prev

WEEKLY COMMODITY CHARTBOOK

Despite the dollar trading down over the last week, many of the commodities we monitor continue to decline in price as economic concerns impact demand expectations. Softer top line trends due to economic weakness are obviously a negative for restaurants but when those softer top line trends are accompanied by all-time high cost of sales growth, the impact on the bottom line can exceed expectations.

 

General Overview

 

Clearly, “Softer top line trends and all-time high cost of sales growth” was referring to Buffalo Wild Wings.  Estimates are holding firm here, for 2012, even as wing prices are up 133% year-over-year.  Beef costs were down over the last week as demand concerns continue to weigh on prices.  Supply dynamics remain bullish for prices, but our view is that supply data points highlighting the shrinking herd size in the U.S. have been known for some time.  Coffee costs continue to come down which is a positive for SBUX, PEET, GMCR, and other coffee companies.  In line with the Hedgeye Macro team’s stance, for a broad overview of where commodity costs are going in our space, we pay particular attention to the US Dollar. As Keith likes to say, “get the US Dollar right, and you’ll get a lot of other things right”, and anchoring off our Macro team’s work on the dollar has helped us to better understand the commodity complex for the restaurant space.  Per the second chart, below, the inverse correlation between the dollar the CRB foodstuffs Index is quite strong at -0.81 over the past nine months.

 

WEEKLY COMMODITY CHARTBOOK - commod614

 

WEEKLY COMMODITY CHARTBOOK - usd crb food correl

 

 

Gasoline Prices


For the week ended June 8th, gasoline demand in the U.S. fell 0.5% to a five week low despite prices at the pump falling lower.  Fuel use over the four weeks prior to June 8th fell 1.9% below the same period in 2011, a record 64th consecutive drop in that measure.

 

WEEKLY COMMODITY CHARTBOOK - gas prices

 

 

Coffee

 

Coffee costs lead to the downside over the past week.  Here is a refresh on the most recent commentary, by company, on coffee costs.

 

SBUX: With the commodity markets today and again this is primarily dominated for us by coffee, it is clear that we have a tailwind coming certainly in fiscal 2013 as we've locked most of those prices in for coffee through 11 months of our coffee needs in our fiscal 2013 and directionally we expect tailwinds again in 2014, now we've not locked much of our coffee prices for 2014. We have done some buying for 2014 already, but directionally everything looks like we will face certainly 12 months and I expect 24 months or longer of now – of more favorable commodity cost environment.

 

HEDGEYE: This coffee tailwind should mitigate some of the dilution to EPS that is expected as a result of recent acquisitions.  However, FY12 and FY13 costs being largely locked and given that the company bought all the way down from the peak in coffee costs just over a year ago, the tailwind starting in FY13 should be modest.

 

 

Chicken Wings

 

BWLD [from the most recent 10-K]: “A 10% increase in the chicken wing costs for 2011 would have increased restaurant cost of sales by approximately $3.8 million.”

 

HEDGEYE: We estimate that a 10% increase in chicken wing prices would account for $0.14 of EPS pressure.  1Q inflation was 57%.  If we assume 120% inflation for 2Q and a possibly-conservative 70% for the year overall, that would imply $0.95 of FY12 EPS pressure.  We do not think that the Street's estimates have been adjusted accordingly.

 

WEEKLY COMMODITY CHARTBOOK - egg sets wing prices

 

Correlation Table

 

WEEKLY COMMODITY CHARTBOOK - correl table

 

Charts

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

WEEKLY COMMODITY CHARTBOOK - imlk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


BET ON RED: Gaming revenue a concern

Hedgeye Gaming, Lodging and Leisure Sector Head Todd Jordan has released a chart that will make anyone who was long traditional gaming think twice.

 

The truth of the matter is that established domestic gaming markets are under severe pressure due to multiple factors. They include the faltering economy, an aging customer base and of course, new competition. May is looking really ugly for the five regional gaming states. Same store sales are expected to take a hit of 3%, as indicated on the chart. The upturn that occurred in February is considered to be cyclical as the economy heavily influences this market.

 

BET ON RED: Gaming revenue a concern - jordan gamingboat3m


INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW

Claims Continue to March Higher 

Claims move notably higher again this week, up 9k WoW to 386k. Excluding the normal weekly revisions, which this week were 3k, claims were higher by 6k (377k vs 380k). This data series continues to play out very consistently with our framework for thinking about the seasonal distortions taking place in the economic data. As a reminder, we think the data will continue to get worse for approximately two more months before starting to get better. Rolling claims rose 3.5k to 382k. On a non seasonally adjusted basis, claims were 9% lower YoY. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Raw

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - NSA rolling

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - S P

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Fed

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - YoY

 

The Yield Curve Continues to Get Steamrolled

The 2-10 spread tightened another 10 bps last week to 130 bps as of yesterday. The ten-year yield decreased 6 bps to 160bps. To put this in perspective, if spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11, an ominous sign for bank margins. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Subsector performance

 

INITIAL CLAIMS: JOBLESS CLAIM NEAR YTD HIGH WHILE YIELD CURVE NEARS YTD LOW - Comapnies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE M3: TAIPA INFRASTRUCTURE; PACKAGE TOURS

The Macau Metro Monitor, June 14, 2012

 

 

LRT STARTS CONSTRUCTION ON ALL TAIPA AND COTAI SEGMENTS Macau Daily Times

Four months after the beginning of construction for the first section of the Taipa Light Rapid Transit (LRT) system, yesterday's ground-breaking ceremony marks the start of a full force construction of the entire mass transit system, and is expected to be completed in 3 years.

 

The 3.4km Cotai Section consists of four stations covering the major resorts in the Cotai Strip as well as the centre of Taipa village, while the 3.1km Lotus Border Crossing Section has three stations linking the Macau University of Science and Technology, the airport and the Pac On Ferry Terminal.  The 1.9km section with five stations linking Taipa village and the Sai Van Bridge started its construction in February.  According to Lei Chan Tong, Coordinator of the Transportation Infrastructure Office, the original completion target of 2015 for the Taipa project remain unchanged.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR APRIL 2012 DSEC

Visitor arrivals in package tours increased by 28% YoY to 695,762 in April 2012.  Visitors from Mainland China (491,337) went up by 20.3%, with 170,164 coming from Guangdong Province; besides, those from Taiwan (53,774); Hong Kong (41,672); and the Republic of Korea (23,247) soared by 95.6%, 68.6% and 25.3% respectively.

 

Attributable to the opening of new hotels, the number of available guest rooms of the 97 hotels and guest-houses totaled 24,211 at the end of April 2012, an increase of 4,063 rooms (+20.2%) YoY, with those of the 5-star hotels accounting for 61.3% of the total.  Average occupancy rate of the hotels was 82.5%, with 5-star hotels leading at 83.1%.  The average length of stay decreased by 0.08 night to 1.4 nights.



Cheap Talk

“My own view is that he will speak eloquently, but that words are cheap, and that the record of an individual is the basis upon which you determine whether they should continue to hold on to their job.”

-Presidential candidate Mitt Romney

 

Since starting Hedgeye almost four years ago, many of our readers have a hard time discerning the political leanings of the firm.  At times we’ve been accused of being Democrats and in other instances we’ve been accused of being Republicans.   In reality, while individuals at Hedgeye have personal political leanings, and we encourage them to get involved in the process, as analysts we are completely objective about politics.  Our job is to analyze the economic policies of politicians and come up with a view of their ultimate impact on asset classes and prices.

 

I highlight the quote above not because I necessarily agree with Romney, but rather because I want to highlight that the political debate is going to only accelerate in the coming months heading into the nominating conventions and ultimately the general election in November.  Romney’s statement above is very accurate in one sense, this election, as they usually are, will be about the performance of the incumbent and the economy under the incumbent.

 

Later today President Obama will be giving a speech that will be the beginning of his campaign’s attempt at taking back the economic debate.  Based on early previews, Obama is likely to focus less on the last three years, a time in which he will claim he shored up the economy, and more on the future prospects for the U.S. economy.  As it relates to the future, Obama will attempt to juxtapose Romney, a wealthy private equity investor, with middle class Americans.   The insinuation being that Romney’s policies will only enrich the wealthy, while Obama will help the middle class.

 

The challenge that Obama faces, especially if he uses only rhetoric and has no new tangible plans, is that the middle class has very much struggled under his Presidency.   The two statistics that the Romney camp repeatedly cites, which are largely accurate, are that no net new jobs have been created under Obama and that median household incomes have declined somewhere in the range of $4,000 per annum under Obama.

 

In the Chart of the Day, we highlight our proprietary Hedgeye Election Indicator (HEI).  The HEI is driven by real time economic price data that correlates closely with polls and ultimately establishes a probability of an Obama re-election.  In line with Romney’s statement that talk is cheap as it relates to economic performance, the HEI bears this out as it has declined to its lowest level in five months at 54%.  As the economy goes, so goes Obama’s re-election chances.

 

In Europe this morning, we are getting increasing evidence that not only is talk cheap, but action itself is cheap.  Specifically, Spanish 10-year yields touched 7.0% overnight.  This is a 91 basis point increase from Monday morning’s bailout lows.  It seems the attempt at containing European sovereign debt issues by adding more debt, without long term structural reform, is actually now being perceived as mere talk by the market, even if the Eurocrats see it as action.

 

Later today we will be publishing a note on Italy.  As much of the media attention is rightfully focused on the pressure points of Spain and Greece, Italy is the third largest economy in the Eurozone , so a much bigger problem than Spain, and its yields and CDS are starting to trade in line with Spain at 6.3% on the 10-year and 554 basis points on 5-year CDS.  With a 120% debt-to-GDP, it should be no surprise that adding more debt in Europe to bail out Spain is not a positive catalyst for Italy.

 

The unintended consequences of failed European bailouts are not only being seen in Italy’s sovereign debt markets, but also broadly in European companies.  This morning the Swiss banks are getting punished.  Credit Suisse is down -8.0% after the Swiss National Bank said they need a “marked increase” in capital this year to prepare for possible escalation of Euro-zone risks.  The Swiss National Bank also recommended that UBS boost capital. 

 

On a more micro level, our Restaurant team led by Howard Penney will be hosting a call on the restaurant industry’s franchise model, and its latent risks, with restaurant finance expert John Hamburger (yes, that is his real name). The crux of the debate is as follows:

 

“The interests of franchisees and franchisors do not always align; in fact, in today’s environment of tight capital supply for small businesses and increasing competitiveness among restaurant companies, they can sometimes diverge.  Through franchising, franchisors gain more stable cash flow, protection from swings in variable costs, and lower expenses.  In turn, franchisees, ideally, gain operational expertise from companies and brand recognition while assuming much of the operational risk of the business.  Most of the decision-making authority pertaining to the business remains with the company and, in difficult business conditions, this can be a source of contention.

 

As franchisors seek to grow royalty fees, decisions made by corporate restaurant executives in the past few years have tended to focus on promotional strategies and capital-intensive store and process alterations.  Of course, as long as the consumer and financing environments cooperate, this behavior may not meaningfully impact the franchisee’s bottom line.  However, with the backdrop of a fragile economy, volatile commodity costs, tight access to capital, and increasing labor costs, there is a potential for friction.  The addition of any controversial business decisions that magnify franchisees’ difficulties all but guarantees disharmony between management and the franchise community.  Examples over the past few years are numerous, from Kentucky Grilled Chicken at KFC to bun toasters at Wendy’s to 99 cent double cheeseburgers at Burger King.”

 

So, in effect are the perceived benefits to the franchisee really just talk?  If you are an institutional investors and would like to join the call and trial our restaurant vertical please email .

 

As it relates to talk and action, I will leave you with one last quote from President Roosevelt:

 

“The man who really counts in the world is the doer, not the mere critic-the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.”

 

Indeed.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.11-98.85, $81.91-82.46, $1.24-1.26, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Cheap Talk - Chart of the Day

 

Cheap Talk - Virtual Portfolio


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next