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Commodities rebounded over the last week, with a few exceptions, as the dollar declined. 




Corn prices gained over the last week but are again falling today as news emerged from the government that stockpiles of the grain before the 2012 harvest will total $866 million bushels, up from 672 million forecast in September.  While the dollar decline last week helped drive grain prices higher over the same period, the supply and demand metrics for corn are pointing to continuing declines.  Our macro team’s view is also dollar-bullish (for now). The decline in corn/wheat prices is a positive for food processors such as TSN and SAFM in particular, particularly as beef prices continue higher.  Rising beef prices are a concern for WEN, TXRH and many others in the restaurant industry.


Coffee prices have continued to slide, making it less likely that additional price raises from coffee retailers such as SBUX, DNKN, PEET, GMCR, CBOU and THI are imminent.  We would expect high retail prices to persist for some time as inventory bought at elevated prices is worked through.


Chicken wing prices declined on the week, which is a positive for BWLD.  However, wing prices have been trending higher for much of the last month and if the upward momentum recommences, BWLD could see some shift in sentiment.  BWLD is a favorite of ours on the short side.









Grains shooting higher last week on the declining dollar and “improving economic prospects” impacted food processor stocks like TSN and SAFM. Today, following an upward revision of inventory estimates, corn is declining and the Food Processing name are outperforming.


As we have been writing of late, declining commodity costs are generally a positive for restaurants but it is worth noting that much of the softness in commodity demand is related to softening economic conditions and this implicitly means a drop in demand for consumer goods and services.  We believe the dollar impacted trends over the last week but, as with corn, much of the incremental supply and demand data hitting the tape is bearish for prices.




Gasoline prices continue to toe the 2008 line but the weaker dollar supported price over the last week.









Corn has been trending lower but popped up almost 10% last week.  The declining dollar most likely had an impact (see correlation table).   It seems that the data points emerging today regarding stockpile estimates in the U.S. could be triggering a resumption of the downward trajectory in corn prices.  If this is the case, this is a positive for protein producers that can enjoy much needed relief as feed prices decline.  Supply and demand concerns (rising inventories and slowing economic growth) seem to be attracting investor attention in today’s trading.





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:  This past week aside, weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  In fact, corn and wheat stockpile estimates have risen globally, which is leading grain prices lower today.  While this is a positive in terms of costs, 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.”





Cheese prices declined -1.2% on the week.  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.





Coffee prices declined over the last week even as the dollar weakened.  Despite the recent drop, coffee prices remain up 26% on a year-over-year basis.  Coffee is trading higher today as optimism grows that Europe will control the region’s debt crisis, boosting the outlook for commodity demand.




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


PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Strength in the dollar has helped bring coffee prices lower but whether or not dollar strength will continue or not will be a significant factor in future price action in coffee.  Growing demand, globally, is bullish for coffee prices over the long term.


Howard Penney

Managing Director


Rory Green



Sausage: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Staples (XLP)


Making the multi-factor, multi-duration, risk management sausage isn’t easy. If it was, Nomura would be sending you a note today about sausage.


I’ve been writing this since the SP500 got back above its immediate-term TRADE line of support (1169), and it’s the point to be made once again. The SP500 is bullish TRADE and bearish TREND/TAIL with the following lines that matter: 

  1. TRADE = 1169
  2. TREND = 1229
  3. TAIL = 1266 

Broken TREND/TAILS are not good. This, anyone managing risk over the course of the last 5 months knows. What they may not know is that when an immediate-term TRADE breakout expedites itself on a low-volume squeeze, you create a big air-pocket.


Air-pockets, within bearish TREND/TAILS, are not good either. As prices move higher within then, the probabilities of a crash (from those higher prices) increases.


If this market fails at 1229 and dives below the TRADE line again – and it could all happen very abruptly – I’d call a 1-3 day short-term peak-to-decline move towards 1086 probable.


People like to talk about “risk management” on a revisionist basis. The real-time risk management occurs when someone flags the probability of something crashing going up as the market is going up.


That’s not me making up mathematical stories. That’s just how I make the sausage.



Keith R. McCullough
Chief Executive Officer


Sausage: SP500 Levels, Refreshed - SPX


Bullish commentary, all things considered. Q4 RevPAR expected to accelerate over Q2/Q3.  We still like lodging.




  • "Comparable hotel RevPAR increased 6.4% for the third quarter, as a result of the improvement of average room rate of 3.7%, combined with an increase in occupancy of 1.9 percentage points to 75.8%... Comparable hotel adjusted operating profit margins increased 110 basis points and 80 basis points for the third quarter and year-to-date 2011, respectively." 
  • Euro JV completed the acquisition of 396 room Pullman Bercy in Paris for Euro 96MM on September 30th and will fund Euro 9MM of renovations at the property. Accor will continue to operate the hotel.
  • On 8/30 HST purchased the remaining 51% interest in Tiburon Golf Ventures which owns the golf club surrounding the Ritz Naples Golf Resort for $11MM
  • Capex in the Q: $32MM in ROI projects (NY Marriott Marquis was completed) and $63MM of renewal and replacement capex
  • Used proceeds from the issuance of $500MM 5 7/8% Series W Sr. notes to repurchase $105MM face of 2 5/8% 2007 Debentures for $106MM which were puttable to HST in April 2012 and likely to get put back based on HST's stock price
  • Guidance was lowered due to a delay in the anticipated closing of the Grand Hyatt Washington DC acquisition which they company assumed would close in September and is now forecasted to close on December 14th. Previously issued guidance included $9MM of EBITDA in 4Q11 from the Grand Hyatt DC.  Should the acquisiton not close, HST will forfeit its $15MM deposit, negatively impacting FFO by $0.01, Adjusted EBITDA by $15MM and net income by $8MM.
  • FY2011 Outlook:
    • Comp RevPAR: 6.25-6.75% vs. 6-8% previously
    • Operating profit margins: +170-190bps vs. 210-260bps previously
    • Comp hotel adjusted operating margins: +80-90bps vs. 100-140bps previously
    • FFO: $0.86-$0.88 vs. $0.88 - $0.93
    • Adjusted EBITDA of $1,015-1,025MM vs. ($5-25MM lower than previous guidance)
    • FY Capex: $220-240MM for ROI projects and $300-320MM in renewal and replacement projects



  • Current RevPAR levels are just slightly shy of (1.3%) of peak 2007 level.  Irene caused a 60bps hit to the quarter as their downtown NYC hotel was evacuated and Washington conferences were cancelled.
  • Business mix trends were favorable this quarter. Transient demand and rate were the primary drivers of growth.  Retail rooms were down slightly but special corporate was up 5.3%. Transient revenues grew more than 7%.
  • 15% increase in demand in higher rated corporate business as discount business declined 6% - resulting in a 4% increase in group business in the quarter
  • Outlook for 4Q remains quite positive.  4Q booking pace is up 2% and revenues up 5%. Transient up 6% so far. Do expect that 4Q RevPAR growth will be in-line or slightly better than the last 2 quarters.
  • Fundamentals for their business continue to be attractive:
    • 0.5% supply growth in 2012.  Occupancy should continue to grow even if GDP is very modest at higher rates
    • Recently issued government per diem rates increased 5% on average
    • Special corporate rates should also be higher
    • They should continue to benefit from mix-shift and rate increases
  • RevPAR in Paris has increased 18% YTD and expect it to perform well going forward
  • Determined that extended the closing date of the Grand Hyatt DC made sense in light of the continued global turmoil.  Still believe that the hotel is a good asset in a great location. Unlikely that any other acquisitions would close before year end.  They are marketing a few assets for sale but those are likely to close in 1Q12.
  • They were very pleased with operating results in the quarter despite global turmoil.  They feel like only risk is reflected in the group's stock movement.  Their equity price suggests a price per key of just $200k- or just 50% of replacement costs
  • Phoenix - 24.4% RevPAR growth.  Strong group demand - occupancy improvement of 20%. ADR growth of 8%. Expect outstanding 4Q.
  • Miami/Ft Lauderdale: 20.6%, Occupancy increased 12% & ADR increased 2%. Renovations helped.  Expect great 4Q.
  • Florida region was impacted by significant renovations elsewhere
  • 17% RevPAR growth in San Fran - ADR improved due to better mix. Expected to perform well in 4Q.
  • Houston: +12.6%, Occupancy over 6% and ADR growth over 2%. Expect strong 4Q.
  • Hawaii: +6.8% Occupancy +5.8%. Expect to outperform in 4Q.  More air capacity helping.
  • Chicago: +6.7%, ADR +2%.  Good 4Q due to strong group bookings.
  • NY: +6.7%, ADR+8% - would have been better ex Irene -expect excellent 4Q
  • DC: +2%.  Expect DC to perform better next quarter.
  • Boston: -4% affected by lack of group demand.  Group demand expected to be weak in 4Q.
  • New Orleans: -10% RevPAR due to difficult comps - occupancy declined 12%; ADR increased 6%.  Expect rough 4Q due to new opening of Hyatt and difficult comps from last year's oil spill clean up effort
  • Euro JV: +5.2% REVPAR.. 3 hotels were impacted by meeting space renovations. Excluding Sheraton Roma - REVPAR would have been up 8%
  • Unallocated costs increased 3% - due to variables expense growth. Utility increased 3.6%, insuirance grew significantly as property insurance poilicies were renewed.
  • Expect 4Q margin performance similar to YTD but better F&B flowthrough, and higher rate contribution but expect higher property taxes (refunds received last year) and higher unallocated costs
  • Prior guidance included $9MM of total EBITDA from the Grand Hyatt acquisition - however, if the deal doesn't close, then EBITDA would be $15MM lower in 2011.  Reason for the mismatch is due to transfer tax payment of $7MM which didn't get paid this quarter.



  • Group rates for 2012 so far is up about 1%
  • Deal market? They are trying to assess that right now. Sellers have yet to drop their prices. Cost of financing has increased a bit so buyers are probably looking to pay a little less. Seeing a little less purchase activity from other REITs given where equity prices are. Expect pace in 2H11 will fall short of expectations.  However, there is still an active market out there.
  • 4Q bookings are up 2% - same as commentary from last quarter
    • Net net bookings for 4Q are better than where they were earlier this year. As they have worked their way through the year they have seen continued improvement for 4Q. Last 60 days they booked more business for 4Q than they booked around the same time last year.
  • Lost some group activities on the East Coast due to Irene. Big group in Philly cancelled. Had to shut down in NY for the entire weekend.  Expected DC strong bookings for the opening of the MLK memorial.  
  • Property level forecasts are stronger than the guidance they are giving for 4Q
  • Why was corporate expense so low?
    • Significant part of their comp is tied to restricted comp - so they will earn less of that stock comp and with the stock comp being a lot lower so is the comp amount
  • Need 7% RevPAR growth (SS) to hit their FY 11' guidance
  • Generally would view a stock buyback as an attractive use of capital here. However, they like to use proceeds from asset sales to repurchase stock
  • 2012 group booking trends?
    • Room nights were up 4% and rate so far is up 1%
  • Acquisition RevPAR was up 14% - so they would have had 7.1% RevPAR for those assets. Excluding Irene they would be up 7.7%.
  • Why aren't they more aggressive today buying back stock if they are so confident?
    • If everything plays out things will be good next year but there are some real risks (macro) that things can get a lot worse. Thinks its prudent to be conservative for now.
    • Don't want to lever up today.  There are a lot of advantages to a lower cost of capital for them.
  • Not comfortable issuing stock at current prices therefore, they walked away from the St. Regis deal
  • Think that in the long run its better to be overweighted to Group since over the long term Group is more resilient than transient. However, in this year transient is clearly better than group.  The opportunity for 2012 is really on the group side for them.  For group - they are still 9% below peak levels.
  • Thinks that the opportunity on the transient side is more on the rate side for 2012 vs. occupancy - as occupancy is already very strong
  • Think that it's still fairly early to know how negotiated rate will play out.  Clearly, occupancy levels are higher and there is a higher level of group activity on the books.  So it puts them in a better negotiating position.
  • If event risk doesn't occur, they feel like they could accomplish the rate range that MAR layed out
  • In the event of the economy heading south, how much cost cutting is left?
    • If it's in the form of reduced demand - they can reduce costs (i.e. variable costs) but at current occupancy levels, it's a lot harder - they already made those cuts
    • Occupancy went from 66% to 72% - so they have had to add head count in line with that increase but they are still well below prior peak levels
  • Lower ADR growth this quarter is likely due to a stronger leisure mix in the summer quarter vs. inability to push rate - so less of a mix shift benefit as they have seen in other quarters
  • Not sure that across the board cap rates have really moved up that much in top gateway cities - however, it's possible that they have increased about 50bps in some markets related to higher cost of funding and therefore needing a lower purchase price to meet hurdle ROI rates
  • They are at 55% of their total room nights for 2012 (on the books) however that isn't too far off of where they would normally be - for group nights. By end of year, they would expect 70% of their group nights to be booked for '12
  • EBITDA impact from Irene - $4.5-5,0MM

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.






Small-business confidence


Yesterday, recession fears continue to weigh on U.S. small-business confidence, as the NFIB Index moved slightly higher in September, rising from 88.1 to 88.9.


The gain snaps a streak of six consecutive monthly declines. Despite the improvement, the index remains depressed, having been below 90 for three consecutive months. There was no noticeable improvement in the details; it is clear small businesses are in no rush to expand.




Corn and wheat prices have driven higher over the past week.  News emerging today from the government states that the U.S. corn crop, the world’s largest, will be 0.5% smaller than forecast last month after unusually hot weather in July and freezing temperatures in September reduced yields.







Food processor stocks have slowed as corn prices reversed the downward slide that had been helping the outlook of TSN, SAFM, and the rest of the industry.


THE HBM: TSN, SAFM, CMG, EAT, DRI, CAKE, PFCB - subsector fbr





CMG: An article in Fortune, published yesterday, is highly critical of Chipotle’s new concept, ShopHouse Southeast Asian Kitchen.





EAT: GS resumed coverage of Brinker at Neutral with a price target of $21. 


EAT: Chili’s Grill and Bar opened its first restaurant in Sao Paulo, Brazil.


DRI:  Coverage of Darden was resumed at Goldman Sachs at Buy


CAKE: Coverage of The Cheesecake Factory was resumed at Goldman Sachs at Sell


PFCB:  PFCB was resumed Neutral at GS, price target is $29.





Howard Penney

Managing Director


Rory Green



Stupid Easy

This note was originally published at 8am on October 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

-Charlie Munger


That’s one of the quotes Howard Marks uses to introduce his thought about what he calls “Second-Level Thinking” in his book that I just finished reviewing – “The Most Important Thing.”


People on Old Wall Street really don’t like being called stupid. They don’t like being called monkeys either. Both on the ice and in this Globally Interconnected Arena of risk management, I’ve been called plenty of names. It’s what gets me up in the morning.


Name calling isn’t nice. Neither is lying to people or blowing up their money. In some conflicted and compromised research report, this game looks gentlemanly. On the front lines though, this game is far from polite. It isn’t easy either.


Managing risk isn’t about getting a guy to call you with a whisper about this morning’s unemployment report. Neither is it about assuming we all know what we don’t know. It’s about embracing uncertainty, then considering scenario analyses, probabilities, and ranges. You don’t have to be a contrarian all of the time – but, some of the time, you need to play this game to win.


“Of course, it’s not that easy and clear cut … if your behavior is conventional, you are likely to get conventional results… Only if your behavior is unconventional is your performance likely to be unconventional.” (Howard Marks, The Most Important Thing)


Back to the Global Macro Grind


This morning’s setup across Global Macro is much more concerning to me than the one we were staring down the barrel of on Tuesday morning. Given that most of Asia and Europe was crashing and the S&P futures were trading at 1078 in the pre-market, that probably sounds like an unconventional thing to say.


Unconventional is as unconventional does. Covering shorts and buying that opportunity was too.


Today, after 3 consecutive days of The Pain Trade (short covering), all of Asia, Europe, and the US have rallied between +5-10% “off the lows.” The S&P futures are +5.9% from the YTD closing low (Monday, October 3rd 2011 = 1099), and if I had a Canadian Loonie for every email and tweet I’ve had that this US unemployment report is going to be “better than expected”, I’d pay myself for once.


I know. It’s unconventional for generals in this industry to eat last. It’s unconventional to be yourself instead of who you are supposed to be. It’s also been unconventional to have said Growth Slowing would be the 2011 call that needed to be made. If my behavior has sounded too “confident” or whatever it is that mediocrity calls success in this country these days, so be it.


Looking across my Global Macro factors this morning, here’s why I say start selling again today:

  1. Japan’s Nikkei’s 3-day rally failed at TRADE line resistance of 8777 and remains in crash mode
  2. Hong Kong’s rally failed at TRADE line resistance of 18,918 (Hang Sang) and remains in crash mode
  3. South Korea’s squeeze failed at TRADE line resistance of 1797 and remains in crash mode
  4. British banks are breaking down again and the FTSE remains in a Bearish Formation (bearish TRADE, TREND, TAIL)
  5. Belgium and Switzerland have taken over Europe’s negative divergences for this morning (big bank exposures for both)
  6. Russia’s Trading System Index rallied to another lower-high and is down -39% since April when US stocks peaked
  7. Oil prices remain in a Bearish Formation despite another bounce to lower-highs
  8. Copper prices remains in Bearish Formation despite a big short squeeze from a very newsy September oversold low
  9. Gold is now bearish TRADE and TREND for the 1sttime in forever with TREND line resistance up at $1673
  10. SP500’s TRADE, TREND, and TAIL lines of resistance (Bearish Formation) = 1182, 1237, and 1266, respectively

So that’s just the Top 10 unconventional calls you could have been making for the last 3-6 months. If you back this up to when we bought the Growth Slowing Trade (Long the US Treasury Flattener (FLAT) in February) you’ll see a lot of Global Equity prices put in their 2-year cycle peaks in February of 2011, not April.


And while its conventional to call out the SP500 as having “staved off a bear market” this week (because it didn’t violate the -20% crash signal; it was down -19.4% on Monday’s close), its unconventional to remind the bulls that Financials (XLF), Industrials (XLI) and Small Caps (Russell2000), have all crashed already in 2011 anyway.


Can the market rally on hope? For sure. It just did. But what do you do right now? If this unemployment number is better or worse than expected, my Stupid Easy hockey head answer will remain the unconventional one for 2011 – sell.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1602-1673, $75.92-85.11, and 1101-1172, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stupid Easy - bearish formation


Stupid Easy - virt. port

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