A weekly look at commodity trends pertaining to our space.  Over the last week, dollar strength and concerns surrounding economic growth have helped drive overall commodity prices lower.




Beef prices led the way over the past week, gaining 2.6% along with rice and chicken in what was a muted week for the gainers.  To the downside, Milk led the way with a -12% move and grains, soybeans, sugar, and coffee also declined week-over-week.







Cheese prices stayed flat week-over-week but have declined -17% since August 1st.  Prices have been extremely volatile this year but, for companies that have exposure to cheese prices (like DPZ, PZZA, TXRH, YUM and others), the recent leg down in dairy prices is encouraging.







Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls.


DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”


HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  It remains to be seen if cheese prices will remain above 2010 levels for the remainder of the year but CAKE’s guidance for inflation in 2011 recently became much more realistic, although not a sure thing.



TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.”


HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.  For the remainder of the year, barring another (possible) spike in prices, TXRH could see some margin relief from lower dairy costs.



CMG (4.20.11): “As we move into 2011, we're expanding our use of cheese and sour cream made with milk from cows that are raised on open pastures rather than spending much of their time in confinement, as most dairy cattle do.”


HEDGEYE:  For CMG, the lower levels of dairy costs, if they persist, will offer some food costs relief on the company’s P&L.





Corn and wheat prices have been moving higher over the past couple of months as adverse weather conditions depress sentiment surrounding the upcoming planting season.  Russia increasing its grain exports is offering some relief as crops have been coming in worse-than-expected in the U.S. and Europe.   Besides the strength in the dollar, decreased demand as global economic growth concerns stemming from the accelerating European sovereign-debt crisis is also weighing on grain prices.


One interesting article we read today highlighted that Cropcast, a well-known agricultural weather firm, projected U.S. farmers will harvest 4.3% less corn than last year due to poor weather.  Cropcast cut its output forecast because it expects many acres planted with corn will not be harvested due to flooding around the Mississippi and Missouri rivers and a severe drought in Texas, said Don Keeney, senior agricultural meteorologist for Cropcast.







Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.


PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”


“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”


“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”


HEDGEYE:  Wheat costs have come down but it remains unclear whether or not the current easing of grain prices will continue.  Weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  Slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.



DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”


PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”





Beef prices gained by 2.6% week-over-week as unfavorable conditions persist for cattle farmers.  The USDA has rated 90% of the pasture conditions in the Southern Great Plains as very poor.  To make matters worse, as the website CattleNetwork states, most livestock water sources are drying up or have reached a point where water quality is a major concern.  Beef producers are now being faced with a difficult proposition: liquidate the herd or maintain the herd until pastures are – hopefully – renewed in April or May of 2012 and take on the implied cost of feeding the herd with feed prices far higher than a year ago.  The following link walks the reader through the logic of the decision facing producers. [herd liquidation story ]





Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.


RRGB (8/11/11): “We're still buying ground beef on the spot market… If you recall, we said 5% to 6% commodity inflation on the last call and we dropped that to 5 to 5.5. Again, that's mainly ground beef driving that.”


HEDGEYE:  Live cattle prices are up 22% YoY and, we believe, will continue to be a negative for RRGB’s P&L going forward.



WEN (8/11/11): “That's one of the reasons why as we've talked about our margin guidance, we do not expect to see much relief on beef cost this year.”



Howard Penney

Managing Director


Rory Green






Some details on Chinese shadow banking



There is an interesting article on “shadow banking”  in China.  See the link below.  We’ve written about this being a potential negative for junkets in Macau.  These “banks” are offering yields higher than those provided by traditional banks and may compete with rates paid by junkets for capital.  Liquidity fuels the junket business and serious competition for capital could have negative implications on junket liquidity. 


Of course, we first started writing about this as a potential risk months ago and junket volumes have only accelerated since.  At this point, it is only a risk factor, but one we are monitoring closely as we continue to analyze weekly Macau data.


Notable macro data points, news items, and price action pertaining to the restaurant space.






Food Retail is has outperformed over the last day, week, and two weeks as Food Processors continue to lag peer food, beverage, and restaurant spaces.


THE HBM: MCD, SONC, CMG, DRI - subsectors fbr




  • MCD Canada is to spend $1 billion to renovate all of its locations in Canada in effort to take market share.  Testing has already proven a success with traffic in reimaged restaurants growing close to double-digits.
  • SONC was cut to “Market Perform” at William Blair. 
  • CMG’s second London location is now open on Baker Street in the Marylebone district.



  • DRI preannounced 1QFY12 EPS at $0.78 versus $0.87 consensus but reaffirmed FY12 EPS guidance of 12-15% EPS growth.  Sales trends were disappointing at Olive Garden in June, July and August (prelim. August number).  See our post from this morning for more details.
  • DRI was cut to “Outperform” from Raymond James versus “Strong Buy”.  The price target was cut to $52 from $62.

THE HBM: MCD, SONC, CMG, DRI - stocks 97



Howard Penney

Managing Director


Rory Green


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TODAY’S S&P 500 SET-UP - September 7, 2011


As we look at today’s set up for the S&P 500, the range is 42 points or -1.65% downside to 1146 and 1.95% upside to 1188.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1402 (-2155)
  • VOLUME: NYSE 1124.29 (+15.3%)
  • VIX:  37.00 +9.08% YTD PERFORMANCE: +108.45%
  • SPX PUT/CALL RATIO: 1.85 from 2.02



  • TED SPREAD: 32.54
  • 3-MONTH T-BILL YIELD: 0.0254%
  • 10-Year: 2.01 from 1.98    
  • YIELD CURVE: 1.81 from 1.79


MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly sales
  • 10 a.m.: Jolt Job openings
  • 11:15 a.m.: Fed’s Evans speaks in London
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • Noon: DoE short-term energy outlook
  • 2 p.m.: Fed Beige Book
  • 4 p.m.: Fed’s Williams to speak to Seattle Rotary Club
  • 4:30 p.m.: API inventories


  • Yahoo! fired Carol Bartz as CEO, replaced her with CFO Tim Morse on interim basis, starts strategic review
  •  Bank of America shook up its top ranks, ousting wealth-mgmt head Sallie Krawcheck, consumer-banking head Joe Price
  • Constitutional challenges to Germany’s participation in the euro rescue funds were rejected by country’s top court today
  • Anglo American said to decide against takeover offer for MacArthur Coal
  • NY prosecutors said to issue subpoenas to Morgan Stanley as probe of Goldman sale of mortgage-backed products widens: WSJ
  • SEC said to probe effect of ETFs on Aug. market swings: WSJ
  • S&P said to have met with some bond investors before U.S. debt downgrade: WSJ
  • Trial on patent lawsuit by Teva Pharmaceutical over multiple-sclerosis drug Copaxone set to begin today
  • FDA briefing docs due for 9/9 panel on use of bisphosphonates in light of possible link to osteonecrosis of the jaw; makers include MRK, WCRX, Roche, Novartis
  • Saab Automobile applied for protection from creditors today in bid to raise money to restart ops; reorganization process will last at least 3 months, can be extended up to a year
  • AT&T can lower the price it pays for T-Mobile USA if remedies requested by regulators too expensive, people familiar said
  • Google’s Seoul office said to be raided by South Korea’s antitrust regulator as part of probe into whether company unfairly blocked competitors in mobile-search market
  • United Technologies said to receive potential buyer interest for unit Pratt & Whitney Rocketdyne, considering sale: Reuters
  • Archstone said to get acquisition offers from four suitors including Blackstone and Brookfield Asset Management: WSJ
  • Hurricane Katia, now a category 1 storm, continued to move between East Coast and Bermuda; second system advanced west across Atlantic Ocean, may reach Puerto Rico by this weekend
  • No IPOs expected to price today




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rebound as Low Interest Rates May Help Boost Demand
  • Corn, Soybeans, Wheat Advance as Dry Weather May Damage Crops
  • Sugar Rises in New York During Lull Before Crops; Coffee Rises
  • Pawnbrokers Thrive as Rising Gold Price Entices Hard-Up Britons
  • India May Ship Raw Sugar First Time in Four Years on Supply
  • Libya Oil Resumption May Take at Least 18 Months, BofA Says
  • PhosAgro to Renegotiate Indian Accord to Match Prices of Rivals
  • Afghan Hajigak Iron Ore Gets Bids From India, Iran, Canada
  • Aluminum Will Stay in Surplus for Fifth Year, Sumitomo Says
  • Vale Says Sale of World’s Largest Ore Ships ‘Won’t Carry Loss’
  • Whole-Milk Powder Slips to 13-Month Low on Supply Boost
  • Gold Price Retreat May Prolong Bull Run, Top U.K. Investor Says
  • Oil Supply Falls in Survey on Storm, Imports: Energy Markets
  • Coffee Demand Rises on Single-Cup Sales, StudyLogic Data Shows





THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director



The Scoundrels of Consensus

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton


In financial markets, consensus is typically what astute stock market operators invest against.  That is, if the crowd has a similar view of an asset or asset class, that asset or asset class will typically be priced to perfection.   Therefore, savvy analysts and portfolio managers strive to find the nugget of non-insider information that will prove that consensus is wrong, which inevitably leads to a re-pricing of the asset and profits for those that appropriately determined where consensus views were wrong.


Obviously, the key variant macroeconomic view that Hedgeye held coming into 2011 versus consensus was that growth was slowing and would continue to slow.   We won’t rehash the thesis, but our view was for sub 1.5% growth in the first two quarters of 2011, while sell side consensus GDP estimates were, based on Bloomberg data, at +3.4% as of early February. 


As always, though, the job is to play the game in front of us and while rehashing old victories can be fun, we’ll save those opportunities after the inevitable victories of Yale over Harvard at the Yale / Harvard hockey and football games this year.  So two questions to ask into the remainder of the trading year are:


1)      What is consensus?


2)      What are your best variant views versus consensus?


Yesterday, I noticed a nugget of information that at first suggested to me that market consensus was leaning too far to the negative.  Specifically, negative bets on the SP500, as measured by a net outstanding 107,913 futures contract in the week August 30th, were at their highest level since September 2007.  My knee jerk reaction, as it relates to determining consensus, was to look at this statistic as a contrarian indicator. History, of course, suggests a different byline.


In fact, as noted above, the last time negative options bets were at this level was September 2007.  The next month, October 2007, marked the all time high in the SP500.  There are number of studies that provide an explanation as to why this seemingly contrarian indicator is actually not one, but the primary reason is that short sellers, in aggregate, typically invest with better information than market participants broadly.  One recent study by Morningstar CMPS on Canadian stocks from 2003 to 2011 showed the following:


“CPMS looked back to 2003 (when it started to record short interest data) and found that a portfolio of the most heavily shorted stocks indeed did poorly and underperformed the S&P/TSX composite total return index by about six percentage points annually, assuming an equal weighting of each of the 15 names and reselecting new names each month.”


Thus, while consensus views are important to determine when contemplating the risk / reward of positions, always be aware of The Scoundrels of Consensus.  These critters come in many forms, such as in the form of those who practice the dark art of short selling or even, gasp, in the form of statements from senior executives or government officials.


Typically, of course, I would give little credence to the idea that either government officials or senior company executives have much insight into the global macro environment, or that they would truthfully share their views.  At times, though, I do recommend taking the words of The Scoundrels of Consensus at fair value.  Some recent statements from European “leaders”, which I’ve outlined below, exemplify this point.  To wit:


1.   “Under the current structure and with the current membership, the euro does not work.  Either the current structure will have to change, or the current membership will have to change.”

-          Stephanie Deo, Paul Donovan, and Jacek Rostowski of UBS Bank


2.   “The Euro has never had the infrastructure it requires.”

-          Herman Van Rompuy, EU President


3.   “I regard the huge buy-up of bonds of individual states of the ECB as legally and politically questionable.”

-          Christian Wulff, German President


4.   “All this reminds one of the autumn of 2008.”

-          Josef Ackerman, Deutsche Bank CEO


5.   “Dealing with a banking crisis was difficult enough, but at least there were public sector balance sheets on to which the problems could be moved.  Once you move into sovereign debt, there is no answer; there’s no backstop.”

-          Mervyn King, Governor of the Bank of England


6.   “The euro is in danger . . . if we can’t deal with this danger, then the consequences for us in Europe are incalculable.”

-          Angela Merkel, Chancellor of Germany


The intention this morning is not to fear monger our subscribers into getting overly negative in the short term.  In fact, our most recent moves in the Virtual Portfolio yesterday morning were to cover two shorts : United Kingdom Equities (EWU) and Capital One Financial (COF).


Instead the advice this morning is simply this: be aware and wary of The Scoundrels of Consensus.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Scoundrels of Consensus - Chart of the Day


The Scoundrels of Consensus - Virtual Portfolio


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