TODAY’S S&P 500 SET-UP – June 8, 2012


As we look at today’s set up for the S&P 500, the range is 49 points or -2.43% downside to 1283 and 1.29% upside to 1332.




THE HEDGEYE DAILY OUTLOOK - levels and trends


THE HEDGEYE DAILY OUTLOOK - sector view table


THE HEDGEYE DAILY OUTLOOK - global performance




    • Versus prior  trading day +2305
  • VOLUME: on 6/7 NYSE 854.61
    • Versus prior trading day 711.57
  • VIX:  as of 6/7 was at 22.16
    • Change versus prior trading day of -2%
    • Year-to-date change of -7.2%
  • SPX PUT/CALL RATIO: as of 6/7 1.41
    • Versus prior trading day 1.74     



  • TED SPREAD: as of this morning: 38.7
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year yield: as of this morning 1.67
    • Versus prior trading day 1.65
  • YIELD CURVE: as of this morning 1.30
    • Versus prior trading day 1.37



  • 8:30 am: Trade Balance, April, est. -$49.5b (prior -$51.8b)
  • 10am: Wholesale Inventories, April, est. 0.4% (prior 0.3%)
  • Fed to purchase $1b-$1.5b note in 2/15/2036 to 5/15/2042 range
  • 1pm: Baker Hughes rig count
  • 8pm: Fed’s Kocherlakota to speak on economic theory in Michigan



  • American Bankers Association issues economic forecast. 10am
  • President Obama holds bilateral meeting with Philippines President Benigno Aquino. 2pm
  • House in session
  • House Ways and Means subcommittee holds hearing on tax extenders. 9:30am



  • U.S. moves ahead with implementing global bank capital rules
  • Chesapeake Energy holds annual meeting; Chesapeake shareholders seen to challenge directors’ CEO review
  • Olympus to cut 2,700 jobs, ~7% of its workforce, may consider an alliance to boost capital
  • Google co-founders Larry Page, Sergey Brin said to be slated for questioning by U.S. antitrust regulators
  • U.S. trade deficit likely shrank in April on falling oil prices
  • Morgan Stanley, other global banks undergoing credit review by Moody’s; decision expected by end of month
  • NYSE opposition to Nasdaq’s proposed remedy to Facebook’s botched IPO could delay Facebook compensation plan
  • Spanish Prime Minister Mariano Rajoy holds bank talks with EU leaders as Fitch cuts Spain
  • CA said has begun succession planning for CEO Bill McCracken, who turns 70 this yr
  • Apple’s move to block Samsung Galaxy phone placed on fast track
  • Federal Housing Administration to boost sale of delinquent loans to investors: WSJ
  • McDonald’s releases monthly sales
  • Nomura apologizes for multiple insider trading cases
  • Watch for update on GlaxoSmithKline’s $13-shr hostile bid for Human Genome; tender deadline was yday
  • Russell Index rebalancing after the close
  • U.S. Inflation, Apple, OPEC, Egypt Votes: Week Ahead June 9-16



  • Copper Trade Most Bullish Since March as China Cuts: Commodities
  • Oil Heads for Longest Run of Weekly Losses in More Than 13 Years
  • Commodities Head for Longest Weekly Losing Streak in 11 Years
  • Copper Falls Most in Eight Weeks Without Fed Stimulus Signal
  • Gold Drops in London as Bernanke Dampens Stimulus Expectations
  • Coffee Falls on Speculation Slower Growth Will Curb Consumption
  • Palm Oil Set for 20-Month Low as Mistry Sees Demand Slowdown
  • Jiangxi Copper Considers Halting LME Exports as Prices Decline
  • Barclays, BNP Japan Commodity Sales Heads Leave as Banks Cut
  • Cooking Oil Demand in India Poised to Climb 29% as Income Rises
  • Palm Oil Seen Extending Drop on Falling Biofuel Appeal, Fry Says
  • LNG Sellers Bet on Oil-Link Amid U.S. Shale Boom: Energy Markets
  • Kingsman Raises 2012-13 World Sugar Surplus By 63% on Plantings
  • Copper Trade Most Bullish Since March
  • Copper Stockpiles in Shanghai Decline for Ninth Week
  • Merchant Commodity Hedge Fund Said to Drop 7.5% Last Month
  • Rubber Declines for Fifth Week as Bernanke Holds Off Stimulus

THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance




  • Steepest Global Slide Since Recession Pushes Central Bank Cuts
  • Oil Heads for Longest Weekly Losing Streak in More Than 13 Years
  • Stocks Decline With Oil as Bernanke Damps Stimulus Speculation
  • Malaysia Sukuk Gain a 5th Week on 15-Year Debut: Islamic Finance
  • Mizuho Ousts WestLB as Japanese Boost Lending: Turkey Credit
  • LNG Sellers Bet on Oil-Link Amid U.S. Shale Boom: Energy Markets
  • Oil May Climb as OPEC Meets, U.S. Supplies Shrink, Survey Shows
  • Iran’s LNG Company Says Sanctions Won’t Deter Production in 2013
  • GCC Sales Set for Record First Half as Costs Drop: Arab Credit
  • Bernanke Anxieties Embodied as Bond Sales Tumble: Credit Markets
  • Rajoy Bid to Avoid Full Bailout Risks Falling Short: Euro Credit
  • U.S. Inflation, Apple, OPEC, Egypt Votes: Week Ahead June 9-16

THE HEDGEYE DAILY OUTLOOK - mideast perforamnce



The Hedgeye Macro Team


Dollar weakness sent corn higher over the past week which is has dampened the performance of SAFM and also drove beef prices higher for the week.  There is still plenty of good news for restaurant companies with corn, wheat, cheese, rice, milk, and coffee all down double digits versus last year. Coffee and chicken breast prices were the biggest decliners on the week, of the foodstuffs that we track. 


General Overview


Chicken wing prices remain the standout item in our commodity monitor but a close second is the growing amount of red that we see on the table over the last few weeks. Increasing economic uncertainty and dollar strength is helping to bring down food costs for operators in the restaurant industry after a prolonged period of margin pressure in part due to rampant inflation in beef, dairy, coffee, and other items.


The chart of the CRB Foodstuffs Index versus the US Dollar Index, below, indexed from September 1stof last year, highlights the inverse relationship between the U.S. dollar and foodstuffs prices over the last nine months.  As a firm, Hedgeye has been of the opinion that a Strong Dollar translates into Strong Consumption in America, which helps the top line growth of restaurant companies but it is also helping to relieve margin pressure – as the chart below shows. 




WEEKLY COMMODITY CHARTBOOK - crb foodstuffs vs usd index



Gasoline Prices


Gasoline prices continue to decline.  The easing of pressure at the pump is having an impact on demand. According to AAA, US retail gasoline prices are now -5.5% year-over-year and consumers are responding.  Earlier this week, Mastercard reported that the gasoline consumed over the 4 weeks prior to June 1stwas -1.9% year-over-year, which is the smallest decline since 9/16/11.  Gasoline consumption has been negative, on a year-over-year basis, for 40 straight weeks as lower prices spur demand but the weak economy weighs on fuel purchases.


WEEKLY COMMODITY CHARTBOOK - retail gasoline prices



Beef Prices


Beef prices traded moderately higher over the last week as dollar weakness provided support.  Optimistic expectations for this year’s corn crops, as well as economic concerns, had been weighing on beef prices but mounting concern that dry, hot conditions across the Corn Belt are sending prices for the grain higher. Below, we detail some thoughts on several companies’ exposures to beef prices.


JACK: Jack in the Box is one of our favorite longs.  On May 17th, the company said that it expects beef costs to be up 5-6% versus prior expectations of high single-digit inflation.  While prices have gone up since then, we do not think that the company will have revised its stance, yet.  The company also said that, if beef prices were to continue to “stay low”, its guidance of 14.5-15% for restaurant operating margins might could have been conservative.  We think expect its restaurant operating margin to come in close to that target given the recent gains in beef costs.  Beef, which is 20% of the company’s spend, is the biggest wildcard in its commodity basket.


WEN: Wendy’s, like Jack in the Box, purchases fresh beef (20% of its basket) on the spot market. On May 8th, the company said that it expected beef prices “back up” by the fourth quarter and that its purchasing is pretty much “at market with a three months lag as you see the impact of market changes on beef”.


TXRH: Texas Roadhouse, as of April 30th, had pricing arrangements in place for well over 90% of its beef.



Chicken Wings


We have to highlight, once again, the resilience of chicken wing prices even as other commodities and protein costs roll over.  Our conversations and analysis continue to point to undersupply in the market which, given the price action, is not being addressed by the marginal increases in egg sets that the data is showing every week. As the chart below shows, egg sets are still declining at ~4% year-over-year.


WEEKLY COMMODITY CHARTBOOK - egg sets wing prices



Correlation Table

















WEEKLY COMMODITY CHARTBOOK - chicken whole breast









Howard Penney

Managing Director


Rory Green


Industrials Chart of the Day & Sector Commentary

Chart of the Day


-          Chinese rebar futures markets not betting on stimulus working in construction

-          Rebar spot prices down about 20% Y-o-Y nominal

-          Worth watching to gauge informed local market expectations for construction activity/heavy equipment demand


Industrials Chart of the Day & Sector Commentary - chart1 rebar futures



Navistar Miss:  Navistar reported some very challenging results and the shares have sold off significantly today.  The lack of clarification on the company’s engine certification was particularly troubling.  Even after a period of significant underperformance relative to Paccar, Paccar still trades at a 23% discount to Navistar on an Adjusted EV/2011 EBITDA basis.  While this may reflect some concerns about Paccar’s SEC inquiry, that is a less significant business headwind than not meeting *2010* emissions targets in mid-2012.

Industrials Chart of the Day & Sector Commentary - chart2 adjev ebitda



Sub-Industry Performance

Industrials Chart of the Day & Sector Commentary - chart 3 sub industry performance 6 7

Early Look

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HedgeyeRetail: Chart of the Day; Cotton Bulls

Let’s quantify the Bull vs. Bear case for input cost benefits in 2H. The math works out such that the industry MUST hold price in 2H. Even a 1% decline in retail price will stress the supply chain. We think we’ll see more. 


The Bullish case for retail in 2H12 is largely predicated on lower cost cotton flowing through the P&L and retailers gaining back a substantial portion of the margins lost last year. The Bearish case acknowledges that raw material costs account for ~40% of cost allocation with Cotton accounting for 20% at best.


Think of the following…


Retailers Price: $10

Retailers Cost: $5-6


Wholesale Price: $5-6

Wholesaler Cost: $3


Manufacturer Price: $3

Mftgr Cost: $2.00-$2.50


Then look at the following chart. See how much of the manufacturer cost is related to raw materials – it’s around 40%. If we assume that cotton is ½ of raw materials (it’s actually less), and that cotton-substitutes and synthetics account for the remaining 50% (which are down, but not as much as cotton), we’re looking at much different math. That means that raw materials (including cotton) could be down by 20% in 2H, and we’re talking ~$0.20 per unit. And that’s assuming that labor, etc… is flat. In actuality, labor, which is now closer to 15%-20% of total cost is going up 10-15% per year or better. That knocks the net benefit down to about $0.15.


So $0.15 per unit is nice. But a) every CEO in retail, wholesale, and manufacturing sees it and thinks they’re going to keep it. B) the average consumer price reduction being put in place by Johnson and the JCP team is ~40% at the everday price.


Off a retail price of $10, we’re talking costs of $3-$5 per unit. If we see consolidated prices come down even 3% in 2H, it will offset the cost benefit everyone is eyeing by a factor of 2. 


HedgeyeRetail: Chart of the Day; Cotton Bulls - Cotton COTD


Idea Alert: Buying BUNL

Positions in Europe: Long German Bunds (BUNL); Short EUR/USD (FXE)

Keith bought German Bunds via the etf BUNL in the Hedgeye Virtual Portfolio today. The etf is in a bullish formation, meaning the current price is above its immediate term TRADE and intermediate term TREND levels (see chart below). Buying BUNL takes our Fixed Income asset allocation to 12% versus 0% at the start of the week. We do expect German fixed income to remain a bet on safety. A threat to this positioning would be any indication from Chancellor Merkel of a softening line or full acceptance of Eurobonds.  


Idea Alert: Buying BUNL - 111. bunl


Our thinking about investing in Europe hasn’t changed: there’s a relative advantage to playing the capital markets of the stronger countries on the long side and weaker countries on the short side, at a price. We’re highly sensitive to price and well aware that there’s no simple equation to pair or hedge risk in Europe: political headline risk, even from the tiniest of countries in Europe, can roil country equity indices and influence yields across the continent. 


However, from a political timing perspective, we expect Eurocrats to evaluate the outcome of Greek elections on 17. June before embarking on deeper discussions around a fiscal union, Eurobonds, and a Pan-European deposit insurance, topics that should be central at the EU Summit on June 28-29.


Matthew Hedrick

Senior Analyst


  • We’re calling for moderating RevPAR growth assuming stable economic growth
  • A worsening jobs/GDP picture could pressure RevPAR even more
  • RevPAR tends to drive near-term sentiment


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