CPI: Cost vs Price Divergence

CPI numbers released this morning for apparel appear to be moving lock-step with the change in import prices.  Apparel CPI rang in at +4.17% vs. last year. Big number, but a deceleration from 4.65% in Jan. It's really a nit-pick to note that this is a 'slow down.' Though it is worth noting that the rate has stopped going up.


What is worth noting (chart 1) is that when looking at the underlying trend on a 2-yr basis, the CPI is rolling at a greater rate, while import prices are still headed up.


We know that this is backward looking, and that input cost compares get easy in 2H. But the problem is that everyone and their grandmother knows this too. Most companies are baking this into their models, and their guidance. Importantly, they are not accounting for what will happen to their plan if a competitors' plan fails. 


In other words, the consumer needs to continue to pay up for apparel. We need to continue to see low single digit yy CPI growth -- even though comps start to get extremely tough mid-summer.


Watch these Macro trends. They matter.


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CPI: Cost vs Price Divergence - 3 16 2012 11 01 01 AM


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February’s data showed a continuation of the narrowing of the spread between CPI for Food at Home and CPI for Food Away from Home.


This is a trend that we called out in Wednesday’s WEEKLY COMMODITY CHARTBOOK; the advantage that restaurants have enjoyed in terms of lower prices increases year-over-year as compared to grocery stores is fading.  In 2011, restaurant margins were impacted by inflation but, due to strong top line trends, rising food costs did not have as severe an impact on earnings as some were anticipating.  Grocers were forced to raise prices to protect margins and we believe that restaurants’ traffic levels benefitted from that. 


McDonald’s COO Don Thompson said this week that inflation in the grocery aisle outstripping price gains at McDonald’s is good for his company and that the projection is for Food at Home and Food Away from Home CPI are projected to be between 4-5% and 2-3%, respectively.  It’s difficult to know how the year will shake out but it seems that the current trend is for the spread to be negative (higher inflation for food away from home than food at home) by May.  Obviously, this estimate pertains to the overall restaurant industry and not just McDonald’s.  The ability of restaurant companies to lap the strong comps of last year may be negatively impacted by this year-over-year change in the food value spread.


We will continue to monitor this data point going forward; we continue to believe that it will matter in 2012.  As we know from executives like Jerry Reibel at Jack in the Box, management teams in the restaurant industry pay close attention to this data when thinking about pricing.


FEBRUARY CPI DATA SHOWS NARROWING OF FOOD VALUE SPREAD - food at home vs food away from home



Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, March 16, 2012




The Statistics and Census Service (DSEC) reported that GDP in 4Q11 increased by 17.5% YoY. Growth was driven by the rise in exports of services, investment and private consumption expenditure.

  • Exports of gaming services: +25.2%
  • Visitors’ spending: 10.4%
  • Investment: 16.7%
  • Private consumption: 12.1%
  • Government final consumption: 16.3% 
  • Exports of merchandise registered: 7.7% 

4Q growth represented a deceleration from the 21.8% growth achieved in the first 3 quarters of 2011.   



Faruqi & Faruqi, LLP, a law firm concentrating on investor rights, consumer rights and enforcement of federal antitrust laws, is investigating whether certain officers and directors of Wynn violated the Foreign Corrupt Practices Act ("FCPA") by providing improper monetary benefits to government officials in Macau.  The investigation comes on the back of the SEC's inquiry into Wynn's $135MM gift to the University of Macau Development Foundation. 



Speaker's at the Hotel Investment Conference Asia Pacific (HICAP) predicted that Singapore ADR's would rise between 4-8% in 2012. OCBC Investment Research expects "solid hotel room demand growth at 6.4 per cent per annum, which would exceed overall room supply growth of 3.8 per cent per annum".  The addition of the International Cruise Terminal in 2Q12 and the government's plan to invest S$905MM into the Tourism Development Fund should drive room demand and help the Singapore Tourism board hit their visitor arrival target of 6.6% annual growth and 17MM in 2015.


WATERTIGHT CASE? Inside Asia Gaming

Inside Asia Gaming speculates that the timing of the campaign is tied to the upcoming US presidential elections.  It's no secret that Sheldon hasn't been a fan of labor unions and this may be their way of embarrassing him and any Republican candidates who Sheldon supports - like Newt Gingrich.   


MUDDY WATERS Inside Asia Gaming

Inside Asia Gaming examines how the transition of China's national leadership is complicating and stalling the approval of new Cotai projects. Given that the casino industry and gambling are political hot topics in China, Macau officials are weary of making grand plans for Cotai's future expansion without getting "approval" from the political powers that be in China.  The fact that the political players are currently in flux is likely a large driver for the delays in granting permission for the gazetting of the 4 pending projects on Cotai. The recent drama and embarrassing accusation brought out by the Wynn/ Okada lawsuits are only likely to further delay approval of Wynn's land grant. 

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 80.46%
  • SHORT SIGNALS 78.35%






Commentary from CEO Keith McCullough


Top 3 Most Read (Bloomberg) this morning (Buffett, Billionaires, Morgan Stanley) all about Wall St comp; not about the “rally”; fascinating:

  1. INDIA – the Indians told the world they got off the Greenspan-put drugs (no rate cut), so the world sold their equity market down another -1% overnight (down -2.6% in 2 days). India is a net importer of inflation (oil) and has seen their yield curve go flat.
  2. OIL – after attempting to SPR global Consumers yesterday while they were watching some hoops, the Administration of Central Planning denied they’d ever politicize what the DOE defines (govt website next to the slide deck on Obama’s opinion on oil supply/demand) as “the last line of defense against a supply disruption." I bought oil on that as all 3 of my durations of support held like the rock of Gibraltar.
  3. USD – this is easily the most bullish development we’ve seen since Bernanke’s attempts to debauch the dollar (Jan 25th) – gravity. US Dollar Index should close up for the 3rd consecutive week – while it may not have been for Apple and BAC, this has been a huge headwind for anything Bonds, Gold, Foreign Currency, etc. this week. Yes, anyone who is diversified across Global Macro got tagged by this Correlation Risk.


Quadruple witching options expiration and a sequentially inflating US Consumer Price report up next.





THE HBM: MCD, SBUX, PNRA, BWLD - subsector





MCD: McDonald’s China executives were questioned by food safety regulators.  According to media reports emerging this morning, McDonald’s sold chicken wings past their sell-by period.  The McDonald’s restaurant in Beijing is reported to have sold chicken wings 90 minutes after they were cooked versus the company’s guidelines of a 30 minute limit. The company said that this is an isolated case.


SBUX: Starbucks was named one of the “World’s Most Ethical Companies” in 2012 by the Ethisphere Institute.


PNRA: Panera Bread founder Ron Shaich will share the title of CEO of the company with Bill Moreton, according to a press release published yesterday.  The statement said, “The transition to co-CEOs formalizes a relationship that has evolved over the last year and is a reflection of the way in which Shaich and Moreton have been operating as partners. This change in titles is simply a statement of their partnership and shared commitment to Panera.”




COSI: Cosi declined -1.8% on accelerating volume.


CBOU: Caribou gained 4.8% on accelerating volume.  Coffee’s price declining is helping the coffee retailers many of whom took price last year to mitigate shrinking margins.





BWLD: Buffalo Wild Wings was cut to Neutral versus Outperform at Wedbush. 




PFCB: P.F. Chang’s gained 3.6% on flat volume.  This is the best performing stock in casual dining over the 90-day duration.





Howard Penney

Managing Director


Rory Green




“The downside to thinking statements are more complicated than plainly stated, is that what is plainly stated is more often than not the truth when arrived at the long way around.”

-Rob Shewchuk


Rob Shewchuk is a long time friend of Hedgeye and also many moons ago played junior hockey with our CEO Keith McCullough for the Pembroke Lumber Kings.  If the moniker Big Alberta fits me, I think it is fair to say that Big Ontario fits the 6’3”, cowboy boot wearing Rob Shewchuk.  Rob grew up in the mining town of Red Lake, Ontario and has parlayed his natural business instincts into becoming one of the top brokers in Canada, with a special focus on undervalued mining assets and emerging growth companies.


Rob and I were texting each other about a common business situation and he put on his Red Lake philosopher’s hat and sent me the above quote.  As a bachelor who is still in full dating mode, I’ll be the first to tell you that text messages can lead to confusion, but I think the message Rob was sending was pretty clear: keep it simple.


In investing, complexity negatively infiltrates the investment process in a number of ways.  One way is analysis paralysis.  Undoubtedly, we’ve all worked with analysts that are guilty of this crime of complexity.  The guilty analyst will have a 75 page spreadsheet analyzing a company down to the return on capital of the administrative assistant to the head janitor, but won’t be able to make a call on whether the stock is going up or down.  The analyst knows so much, he or she is in fact paralyzed and unable to make a decision.


The other crime of investing complexity, which is more to Rob’s point, is when an analyst complicates simple things, like say valuation.   A friend of mine from home says that when it is – 40 degrees Celsius out, you don’t need to ask how cold it is, you just know it is *expletive* cold.  The same could be said for valuation.  If a stock or asset is cheap, you shouldn’t have to argue it’s cheap, or justify that it is cheap.  The valuation will be plainly obvious.


Yesterday, to the last point, I wrote a research note on the valuation of the SP500.   Many stock market pundits are making the case that the SP500 is cheap based on future consensus earnings. Unfortunately, that analysis is not really all that simple, for the basic reason that consensus estimates are usually wrong.  In fact, according to a McKinsey study from 1985 to 2009, SP500 earnings estimates were higher than the actual reported number 92% of the time.


So, obviously when making the simple valuation call, it depends on the complexity of the underlying estimates. When looking at the valuation of the SP500, we prefer to use CAPE, or cyclically adjusted price to earnings.  CAPE is a metric popularized by Yale Professor Robert Shiller that looks at a market P/E that is adjusted for inflation and normalized for cycles.  Currently, CAPE is showing that the SP500 is trading 21.9x, which is the highest level since July 2011 and in the top quintile of market valuations going back to 1880 (before even I was born).


CAPE hit a 35-year low in March of 2009 at 13.4x. This also coincided with a low in other stock market valuation metrics and the bottoming of the market.  Stocks were, simply, and obviously, cheap.  As for now, it is neither simple, nor obvious.


As of late, we’ve been flagging and harping on another simple indicator of the equity markets peaking, which is the VIX.  The Chart of the Day today goes back exactly three years to the bottom in March 2009 and compares the SP500 to the VIX over that period.  As the chart shows, a VIX level of 15-ish has coincided consistently with a short term top.   To the simpletons at Hedgeye, that is a red flag worth emphasizing.  More simply, the VIX at this level signals that complacency is setting in.


Over the last 24 hours, we’ve made a couple of simple moves in the Virtual Portfolio that should inform you on our current positioning:


1.   Shorted Greece via the etf GREK – With “positive” catalyst of the Greek debt restructuring in the rear view mirror, Greek equities now have to deal with austerity headwinds and a population that is leaving Greece en masse.


2.   Shorted SP500 via the etf SPY – Selling the SP500 at our overbought line has a high historical batting average and at 1,401, the SP500 is overbought.  Yes, it can be that simple.


3.   Shorted consumer discretionary via the etf XLY – With oil prices and inflation accelerating, this isn’t good for growth or discretionary spending.   Historically, growth slows when oil reaches 5.5% of GDP. Simplistically, a Brent oil price of $116 equates to 5.5% GDP and Brent is currently at $123.


Henry Wadsworth Longfellow also had a great quote about simplicity (although he didn’t text it to me), which was: "In character, in manner, in style, in all things, the supreme excellence is simplicity."




Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Simpletons - 11. CHart of the Day


Simpletons - 11. VP 3 16