The important commodities, at least for the food and restaurant industries, moved higher over the last week.  Despite the dollar strengthening over the past week, commodities went higher including those that typically trade with an inverse correlation to the greenback.


Please scroll down for charts detailing the trends of individual commodities.







Corn is an important for all companies in the restaurant industry, not only those I mentioned in the heading.  Corn prices gained again over the last week, even as the dollar gained, as the USDA crop progress report indicates that 87% of the harvest for the top 18 corn-producing states is complete.  The USDA also cut its corn harvest estimate by roughly 1% from its previous forecast.  The expected yields, per the USDA are now at 146.7 bushels per acre, down 1.4 bushels from the October forecast.  If this yield were to come about, it would be the lowest yield since 2003.




Texas is the state most associated with the drought that has plagued cattle farmers this year but ranchers in Arkansas are now stepping up the rate at which they are culling their herds.  The quality of the calves being sold is also down, according to market participants interviewed by  With grain too expensive to maintain herd sizes through the winter, and small rain showers having no material impact on soil conditions, farmers are downsizing their herds drastically. 


While this is boosting supply in the near-term, for FY12 it may mean even higher prices.  Consumer may expect higher retail prices in the grocery aisle but, as WFM noted in its earnings call last week, passing on inflation in meat prices has proven difficult.




Chicken wing prices have continued their march higher.  As we wrote recently, food industry experts’ commentary as well as our own analysis gives us confidence that BWLD could have year-over-year inflation in wing prices beginning in the first quarter of 2012.  Replicating the 3Q11 strategy of driving comps via a promotion will likely be difficult in 2012 if the company faces significant inflation.  Some industry experts see $1.50 wings next year and sustained year-over-year inflation versus 2011 next year.




Coffee prices moved higher over the last week after the previous seven days’ decline.  Despite the crisis in Europe and the strengthening dollar, coffee prices gained 2.3% over the last week as coffee exports from Brazil fell to 3.1 million bags in October from 3.5 million a year prior.  A University of Sao Paulo research group, Cepea, is stating that the 2012-13 harvest may still be a record, despite concern that dry weather and frosts earlier in the year could have hampered crop development.







WEEKLY COMMODITY CHARTBOOK - correlation table 119
























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast 119



Chicken Wings















Howard Penney

Managing Director


Rory Green



In preparation for MPEL's Q3 earnings release Thursday morning, we’ve put together the recent pertinent forward looking company commentary.




  • According to IFR, MPEL is considering listing in Hong Kong by way of introduction, instead of selling stock, because of current market conditions.



  • [House of Dancing Water] “The show while operating at above break-even on a stand-alone basis also generates a meaningful ripple effect throughout the whole business, including higher property visitation, improved hotel and food and beverage metrics, as well as provides a significant contribution to our gaming business through, amongst other things, adding key customers to our database to drive profitability and future growth.”
  • 3Q guidance:
    • D&A: $85MM
    • Corp expense: $20MM
    • Net interest expense: $30MM
  • “On the competitive outlook side with Galaxy Cotai opening, it certainly has moved the center of gravity further into Cotai and I think we have benefited from that.”
  • [Macau Studio City] “Effectively a three-year process. And we previously said that we hope to restart construction sometime before the end of Q1 of 2012.”
  • “We’ll probably put the additional tower (Phase III of City of Dreams) on the back burner for now.
  • [Within the mass segment] “This year, the percentage on our premium mass is somewhere about 50% to 60%.”
  • “I think going into the third quarter, we plan on keeping operating expense essentially flat with what we’ve seen in the second quarter. So, we’ll fully benefit from any VIP or mass market top-line growth that we can generate.”
  • [2013 Table cap] “So I think if you read between the lines, only new builds from now until 2013 will get those tables. So, I think we’ve sensed 5 and 6 opening up next year and the year after that, that’s where the allocation of tables will be. So from our internal perspective with regards to City of Dreams and Altira, and I think Ted alluded to it early on, we are continuing to yield up the business and we are trying to operate and utilize the tables as efficiently and as profitably as we can.”
  • “We have some claims in terms of opening one to two junket operators, but due to some labor issue, we have to move those opening to the third quarter.”
  • “Unlike some of our competitors who are still waiting for their land grant, as I pointed out earlier on, the previous owners of the Studio City project had already commenced construction a few years ago and had put in significant piling and foundation work, work that was worth over U.S.$100 million. So for us right now is really a process of recommencing and getting the necessary approvals to restart construction. So, it’s a much less complex and complicated process than what others would be looking at.”

LIZ: Q3 Quick Take


No major surprises in LIZ’s numbers to note this morning before the call. Fundamentals appear largely in-line with our expectations and management’s outlook for both 2011 and 2012 adjusted EBITDA remains unchanged. That said, there was also little by way of updates regarding several items that that we expect to be discussed in more detail on the call at 10am:


These include:

  • What if any corporate expenses related to the legacy Partnered Brands now divested are expected to be carried forward. Assuming there are some, what is the plan and timeline for when we can expect these to be eliminated.
  • An update regarding debt reduction – particularly the timing of when the volatile Eurobond might be settled.
  • As a non-cash tax payer and with the Mexx deal now completed, we should also get an update re the size of NOLs. 

The bottom-line is that there is no change to our view based on this release and we continue to think the company’s 2012 EBITDA guidance looks conservative. We’ll follow up as warranted after the call.


Call at 10am (code: 22874487)



Casey Flavin



Solid quarter but “disappointing” guidance.



“Management is sandbagging”.  “Guidance is conservative”.  We’ve all heard it many times from the sell side – always when a buy rated stock provides disappointing guidance.  We, however, really mean it!  Look, we don’t have an axe to grind either way with IGT.  We’re not trying to justify a Buy rating.  Our call the last few months has been on BYI, not IGT.  However, we’ll call a spade a spade and say that IGT is sandbagging.  Guidance should’ve been 10 cents higher in our opinion.  We lay it out below.


The quarter can be summed up as having very strong top line results for both product sales and gaming operations (solidly ahead of consensus) somewhat offset by disappointing gaming operations margins and higher operating expenses.  We think management may be managing earnings a bit here.  We’ve seen it from them before.  With that level of revenues, EPS should’ve been a lot better.





Product revenues came in 19% ahead of our estimate due to better unit sales while gross margins were in-line with our estimate.

  • We estimate that IGT’s share rose to 40% in September – their best market share quarter since June 2008 (IGT would like to send out a special thanks to WMS)
  • Domestic units shipped exceeded our estimate by almost 3,000 units
    • Replacements were 1,200 units better than we estimated due to higher share (we estimate 39% share vs. high 20's share average over the last 6 quarters)
    • New units were 1,750 better than we estimated due primarily to the earlier than expected recognition of shipments to the 2 Kansas casinos opening in 1Q12 which we estimated accounted for 1,500 shipments
    • Replacement units for the quarter look like they were in-line with our original estimate of 13k for the entire market – marking an 11% YoY improvement.  We estimate that the YTD improvement in replacements is 13% with replacements tracking at 41.6k through September 30th vs. 37.7k shipped in the first 9 months of 2010.
    • International product revenues were $8MM above our estimate but gross profit was $1MM below our estimate. We suspect that this is due to the lower margins from the Entraction acquisition – which contributed to revenue but delivered no profits in the quarter.



Gaming operations revenue was $8MM above our estimate while gross profit was $6MM below our estimate, after adjusting for the $4.8MM IP settlement charge.

  • Better revenues were driven by improvements in WAP yields per day due to better game performance on fresh product.  However, WAPs do have lower margins since the games are largely licensed titles with royalty payments and jackpot funding expenses.
  • The quarter also got a boost from better than expected shipments to international markets –including shipments to CAGE
  • Adjusted for the negative impact from rates and the IP charge, ‘normalized gross profit’ margin would have been 59% - below the 62% rate where IGT had been tracking for the first 9 months of the year.  We suspect that next year’s guidance has a similarly conservative margin.

Other stuff:

  • SG&A was $13MM above our estimate – largely due to higher commissions from better product sales



IGT’s guidance for 2012 is pretty conservative in our opinion:

  • Excludes their signed contract to ship 7,200 units into Canada. If half those units ship in F2012 than that will add 5 cents to IGT's results
  • Flattish to slight uptick in the replacement environment. Unless current trends massively reverse, this is unlikely. For the TTM ended 9/30/2011 we estimate that 54k replacement units shipped in NA, a 12% YoY increase. Assuming just a 10% increase would add over 5,000 units to the market in IGT's fiscal 2012 and assuming that IGT can garner a 35% share that's another 2 cents a share.
  • Flatish new and expansion opportunities in IGT's fiscal 2012 vs. 2011.  We're not sure how that's possible, there were less then 12k new and expansion units shipped into NA for the TTM ended 9/30/11 and we estimate over 18k excluding any new units to Canada, Ohio VLTs, IL and counting 2 of 4 Ohio casino shipments. Assuming IGT get's 35-40% share of these openings we get another 3 cents
  • These 3 items account for roughly 10 cents of EPS. 

IGT’s install base and yields should show improvement YoY, however, we did take down our gross margins to 59%.  We also assumed a 30% variable component to SG&A.  All in, we get to $1.10/share for 2012. 






According to the National Bureau of Statistics, the annual inflation rate in China decelerated to 5.5% in October from 6.1% in September. 


Hedgeye Financials posted this on today's MBA Mortgage Purchase Applications print - "The MBA Purchase Index rose 4.8% last week, bringing the series to an index level of 173. In spite of this improvement, purchase application levels remain roughly 5% below their rates from the summer. At the current rate, applications will finish the year roughly 10% lower than 2010. We reiterate that this has a direct read through to prices."






THE HBM: CBOU, CAKE - subsector fbr





CBOU: Caribou Coffee reported 3Q EPS after the close yesterday of $0.07 versus expectations of $0.06.  Comps increased 4.1% and FY11 and FY12 guidance of $0.39-$0.41 and $0.48-$0.51, respectively.  Consensus is at the high end of both ranges.





CAKE: Cheesecake Factory says it’s doing nearly anything it can to lower costs without cutting portions during a time of high commodity-price inflation.  “We have to balance the need to protect margins with the even greater desire to grow guest counts”, said CFO Douglas Benn.  WSJ


THE HBM: CBOU, CAKE - stocks 119



Howard Penney

Managing Director


Rory Green


Great Inflations

This note was originally published at 8am on November 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The fear of another great inflation remained with him all his life.”

-Niall Ferguson


Inflation is a centrally planned policy. Period.


History is littered with examples of governments devaluing their fiat currencies for short-term political resolve. Keynesians can call their goals “price stability” and “full employment” all they want. The People are starting to call that a joke. In the long-term, banning both gravitational forces and the truth about long-term prices will be difficult.


The aforementioned quote comes from an excellent book that I am in the middle of studying – Niall Ferguson’s High Financier – The Lives and Times of Siegmund Warburg. In the Post 1913 Federal Reserve Act Period (Chart of The Day), there are very few merchant bankers (not to be confused with central or too-big-to-perform bankers) who rival Warburg’s legacy.


What’s most interesting to me about Warburg (like it is with most revolutionary capitalists), is where he came from. Context and experience are some of the things I personally thank God for every day of my life. For Siegmund Warburg, context and experience are what made him the change that the British and American banking systems needed to see.


“I brought something to England which was a little bit different because I was a damn foreigner, a German Jew.”

-Siegmund Warburg (High Financier, page 233)


You don’t have to take my word for it on any of this. I’m just a Canadian who came to the American Financial Empire in 1995 and studied the source code of Keynesian economic dogma at Yale in my cutoff jean shorts.


Take Harvard’s word for it – Ferguson’s book has 104 pages of footnotes.


You don’t have to take Warburg’s word for it either – few in the Establishment of the British economic elite did after he became a British citizen in 1939. But when a post WWII debt-laden England resorted to debauching the British Pound, Warburg called them out on it, big time.


Great Inflations?


Warburg lived through Germany’s hyperinflation of the 1920s and the politicized central banking that perpetuated it. Today’s good ole boy network money printing is not a new strategy. We don’t have that hyperinflation (yet) either. But the manic financial media seems hell bent on cheering on its catalysts.


WTIC and Brent Crude oil prices are trading at $95 and $112/barrel this morning. Deflation? Pull up any long-term chart that doesn’t use 2008’s $150/barrel oil price as its anchoring point in the analysis (all-time high), and you’ll conclude what every man, woman, and child from Kenya to Vietnam already has – Keynesian monetary policies are exporting generationally high levels of food and energy inflation.


Warburg didn’t believe in trading prop, levering up his client deposits, or front-running client capital. His strategy was to simply keep his bank’s balance sheet liquid and conservatively positioned throughout the British and French currency devaluations of the 1950s and 1960s. He also avoided getting train wrecked by the US Dollar Devaluation that ensued under Nixon and Carter in the 1970s.


Warburg fundamentally believed that “inflation was primarily a political phenomenon caused by governments who do not have the courage to either reduce their expenditure or to cover it by taxation.” (High Financier, page 36). Sound familiar?


The sad and pathetic reality about Western Economic Leadership in the 21stcentury (read case studies of both Bush/Obama US Administrations, the 8 or 9 Japanese PM’s they’ve had in the last decade, or … uh, Europe!), is that this is all very familiar.


“To sin by silence when they should protest makes cowards of men.”

-Abraham Lincoln


The metaphor that Ferguson and I make between the British Empire’s peak (then) and America’s (potentially now) is a very important debate that needs to be had. If we repeat history’s mistakes, our children have no business forgiving the elephantine intellects endowed upon us from our Ivy League institutions.


In the late 1940’s and early 1950’s Warburg was at least as critical of British policy as Hedgeye and many others are of US fiscal and monetary policy today.




“By the September 1949 devaluation, which saw the Pound’s dollar value reduced by 30% from $4.03 to $2.80, his Wartime enthusiasm for Labour had waned significantly… he argued in a highly critical memorandum written in August of that year … The country was spending too much on defence. Profits and pay were on a much too high level… the employers indulge frequently in illusions as to the profits …” (High Financier, page 131)




But, but, but … if you don’t adjust them for inflation, ‘corporate profits are great’… and we continue to beg for The Bernank and/or the Italian Job from Super Mario, to cut, print, cut… beg, cut, print… print, bail, cut…


If you’ve been awake since 2006 and watched Big Government Interventions A) shorten economic cycles and B) amplify market volatilities, you get it. Great expectations for Great Inflations have become the root of the common man’s heartache.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1724-1784, $92.66-94.86, 6105-6413, and 1251-1267, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Inflations - Chart of the Day


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