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Takeaway: Dairy prices moving sharply higher is a negative for $DPZ, $TXRH, $CMG, $PZZA, and $CAKE

As the US Dollar gained, many soft commodities that we track as part of our process declined during the last week.  In line with our macro process of paying attention to Correlation Risk, those commodities with the tightest inverse correlation to the US Dollar Index posted the sharpest week-over-week declines.


Summary View



Coffee prices have been gaining on speculation that government stimulus measures in China will buoy consumption within the country – the world’s top consumer.


Cheese prices have been rising sharply of late, gaining 7% over the last week as speculation mounts that milk production is set to slow substantially in 2012/2013.  Dairy prices are, to varying degrees,  a negative for TXRH, CAKE, DPZ, PZZA, and CMG.


Corn prices declined 4% week-over-week as the USDA is set to release the Grain Stocks report tomorrow.  Grain exports data this morning was bearish for corn prices with 400 metric tons sold in the last week versus expectations of 150k-200k.  Demand destruction is evident not only in the export sales miss but in the rising stocks of ethanol versus a year ago.  Stocks of ethanol are showing strength as production slowed over the past week.  The DOE Fuel Ethanol Inventory Index is up 26.5% year-over-year.   Slowing demand for corn through ethanol production is bearish for corn prices.   The huge export sales miss is the main callout for corn over the last week.  It seems that ethanol producers and farmers are waiting for lower prices before demand kicks in again.


COMMODITY CHARTBOOK - ethanol inventory production



Gasoline Prices


Gasoline is rising as concerns grow that refinery shutdowns in the Atlantic Basin will further reduce stockpiles on the East Coast.  According to Bloomberg: “Prices climbed the most since June 29 as Europe’s largest refinery, Royal Dutch Shell Plc’s 400,000-barrel-a-day Pernis plant in the Netherlands, is conducting maintenance until early November.  Supplies on the East Coast, including New York Harbor, the delivery point for futures contracts, were the lowest since October 2008 last week, Energy Department data show.”












COMMODITY CHARTBOOK - crb foodstuffs












COMMODITY CHARTBOOK - chicken whole breast


COMMODITY CHARTBOOK - chicken broilers











Howard Penney

Managing Director


Rory Green



Not Good: SP500 Levels, Refreshed

Takeaway: Bernanke’s broken promise continues to deliver short-term, no-volume, asset price spikes – not economic growth.

As the data changes, we do. Or at least that’s what we aspire to do. In this business, changing your mind is sometimes characterized as a lack of conviction. That’s why I built my own firm. I can change my mind as quickly or slowly as the process instructs.


Being bullish because the market is going up is one thing. I get it. But being bullish and suggesting the economic data supports it is not truthful – at least not as of this week. Bernanke’s broken promise continues to deliver short-term, no-volume, asset price spikes – not economic growth.


Given how the stock market ramped, this morning’s Chicago PMI reading of 49.7 for September is flat out awful. So was a -7.2% y/y Durable Goods print for August. Our US GDP #GrowthSlowing call (intact since March) is now clocking a -68% sequential decline in GDP from Q411 (4.1% to 1.3%).


Across our risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1451
  2. Immediate-term TRADE support = 1430
  3. Intermediate-term TREND support = 1419


In other words, 1430 support looks good until it doesn’t. If it breaks, we should see the more important level of 1419 tested during what will be the worst quarter for SP500 revenues and earnings since 2008.


Keep moving out there – markets wait for no one,



Keith R. McCullough
Chief Executive Officer


Not Good: SP500 Levels, Refreshed - 9 28 2012 10 51 18 AM


Takeaway: We expect BYI to provide a bullish outlook to investors and back it up with strong content at next week’s G2E

As many of you know, Todd has been in Vegas the last 2 days getting a preview into the week ahead.  After a half day of meetings in Las Vegas, a clear cut highlight was a very positive meeting with BYI.  Management was very bullish about their content for G2E and also about the outlook for all segments of their business.  We think this optimism will show through when half of the investment community attends G2E next week.


We’re usually sober regarding the pre-G2E commentary and glowing press releases regarding each company’s upcoming G2E exhibits.  What’s different for BYI is that this historically reel spinning slot supplier is going to display mostly video content that has apparently been getting great feedback from customers.  Remember that approximately 80% of units shipped are video and unbeknownst to most investors, BYI’s recent slot shipments have also been around 80% of total.  So their video content is already driving higher share recently and with what they are going to show at G2E, will likely increase their high teens overall share.  This is not your father’s Bally Gaming.


The stock has done well, certainly relative to its competitors.  However, the valuation is not excessive and forward estimates look like they may need to go higher.  We are not making a call on the September quarter – we’re essentially in-line – but G2E should be a big near-term catalyst along with the announcement of a big award from Western Canada. 


Consensus for the BYI’s FY2013 is $3.17 and company guidance is $2.95 to $3.30.  We think that consensus is achievable and beatable depending on the timing of the IL rollout and Western Canadian Lottery unit shipments.  We already know that the award for Manitoba and Saskatchewan has been awarded but given the politically sensitive topic of spending money on slots when the economy is in a funk, the government has been “sitting” on the announcement.  At least one of the suppliers that has been awarded part of the contract for 10,000 slots has told us that they expect the units to ship by September 2013.   We estimate that BYI’s allocation of the award was between 1,000-2,000 units, which could boost earnings by $0.09-$0.18/share.  


On September 25th, BYI announced contracts for 4,000 VLT shipments to IL which they expect to be deployed over the next 24 months.  In additional, 3,000 VLTs will be connected to Bally Multi-connect, an enterprise wide centralized accounting and management system.  Our understanding is that roughly 50% of the 4,000 units will be sold and the balance will be on lease arrangements.  Every 1,000 units that BYI sells into IL should contribute 8 cents to earnings. The Multi-Connect link will add to BYI’s already material base of recurring revenue from its central system products.



Notes from our meeting with management:



  • They are very bullish about their video content.  After 15 G2Es, we can say their bullishness was significantly more than normal.
  • Grease was their best WAP launch ever; then Michael Jackson exceeded that.  NASCAR coming out in Q4 2013.


  • IL 50/50 units between leased and for sale
  • 1,600 VLTs over 3 or 4 quarters to Atlantic Lottery starting in September Q
  • Won’t disclose how much of a RFP from Western Canada (Manitoba and Saskatchewan) they got but our sources indicate that the award of 10k machines will be announced soon and BYI got a very healthy share


  • Excited about their systems business as well
  • Ontario is big systems contract – not signed but going to happen
  • BC is 25k units
  • Systems maintenance growth rate 15%
  • Systems services provides 4-8 million per quarter in revs
  • Balance sheets restricting service revenues as casinos want to convert but can’t – good news is that is changing
  • 30% penetrated world-wide on systems

Wide Area Progressives

  • No policy to cap WAP outside of a few small deals where they got something else in return – they are adamant that they are not materially capping their upside on WAPs despite what the investment community and competitors say
  • 600 games on Cash Connection include MJ and Grease at 6/30/12 but 1,500 is their goal.  We think they are well on their way to exceeding that goal.


  • Columbus won’t be recognized until FQ2
  • Slot hold increase industry wide might be due to lowering player odds and then giving it back in rewards
  • CZR starting to buy a little more slot product
  • Margins:  48-49% by the end of the fiscal year for product margin – conversions will be the next leg up

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Get Shorty: Rolling Over

Takeaway: Fundamentals are rolling over like US durable goods, so we think an opportunity to short some expensive stocks is coming up very soon.

Post-Bernanke party, when stocks have ripped 50-100% higher in just a few months, energy is one place where we’re looking for short ideas. Fundamentals like durable goods, growth and demand are beginning to roll over and with stocks at expensive prices, we think there’s room for a pullback. Growth is still slowing - remember that.


S&P500 revenues will be +2.2% YoY in the 3Q – adjust that for inflation and real revenue growth has gone negative.  And lately many companies are missing estimates and guiding lower, so the forward outlook is not much better. The question is how high of a multiple can some of these companies trade at in terms of price-to-earnings? 20x? 60x? 100x? Things seem to be getting worse in the market and the economy, not better.



Get Shorty: Rolling Over  - image002

The Sky Is Falling







Chicken Little had it right. Replace the word “sky” for “economy” and he’s spot on. Yesterday’s durable goods print dropped -13.2% for August, an astonishingly awful number. We posted a chart on Hedgeye.com which we implore you to take a look at. Titled “This Is What A Recession Looks Like,” the chart showcases durable goods numbers since 2000. And guess when we saw big time drops like yesterday? In 2000 and in 2007; two years when we encountered bubbles/crises of epic proportions. Things are still really bad out there, folks. Don’t let anyone tell you otherwise just because it’s a Friday.




We’re surprised that Mitt Romney’s promises to hold China accountable as a currency manipulator haven’t resonated more with the American public. Meanwhile, the Chinese yuan hit a new record versus the dollar this morning at 6.2856. This can be attributed to strong corporate demand and institutional investors getting out of short positions ahead of the long holiday weekend in China. Keep in mind that China is under economic pressure, too. Their artificial housing market has tanked and commodity demand has plummeted over the past year.






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“The harder it gets to manage this immediate-term price volatility, the more insider trading (cheating) you'll see” -@Grainmonster




“A good listener is usually thinking about something else.” –Kim Hubbard




Corn futures hit an 11-week low of $7.1625 a bushel.





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