Corn and wheat gained 7% and 8%, respectively over the last week.  Most commodities moved higher as the Dollar Index weakened.


Almost all of the commodities that we monitor saw week-over-week price increases.  Food inflation is likely to be less of a factor, on the margin, for restaurant stocks than it was in 2012 but we still expect some companies to see continued pressure on margins.  This will be especially true in the first half of the year for companies with exposure to beef and chicken (particularly wings).


In terms of CPI, consumers are still seeing steeper food inflation in their grocery bills than in the restaurant check.  Proposed legislation in Washington, HB 3798, is expected to lead to higher food prices for American consumers.  The legislation focused on egg production.  For an albeit one-sided write up, click here.









DPZ: Company expects overall basket to be up 4.5-6% in 2011.  No specific guidance for 2012 but hoping for a moderation from 2011 levels.


CMG: Management plans to take no additional pricing in 2011.  Currently there is roughly 4.6% of price on the menu.



  • Corn output in Argentina is expected to fall by 7% in the year starting March 1ston a year-over-year basis. 
  • Russian grain shipments will slow because of shrinking inventories, according to the USDA.


  • Export demand for American corn is improving.  Export deports near New Orleans boosted premiums this week to the highest level in two months.
  • The UN’s Food and Agriculture Organization has spoken out against the use of corn for ethanol production as it “affects the prices of maize all over the world”.


Chicken Wings – BWLD


BWLD: The company has guided to ~2% pricing for 2012.  We believe that this will be revised higher.  We also expect guidance for “moderate” inflation to be revised when the company reports 4Q11 earnings.



  • The six-week moving average for egg sets has declined for the past couple of weeks (chart below).  We will be watching this as a leading indicator of supply in the U.S. chicken industry.


  • We expected demand for chicken to be strong in 2012 as restaurants look to offset the elevated beef prices.  This is bullish for wing prices.

WEEKLY COMMODITY CHARTBOOK - egg sets wing price





WEN: The company expects ROP margins to be down roughly 100 basis points year-over-year in 2011.  Beef remains a concern at 20% of spend.  The company purchases fresh beef and does not contract its beef needs.



  • The USDA is releasing its biannual cattle inventory report on Friday.  The report is expected to show shrinkage in the U.S. herd, which is already the smallest since the 1950s.
  • Elevated corn prices are not helping the cattle industry, with many ranchers in Texas seeing their businesses hurt in the past year by elevated feed costs and severe drought.


  • The largest tailwind for U.S. beef demand is Japan reviewing curbs on U.S. beef imports.  Japan was once U.S. beef’s biggest customer.  South Korea is also expected to increase its consumption of U.S. beef.




SBUX: Company reports tomorrow, it will be interesting to hear thoughts on pricing strategy going forward.  We expect some commodity-related pressure to ease as we lap higher coffee costs of 2011.



  • Peru’s coffee crop is expected to fall by 8.8% this year from last year’s record.
  • Brazil is consuming more of its own coffee, which will lead to higher prices in the U.S.


  • Coffee consumption in Brazil, the world’s largest producer, will rise by 3.5% this year, according to a Brazilian roaster’s association known as Abic said today.































Chicken – Whole Breast





Chicken Wings















Howard Penney

Managing Director


Rory Green


US Dollar: Selling SOTU

POSITION: Selling US Dollar


Like all free-market capitalists,  I am driven to win. If I win, I don’t want to allocate a #FairShare of my winnings. If I lose, I want to be held accountable for the losses. Winning and losing in America matters.


Our business model is built on transparency, accountability, and trust. When the fundamental research and risk management facts change, I do. Last night’s State of the Union (SOTU) address was not only US Dollar bearish, it ignored the core underpinnings of what’s driven this short-term US Economic recovery altogether – Strong Dollar (the word Dollar wasn’t used once in the speech; a weak Dollar Manufacturing policy was implied).


Reflectivity: Strong Dollar = Deflates the Inflation = Strengthens Consumption = Stronger Employment = Stronger Confidence.


So why is the US Dollar up today (it was down for a week into the SOTU)? 

  1. Ben Bernanke should be less dovish in his FOMC press conference (no Qe3)
  2. Japan is moving closer to a Sovereign Debt Crisis (bearish YEN/USD)
  3. Greece lives to be socialized another day (bearish EUR/USD) 

In other words, the US Dollar could start going down again tomorrow. My process hasn’t changed - Multi-factor, Multi-Duration – within the framework of a globally interconnected marketplace. That’s what all of this is – that hasn’t changed today either.


The policy rhetoric changed last night and so has the US Dollar Index’s price. See the attached chart for TRADE and TREND lines – you’ll note that as of now the USD is bearish TRADE, bullish TREND and there’s nothing that suggests a weak US Dollar policy can’t set us up for an intermediate-term TREND line test of $78.16 support.




Keith R. McCullough
Chief Executive Officer


US Dollar: Selling SOTU - 1






Comments from CEO Keith McCullough


Contrast the Top 2 US Headlines this morn: 1. "Apple Profit More Than Doubles" vs. 2. "Fair Share" – I don’t get it – markets don’t either:

  1. US DOLLAR – I #SOTU Word Scored the entire speech last night and the US Dollar was not mentioned once. #FairShare had 5 mentions and #Capitalism = 0. Just words, but they matter – Even the NYT and BBC ran #FairShare in their headline this morning. It’s just not good for my Strong Dollar case. Clinton and Regan both rolled w/ Strong Dollar, Strong Consumption (ie 71% of US GDP)
  2. TREASURIES – stocks lost all of their Pre-#SOTU speech Apple momentum and have gone red this morning as UST Bond Yields fall a few beeps and the Yield Curve compresses by 3 basis points d/d. If you had to score the speech on Growth, it didn’t score well either. 10yr UST Yields of 2.03% is the most important Global Macro line in my model right now. If we snap it, I’ll get more defensively positioned.
  3. GLOBAL EQUITIES – at about 6PM last night I thought the futures had it right and Apple was going to bust a move taking the SP500 to a fresh YTD high – no dice. Instead we are looking at what’s called an Outside Reversal from Monday (testing new highs intraday of 1322, failing, and closing at/below prior closing high). Asian, European, and Latin American stocks at risk of doing the same.


My bullish Strong Dollar, Strong America tone is changing this morn, because globally interconnected prices have.




THE HBM: MCD, CMG, EAT - subsector fbr





MCD: A McDonald's restaurant in Dickinson, N.D., is offering $300 signing bonuses for prospective employees. The move comes as North Dakota's unemployment rate hovers around 3.4 percent, the lowest in the nation (


CMG: Chipotle is running a promotion on Super Bowl Sunday offering half-off burrito boxes.  The promotion is generating publicity for the company because of the ad itself.


THE HBM: MCD, CMG, EAT - cmg promo





TAST: Working diligently on the separation of the two companies


DPZ:  On a relative basis it was a good day for DPZ





EAT: Brinker was raised to Buy from Hold at KeyBanc Capital.


Other Casual Dining News


Del Frisco Restaurant Group LLC filed registration papers for an IPO.


Howard Penney

Managing Director


Rory Green



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 80.43%
  • SHORT SIGNALS 78.34%


We remain positive on Brinker on all three durations (TRADE, TREND, TAIL). We view yesterday’s sell-off as offering a buying opportunity as current trends suggest that the company may comparable store sales targets for the full year.  From a tail perspective, the long-term improvement to the operating platform at Chili’s, and the benefits that generates remains intact.  From here, we see $5 of upside and $2 of downside.


We understand the stocks reaction to yesterday’s disappointing and decelerating sales trends at Chili’s.  The 240% spike in volume versus the thirty-day average is significant.  The Chili’s and/or Bar & Grill naysayers certainly enjoyed yesterday.  The ride to $27 was painful for them and even with the stock at $25.66 many remain aggrieved.  The Chili’s/ bar and grill naysayers are having a field day.  Prior to that the run to $27 was a painful ride and with the stock settling in at $25 is still inflicts a certain about of pain.


Knowing we get marked to market every day, what do we do with the stock right here and now.  Is it over or not? EAT’s balance sheet, free cash flow and margins are some of the strongest in the industry, so the investment case boils down to an income statement issue.  More specifically, have the changes the company has made to the way Chili’s operates going to allow the positive momentum on traffic to continue for the balance of the fiscal year?


I’m not going to raise the white flag yet.  We are staying positive on all three durations.  Our thinking is focuses on four key points:

  1. The core competitors have responded to the Chili’s $6 lunch promotion but traffic trends early in the current quarter are remaining strong
  2. EPS revisions following the quarter just reported continue to be revised up.  A trend that has been in place for the past 6 months
  3. Sentiment is overly negative
  4. Internally they continue to see positive momentum and the improvement in the macro environment is a net positive


Yes the easy money in EAT has been made, but there is still more to come.  The next quarter is where the rubber meets the road.  I can see a plan that can get Chili’s same-store sales to 3-4% for the quarter (2% price, 1% mix and positive traffic), which will get the company back on track to the 2% guidance for the year.  The wild card is what happens to traffic?


BRINKER:  WHERE TO FROM HERE? - eat price mix traffic


BRINKER:  WHERE TO FROM HERE? - eat vs eps consensus



Traffic trends are helped by the fact that the macro trend is more positive on the margin, with the employment outlook and confidence improving.  In addition, industry hiring trends continue to suggest that the demand picture in improving. 


BRINKER:  WHERE TO FROM HERE? - rest employment



If you are bearish on the Bar & Grill space in general and don’t believe that the internal changes that management has made to the Chili’s concept are real you will not see our side of the story.  Since announcing their version of the “plan to win” in 2010, management has delivered on what was laid out.  The changes that have been made to the kitchen and the restaurant itself will boost the top line over time.


At 7.1x, we view the EV/EBITDA valuation as favorable based on current trends.  From here, we see $5 of upside and $2 of downside.


Howard Penney

Managing Director


Rory Green





“The only thing I’m addicted to is winning.  This bootleg cult, arrogantly referred to as Alcoholics Anonymous, reports a 5 percent success rate.  My success rate is 100 percent.”

-Charlie Sheen


I’m not sure Keith realized that today was my birthday when he asked me to write the Early Look, rather he was likely focused on the fact that I’m Hedgeye’s resident political analyst and last night was President Obama’s fourth state of the union address.  This was also Obama’s last state of the union address ahead of the 2012 elections.


For those of you who aren’t active on the Twitter-sphere (my handle is @HedgeyeDJ if you are), the expression “#winning” was popularized by actor Charlie Sheen early last year when he started a one man campaign against the traditional world of entertainment. In effect, he was saying he wasn’t going to conform to Hollywood 1.0 any longer.  He also announced on twitter that he would continue to win and, amongst other things, the term #winning started trending in dramatic fashion.


Watching the state of the union address last night on Twitter was fascinating to say the least.  Keith has called twitter the new tape many times, and I think it’s also the new political pundit.  In terms of markets for opinion, at least in 140 characters, twitter is about as efficient as it gets.  If you make comments of interest and insight, your followers will increase and so will your influence via your Klout score. 


Last night as people were watching President Obama’s address, the key term that was trending on twitter was #fairshare and it is still trending this morning.  This morning I searched #fairshare on Twitter to get a sense for the consensus view of the speech and the general concept of #fairshare.  Here are the top tweets that came up:


@ewmonster: The defining issue of our time, is how to keep the American Dream alive.  THAT is a paraphrase worth making! #fairshare #sotu


@EconBrothers : Obama is right.  Everyone should pay their “fair share” of taxes, even those who currently pay no federal income taxes.  #FairShare #SOTU


@MonicaCrowley : And here we go again w/ the Warren Buffett warfare tax BS. #FairShare


@IAmSoSmart : I am thoroughly convinced that if democrats understood how hard I worked for my money, it would blow their tiny mind. #FairShare


@KeithMcCullough : #SOTU Word Score: #FairShare = 5, #Capitalism = 0


And my personal favorite:


@EricComedy : If Obama uses the phrase #FairShare one more time, I’m going to stomp on a live gerbil. #SOTU


In all seriousness, Obama clearly used this address to launch the key theme of his campaign, which is that he wants to, at least rhetorically, level the playing field for all Americans.  Whether that practically, or economically, makes sense is somewhat beside the point.  Certainly, in his speech last night President Obama didn’t offer much beyond platitudes.  If you don’t believe me on that last point, here is the New York Times’ interpretation:


“Mr.Obama presented a somewhat modest list of initiatives he could enact through executive authority coupled with more ambitious proposals unlikely to advance in Congress.”


In effect, there was nothing in his speech that would practically move the needle from an economic perspective.  Nonetheless, President Obama appears to be #winning.


According to InTrade this morning, President Obama’s chances of re-election have increased to 56%.  For the last eight months, this probability has been mired below or just above 50%, but in the last two weeks the election markets at InTrade are pricing in an increasing likelihood of an Obama re-election. This is in part due to the increasingly heated rhetoric and dysfunction emanating from the Republican primary.  That said, the economy has started to improve on the margin which benefits the incumbent and the President’s messages are broadly appealing.  #FairShare in 2012 is the #Hope and #Change of 2008.


One of our key criticisms of both the Obama and the George W. Bush Presidencies were their carte blanche backing of Keynesian economic policies.  In the Chart of the Day, we show the notional expansion of U.S. federal government debt under President Obama.  Under President Obama, the United States experienced the largest one year federal debt increase ever and in his first term, when complete, the United States will likely have added more than $6 trillion in debt to the national balance sheet.  This is more than both of George W. Bush’s terms combined.


The key risk of an Obama second term and a Fair Share agenda is that the growth of the federal government and its obligations continue to accelerate.  Already, the U.S. is beyond the 90% debt-to-GDP line in which long term economic growth becomes structurally impaired accorded to more than 200 years of data from Reinhart and Rogoff. In the shorter term, a view by the markets that the federal government is less focused on fiscal prudence is negative for the dollar and detrimental to our thesis that a strong dollar will increase the 70% of GDP that is consumption.


In the chart of the day, I’ve actually included a picture of the Bassano Dam, which is a large irrigation dam south of my hometown of Bassano, Alberta.  When it was constructed in 1915, the Bassano Dam was the largest man made irrigation dam in the world and a game changer for the agricultural community of southern Alberta.  It was a project that was funded by the government.  The point being that not all government funded projects are negative for the economy.  On the other hand, government spending for the sake of ambiguous goals that lack an ROI, like #FairShare, is only likely to add to our debt balance and constrain future consumption and growth.


Since both parties like to channel Ronald Reagan these days, I’ll end with a quote from the Gipper:


“We must not look to government to solve our problems. Government is the problem.”




Our immediate-term TRADE ranges of support and resistance for Gold, Oil (Brent), EUR/USD, US Dollar Index, German DAX, and the SP500 are now $1, $109.44-110.85, $1.28-1.31, $79.41-80.43, 6, and 1, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


#Winning - Chart of the Day


#Winning - Virtual Portfolio

Early Look

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