycenter Margins & Earnings Go in 2H11 and 2012?

*** Tune in for our conference call TOMORROW at 11 am***

  • Quantifying the profound extent of net interest margin pressure from the current rate environment for BAC, JPM, WFC & C 
  • Pinpointing precise timing of that pressure 
  • Layering on the enormous earnings headwinds from credit renormalization - impact and timing

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.

 

This week's notable callouts include tightening in US and European bank swaps WoW, as of Friday, and increased sovereign swaps.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 11 improved / 2 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - summary

 

1. US Financials CDS Monitor – Swaps tightened across all 28 major domestic financials in our table last week.  In contrast, only two companies (ACE and ALL) have tighter swaps compared to one month ago. 

Tightened the most vs last week: ALL, CB, XL

Tightened the least vs last week: BAC, WFC, MS

Widened the most vs last month: BAC, LNC, HIG

Tightened the most/widened the least vs last month: ACE, ALL, CB

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - us cds

 

2. European Financials CDS Monitor – Banks swaps also tightened in Europe last week.  37 of the 39 swaps were tighter and 2 widened.   The average tightening was 10%, or 47 bps, and the median tightening was 7%. 

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - euro cds

 

3. European Sovereign CDS – European sovereign swaps were wider week over week across the continent. We are keeping a close eye on France, which is critical to the EFSF, and where swaps widened by 19 bps to 184 bps week over week. We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency.  Judging by the Greek bailout, regulators are making a concerted effort to design a bailout that does not trigger CDS.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - sov 1

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - sov 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 38 bps last week, ending at 7.69 versus 8.13 the prior week.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 36 points last week, ending at 1536. 

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - lev loan

 

6. TED Spread Monitor – The TED spread backed off slightly from its YTD high, ending the week at 31.5 versus 32.8 the prior week.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - ted spr

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose slightly to -1.9.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - joc

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields hit another new all-time high, ending Monday at 1931.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  After bottoming in April, the index has been moving higher.  Last Friday, spreads fell 13 bps and closed at 150 bps.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose sharply off a low level, climbing 199 points to 1740.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 10-year yield fell to 1.99, pushing the 2-10 spread to 178 bps.   

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following:  8.2% upside to TRADE resistance, 2.6% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - xlf

 

Margin Debt Flat in July

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In July, margin debt held close to flat at $306B.  On a standard deviation basis, margin debt fell to 1.21 standard deviations above the long-run average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through July.

 

TUESDAY MORNING RISK MONITOR: SPAIN, ITALY, AND FRANCE SOVEREIGN SWAPS UP SHARPLY - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 


THE HEDGEYE DAILY OUTLOOK


TODAY’S S&P 500 SET-UP - September 2, 2011

 

Friday was not good. After trying valiantly to close up for a second consecutive week, the SP500 closed down for the fifth week in the last six and is down -13.9% from the April 2011 high, confirming the bearish TREND in US Equities.

 

As we look at today’s set up for the S&P 500, the range is 48 points or -2.47% downside to 1145 and 1.62% upside to 1193.

 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 96

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2155 (-1433)  
  • VOLUME: NYSE 975.06 (-4.21%)
  • VIX:  33.92 +6.60% YTD PERFORMANCE: +91.1%
  • SPX PUT/CALL RATIO: 2.02 from 1.64 +23.17%

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 31.75
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.97 from1.99    
  • YIELD CURVE: 1.75 from 1.79

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10 a.m.: ISM Non-Manuf., est. 51.0, prior 52.7
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 11:30 a.m.: U.S. to sell $15b 8-day cash mgmt bills
  • 1:10 p.m.: Fed’s Kocherlakota speaks at UMinnesota
  • 1:30 p.m.: Donald Kohn, former vice chairman Fed, speaks at London School of Economics
  • Note ICSC/Redbook weekly sales, API inventories being released tomorrow

 

WHAT TO WATCH:

  • Swiss central bank set minimum exchange rate of 1.20 francs per euro, and said it’s “prepared to buy foreign currency in unlimited quantities”
  • U.S. 10-yr yield hit a record low of 1.91% earlier
  • ISM’s non-manufacturing index probably fell to 51 last month, the lowest level since Jan. 2010, economists’ forecast
  • Euro-area 2Q consumption, investment, spending miss estimates after figures revised from first release; 2Q GDP up 0.2%, in line with Aug. 16 est., losing momentum from previous 0.8% growth as govts. imposed austerity measures
  • PepsiCo expected to announce 10-year extension of their sponsorship deal with NFL today: WSJ
  • Toshiba fell to lowest in more than 2 years in Tokyo after WSJ reported co. may buy Shaw Group’s stake in Westinghouse Electric
  • JNJ/Bayer: FDA releases briefing docs for Sept. 8 advisory panel on Xarelto
  • Gulf of Mexico production resuming after Tropical Storm Lee shut 61% of oil, 46% of natural gas output
  • Global regulators may ease new bank rules that require lenders to hold more liquid assets, FT says
  • Ministers from Germany, Finland and the Netherlands meet today to discuss Finnish demand for collateral in bailout for Greece
  • Italian Senate expected to debate EU45.5b ($64b) austerity plan amid strike today after bond yields surged on concern govt. may backslide on the plan
  • WTO yesterday rejected China’s appeal of ruling that backed U.S. duties on tire imports
  • Ralcorp Holdings should explain why they rejected ConAgra Foods’s most recent $5.18b takeover bid, ISS said
  • No IPOs expected to price today

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Falls From Record in London as SNB Imposes Franc Ceiling
  • Commodities Fall to One-Week Low as Europe Debt Concerns Deepen
  • Brent Oil Snaps Three-Day Drop as SNB Pledge Weakens Dollar
  • Corn, Wheat Fall as European Debt Crisis Stokes Demand Concern
  • Gold Not in a Bubble as Central Banks Print Cash, Faber Says
  • Copper May Rise in London on Freeport Strikes, Chilean Output
  • Coffee Falls as Vietnam, Latin America Supply Rises; Cocoa Drops
  • Fertilizer Imports by India May Slump Most in a Decade on Price
  • Coffee Peaking as Latin American Cargoes Surge: Freight Markets
  • Capacity Crunch Looms at Asia Container Ports: Chart of the Day
  • Brazil’s Sugar Output May Rebound Only From 2013 on Weather
  • China, India Target Colombia Coal Deposits as Demand Rises
  • Corn, Soybeans May Rise as Adverse Weather Threatens U.S. Yields
  • Indonesia ‘Life-or-Death’ Coal Law to Cut Sales: Energy Markets
  • Corn Shipments Slump as U.S. Loses to Russia: Chart of the Day
  • Top Copper Producer Chile Sees Output Drop as China Demand Grows
  • Gasoline Tracks European Oil With WTI Collapse: Chart of the Day

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director

 

 



real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

The Edge

“Where is the edge? And how do I stay the right distance from the edge?”

-Ray Dalio

 

That was Ray Dalio’s answer on the key to risk management success (“Mastering The Machine”, by John Cassidy, New Yorker, July 25th 2011). Like he did in 2008, Dalio is beating most of his hedge fund competition in 2011. Hedgeye calls that a repeatable process.

 

Where was The Edge in 2011? Global Growth Slowing. Period.

 

While there will be plenty of storytelling and finger pointing about how it was a pig in Europe or a politician in America, that’s pretty much it. If you got Growth Slowing right, you got a lot of other things right.

 

Growth won’t slow forever. But it didn’t stop slowing in the US on Friday and it doesn’t appear to be slowing in Europe this week either. When growth stops slowing, that will be a critical signal to start thinking about going the other way.

 

The cover of Barron’s this weekend asked “Where Do We Go From Here?” Good question. But for the answers, Barrons (like many other legacy financials media outlets) continues to use the wrong sources. Why many of these journalists are using the same sources that missed Growth Slowing in 2008 is not clear. Why they don’t use Hedgeye is simple: we are their new competition.

 

In my Early Look note from August 11thtitled Forecasting Dark (“Weather forecast for tonight: dark.”-George Carlin) I highlighted what Washington/Wall Street continue to use as their source for “blue chip” strategy. At the beginning of 2011 here were some of the higher profile estimates:

 

Forecasts for 2011 US GDP Growth:

  1. Bank of America = 3.2%
  2. Barclays = 3.1%
  3. Citigroup = 3.1%

Forecasts for 2011 SP500 Returns:

  1. Bank of America (David Bianco) = 1400 (up +11.4%)
  2. Barclays (Barry Knapp) = 1420 (up +13.0%)
  3. Citigroup (Tobias Levkovich) = 1400 (up +11.4%)

As of last week’s train wreck US unemployment report and another -31% estimate cut from the US Government on Q2 2011 GDP, here’s fact versus prior fictions:

  1. Q1 2011 US GDP Growth = 0.36%
  2. Q2 2011 US GDP Growth = 0.98%
  3. SP500 YTD Return = -6.7%

Now, to be fair, there are still some very contrarian views out there. Consider ISI Group’s latest sell-side hire, Bijal Shah, who proclaimed in Barron’s on August 22, 2011, “higher unemployment isn’t necessarily terrible news for equity markets.”

 

It just was last week.

 

So (drumroll), after seeing the data, here are your real-time Wall Street revisions from Barron’s this weekend:

  1. Deutsche Bank (Binky Chada) drops their January 2011 year-end SP500 target from 1550 to 1425
  2. Goldman Sachs (David Kostin) drops their January 2011 year-end SP500 target from 1450 to 1400
  3. Credit Suisse (Doug Cliggott) drops their January 2011 year-end SP500 target from 1250 to 1100

Whoa, hold your horses! Is that one major sell-side firm with a price target below the market’s last price? Indeed. This isn’t Doug Cliggott’s first rodeo getting a bearish move right.

 

So what do we do with all of this incompetence in forecasting?

  1. Realize that the sell-side hasn’t capitulated yet and cut their estimates to the right level (they will at the bottom)
  2. Accept that both the US Government and their economic advisors (the sell-side) continues to use the wrong models
  3. Keep doing what it is that we’ve done to call both the 2008 and 2011 Growth Slowdowns

Not that I’m still keeping track, but on February 3rd, 2011, JP Morgan’s Thomas Lee put out a note titled “Circle of Life”, raising his 2011 EPS  target in the SP500 to $97.50 from $94 saying that it “smells like a secular bull market…”

 

While I’m not certain how to use the scratch-and-sniff model, what we can be certain of is that most of these sell-side strategists quickly revert to calling markets “cheap” when both their earnings and price targets are wrong.

 

Of course, anything can be deemed “cheap” if you use the wrong growth and earnings estimates…

 

Who has the right earnings estimates? You can drive a truck through Deutsche Bank and Credit Suisse views on the “E” in PE for 2012:

  1. Binky Chada says $106
  2. Doug Cliggott says $81

So, Chada will call the SP500 “cheap” because he is using 11x earnings (1173/$106) and Cliggott will call it more expensive at 14x (1173/$81). Who is right? What’s the right multiple? Who has The Edge?

 

Don’t worry, those are not the risk management question you need to answer this morning. The answer that you have to perpetually impute is “how do you stay the right distance from the edge.”

 

To do that, you’ll need a repeatable risk management process as well.

 

My immediate-term support and resistance levels for Gold, Oil, and the SP500 are now $1 (bullish but overbought), $83.87-97.34 (bearish), and 1145-1193, respectively. Europe capitulated yesterday. There’s a good chance another immediate-term low in US stocks comes at a higher-low than the prior closing low (1119) and US Treasuries are putting in immediate-term highs.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Edge - Chart of the Day

 

The Edge - Virtual Portfolio


Nature's Manipulations

This note was originally published at 8am on September 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Willful blindness of the non-linear core nature, has led to the attempts to manipulate the markets certainly by government.”

-Martin A. Armstrong

 

It is the nature of a man who is in the business of being bullish to be bullish. It is in the nature of a woman who is in the business of being bearish to be bearish. Human Nature’s Manipulations of market storytelling is what it is. People push their own book.

 

Over the last 3 years I have been accused of being both a raging Republican and a Yale campus Democrat. In 2009 I was, allegedly, a “reckless” bull. In 2011, I am, allegedly, a Perma- Bear. All the while, across 1,377 positions that I have taken since founding Hedgeye in 2008, my long versus short positions are close to dead even (660 LONGS, 677 SHORTS). Time stamps matter.

 

Perma-Process? Perma-Risk Manager? Perma-Mullet? Who knows. What I do know is that if I am not more right than I am wrong on the big stuff, we don’t get paid. Despite Perma-Bulls claiming they nailed it in August, both the US and Global Equity markets got decimated.

 

Across our Global Macro model’s Global Equity market league tables, here was the score for August 2011:

  1. Greece = down -23.9%
  2. Germany = down -19.2%
  3. Italy = down -15.6%
  4. Russia = down -13.4%
  5. Austria = down -12.7%
  6. South Korea = down -11.9%
  7. France = down -11.3%
  8. Argentina = down -10.7%
  9. Sweden = down -10.6%
  10. Taiwan = down -10.4%

So, I guess, the US stock market bulls who were expecting 3-4% US GDP growth and SP500 returns of 15-20% in 2011 were a little off in August, but they weren’t crashing like everything else (SP500 and Russell 2000 down -6.1% and -8.7% for AUG, respectively).

 

That must be bullish. And I must have been too bearish.

 

Heck, just look at how high US stocks bounced “off the lows” in August. That’s just gotta be bullish, no? Without any economic data to back it (US consumer confidence hitting 1970s type lows; housing/mortgage demand at 14 year lows, global stock markets getting smoked, etc), the bears must be too bearish. Right? Ah to be a connoisseur of consensus…

 

While the answer to who called the August bottom AND actually called the April top remains unclear, what remains crystal clear is that people who are in the business of being bullish bought stocks into August month end.

 

In the Hedgeye Chart of The Day, Darius Dale, illuminates the simple reality of institutionalized career risk management:

 

LAST 6 DAYS OF THE MONTH (in the SP500):

  1. APRIL = +2.0%
  2. MAT = +2.1%
  3. JUNE = +2.6%
  4. JULY = -3.8%
  5. AUG = +4.9%

FIRST 6 DAYS OF THE MONTH:

  1. MAY = -1.3%
  2. JUNE = -4.9%
  3. JULY = +1.8%
  4. AUG = -13.4%
  5. SEP = ?

Now, if you want to roll the Bernanke Bones on this, maybe this time will be different. After all, that’s what the Keynesians and Fiat Fools have been telling us all along. But if it’s not, the US stock market could have a big problem in September. That +4.9% month-end markup into August end was the most aggressive yet and, as you can see, the higher they mark’em up, the harder they fall.

 

Arresting economic gravity is difficult. But Obama is scheduled to release his new bag of goodies next Thursday and, all the while, Charlie Evans can pop in from the Chicago Fed for another US Dollar Debauchery interview (not that his being paid by The Commodity Inflation or sitting on the Chicago Metropolis board with CBOT and UBS execs is a conflict of interest versus the Fed’s “independence” or anything like that).

 

So sit back and enjoy some price volatility in September as the Fed keeps cranking on full employment and “price stability”! We really need these guys to do a lot more of what didn’t work with QG2. Nature and the non-linear interconnectedness of Global Macro markets be damned.

 

Today’s risk/reward in the SP500 is dead even. I have 1203 and 1234 as immediate-term TRADE support and resistance. After moving off of my 0% asset allocation to US Equities last Friday (bought Utilities and were up +3.3% on that already) we’re long XLU (Utilities) and short Financials (XLF). Where could I be wrong? All over the place I guess. My every morning starts and ends with Uncertainty.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1822-1905, $85.98-89.72, and 1203-1234, respectively.

 

Best of luck out there in September,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Nature's Manipulations - Chart of the Day

 

Nature's Manipulations - Virtual Portfolio

 


PNRA - FOLLOW THE TRAFFIC PATTERN

PNRA faces some big hurdles in the coming months, especially in 4Q11.  While we think trends remain on track this quarter, sales have softened a bit of late.  For the industry as a whole, the bar has been raised on sales trends, given the significant downturn in consumer confidence and the lack of any significant improvement in the jobs picture. 

 

On the surface it looks like that PNRA's second half comp guidance seems achievable given that a 5% comp (guided to 4.5% to 5.5% same-store sales growth in both 3Q11 and 4Q11) during the third quarter implies a 175 bp deceleration in two-year average trends. 

 

The biggest risk to guidance seems to come in 4Q11, as the difference in transaction growth between 3Q11 and 4Q11 is driven by the distribution of media.  PNRA will print the highest year-over-year growth in media in 3Q11 as the company is rolling out the “Make Today Better” campaign.  For fiscal 2011, year-over-year media spend will be up approximately 40% system-wide.  Also in 4Q11, PNRA will anniversary the MY PANERA loyalty program primarily in 4Q10.  

 

Being conservative, management’s guidance assumes a fairly significant slowdown in two-year average traffic trends during the second half of the year, which is warranted given that the company intends to raise prices in September, resulting in a 3.5% price increase during 4Q11 versus the 2.5% expected in 3Q11 and reported in 2Q11. 

 

PNRA - FOLLOW THE TRAFFIC PATTERN - PNRA sss vs check

 

 

It was encouraging to hear management talk about the potentially negative impact on traffic as a result of the incremental price increase as companies often talk about price increases as being wholly incremental; management also attributed the expected deceleration in traffic trends to economic conditions. 

 

The biggest risk to Panera’s second half comp targets stems from the assumed sequential improvement in mix.  PNRA reported modest check compression of 50 bps during 1Q11, which worsened to 100 bps during 2Q11.  Management attributed this negative mix impact to the company’s new loyalty program, which offered increased discounts and specific to 2Q11, to the later introduction of its Summer Salad Celebrations versus the year prior. 

 

Going forward, management expects menu mix to turn positive and guided to flat to +1% mix impact on check during 3Q11 and 1-2% mix impact in 4Q11.  PNRA’s comp guidance relies on this mix improvement in the back half of the year but the comparisons get much easier as the company took a big hit on mix during 4Q10 (reported +0.3% versus +3.3% in 3Q10), largely as a result of the launch of its loyalty program. 

 

That being said, although we need to see a big improvement in mix quarter to quarter, the guidance assumes fairly even mix trends on a two-year average basis.

 

It will be important to watch how customers respond to Panera’s upcoming price increase and how customers fare overall in the current economic environment, but given recent trends, PNRA’s comp guidance seems reasonable in 3Q but somewhat more aggressive in 4Q11. 

 

From a commodity perspective, Panera is expecting 4.5% inflation for the full year 2011 and roughly 4-5% for 2012.  Wheat is the most important commodity for Panera, in terms of the percentage of its commodity spend that the grain accounts for.  In 2008, soaring wheat prices impacted Panera’s restaurant level margins severely.  A new strategy of buying at least six months out and buying in short periods of time has benefitted the company through inflationary periods but, as management said in early 2010, has allowed some benefits of commodity deflation to elude the company’s P&L. 

 

Coming into 2010, the company had 80% of its wheat costs locked in at just over $8 per bushel and wheat costs for 2011 were locked “approximately flat” to wheat costs in 2010, according to management.  As the chart below shows, wheat is currently tracking approximately flat year-over-year, at roughly $7.25 per bushel, and could be down year-over-year in early 2012.  In the near term, crop damage in the U.S. caused by drought, flooding, and other events will provide support for wheat prices.  Over the longer term and for 2012 overall, global demand may slow if economic growth remains stagnant.  As always, the U.S. Dollar, and the factors that influence it will be a primary driver of what wheat prices restaurant companies face next year.

 

PNRA - FOLLOW THE TRAFFIC PATTERN - wheat 95

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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