Where's The Beef?

Your favorite fast food joints and restaurants are likely to pass the rising cost of beef on to you sooner or later. Thank Ben Bernanke for devaluing the dollar and inflating the commodity bubble. As you can see, year-over-year, live cattle prices have skyrocketed from $85 to over $125. Higher prices are a negative for everyone from Jack In The Box (JACK) to Wendy’s (WEN) to Chipotle (CMG) to Bloomin’ Brands (BLMN). The fundamental outlook suggests that the strength in beef prices should continue for some time. 


Where's The Beef? - live cattle

Making It Up

Client Talking Points

Making It Up

We truly get a kick out of those who try to forecast economic data. After all - what’s the point? Show us someone who has been right more than 1/3rd of the time on the jobs number and we’ll call BS. People make stuff up, just like the jobs number. So when the number comes out better than expected and the futures rip higher, remember that it’s an election year and someone is probably making those numbers more malleable than expected.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


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.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Only morons have "forecasts" for a jobs number the government makes up” -@KeithMcCullough


“Tragedy is when I cut my finger. Comedy is when you walk into an open sewer and die.” -Mel Brooks


$50 billion. The amount of economic losses expected because of Hurricane Sandy.

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Hot & Cold

“I will have naught to do with a man who can blow hot and cold with the same breath.”



This is the coldest morning the East Coast has had to deal with since Sandy. My prayers go out to the children, sick, and elderly who have to go through this with no power or heat.


Back to the Global Macro Grind


Get’em while they are h-h-ot! That’s what the perma-bull marketers said yesterday as US stocks were having their 1st legitimate up day in the last 7 trading sessions. It’s been a long 1.5 month drought. Literally everything that didn’t work in October went straight up. All the pundits nailed it. Welcome to November.


In other “recovery rally” news – the headlines from the manic media changed, suddenly, this morning:

  1. “Anger As Fuel Shortage Hampers Recovery” –BBC World News
  2. “Scope of Sandy’s Devastation Widens, Death Toll Spirals” –Reuters
  3. “Power Restoration May Take Longer Than Expected” –New York Times

But don’t worry – there a plenty of Keynesians who still believe in Broken-Window Economics who will be out peddling stories this morning about how America is seeing a jobs and hurricane recovery.


We have no idea what this morning’s US Employment Report will bring. Only a moron would have a “forecast” for a number that the government makes up. China gets that – so they are going to start making up their numbers a little faster too.


China Daily noted that the National Bureau of Statistics said China will “revise its GDP accounting methods” in line with international standards. Perfect. So the China recovery is going to get really h-h-ot now!


As our hawk-eyed Asia analyst Darius Dale wrote to our Institutional Clients yesterday, this is the “most bullish data point emanating from China today – inclusive of the sequential acceleration in Manufacturing PMI and the PBOC’s record $6B injection into Chinese money markets this week.”


“From what we’ve noticed, international standards for GDP accounting = shoot first; ask questions later (i.e. report the most positive headline figure you can and subsequently revise it down 1-3 times in the coming months/years). This bodes well for a sequential uptick in China’s YoY GDP growth in 4Q12E!”


In other economic “recovery” news out of Europe:

  1. Spain printed a PMI reading of 43.5 for OCT vs 44.6 in SEP
  2. Germany’s slowdown stayed the same in OCT with a PMI reading of 46.0
  3. Italy’s PMI remained well below the “50 recovery” line at 45.5 OCT vs 45.7 SEP

No worries there. Markets in Europe were relatively hot this week (other than in Greece). These poor Greek guys are having a heck of a time reconciling the media’s “recovery” rumors with economic reality. Greek stocks dropped -15% from October 22nd’s YTD high to yesterday’s close, leaving this -11% down week as the worst week for the Athex Index in 4 years.


Across asset classes, as always, there are plenty of Hot & Cold risk management signals to consider this morning:

  1. SP500 climbed back above its 1419 TREND line of support; but remains below its TRADE line of 1432 resistance
  2. US Equity Volatility (VIX) closing at 16.69 remains in a Bullish Formation; could go to 20 if this jobs report is bad
  3. US Dollar Index continues higher this morning, +0.35% to $80.32; bullish on both our TRADE and TAIL durations
  4. EUR/USD trades down to the low-end of our immediate-term $1.28-1.30 risk range (bearish TAIL remains)
  5. Hang Seng +1.24% last night makes it the 1st major index in Asia to make higher-highs
  6. KOSPI, Nikkei, Sensex were all up > 1% too, but are all making lower-highs, not confirming the Hang Seng
  7. Germany’s DAX and France’s CAC making lower-highs versus September, again
  8. Russia’s RTSI Index remains under crash-test assault, -0.3% this morning (-18% from #GrowthSlowing’s to in MAR)
  9. CRB Commodities Index remains in a Bearish Formation at 296 (Bernanke’s Bubble)
  10. Copper, down -0.5% this morning to $3.47/lb remains in a Bearish Formation as well
  11. US Treasury 10yr Bond Yield of 1.73% remains bearish TRADE and TAIL w/ resistance at 1.75% and 1.91% respectively

And, finally, US Equity Fund outflows (ex-ETFs) continued last week with another -$1.4B yanked. So, was yesterday’s 1-day move a head-fake? Are you feeling hot or cold?


I’ll let the market answer the 1st question for me today. If we confirm 1419 in the SP500 and the VIX snaps 15.54, that would be bullish. On the second question, my arthritic hockey knuckles are officially numb as I sign off from a chilly Westport, CT.


Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.49-109.96, $79.68-80.47, $1.28-1.30, 1.70-1.75%, and 1, respectively.



Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hot & Cold - EL


Hot & Cold - ELVP


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • SAME: Product revenues and gross margins came in ahead of our estimates but the beat was driven by other product revenues rather than new game sales, most of which could be categorized as one time.  Gaming operations sales and margins were also above our estimate, but the beat was not on the core install base or yields, but rather related to interactive.  The "interactive" beat came at a steep price - higher SG&A, R&D, and D&A- all higher than we thought.  So bottom line is that the core business is still "eh" and the verdict is still out on interactive but the additional disclosure was good.


  • SAME:  WMS expects regional budgets will be flat YoY with maybe a 3-5% uptick.
  • PREVIOUSLY: "We expect economic conditions and the gaming industry sentiment to remain challenging....We believe it will take several quarters of meaningful improvements in general economic conditions before we see operator confidence build to the point where they're notably increasing annual capital budgets, and right now we're not expecting such a rebound."


  • LITTLE BETTER:  Revenues were actually up modestly YoY and WMS expects continued improvement in the balance of the year.
  • PREVIOUSLY: "For our first quarter, we expect revenues to approach the levels of revenues in the September 2011 quarter with stronger revenue growth in the back half of the fiscal year."


  • SAME:  WMS reiterated the same range with ramp down as the year progresses to the lower end of the range.
  • PREVIOUSLY: "We expect R&D in fiscal 2013 to increase to a range of 15% to 16% of revenues and that SG&A depreciation will also increase as a percentage of revenues."


  • SAME:  Ship share of new openings has been in the high teens.
  • PREVIOUSLY: "Our floor share of new casinos continues to average in the high teens."


  • SAME:  There was growth this Q and WMS expects continued growth throughout the year.
  • "With a healthy number of open orders for participation units, we expect growth in the installed participation footprint in fiscal 2013.”


  • SAME:  With more than 70% of their install base refreshed and with 35% having the latest content launched over the last 3 quarters, capital spend on gaming operations equipment and PP&E should be 20% lower in FY13.
  • We do expect aggregate capital spend on gaming operations equipment and property, plant and equipment to decline in fiscal 2013 by 20%.


  • SAME:  Given the refreshed and growing install base, completion of a major facility plus amortization of Finite Life intangible assets from two acquisitions completed in the June Q, D&A will be higher in FY13.
  • PREVIOUSLY: The participation footprint expansion, coupled with placements of VLTs in Illinois, of gaming machines on operating leases and the completion of two large PP&E projects in early fiscal 2013 will continue to drive higher depreciation in fiscal 2013."


  • SAME:  On an annual basis, WMS stated that higher revenues will be offset by planned higher spending that supports new product flow and the building of a foundation for interactive products and services.
  • PREVIOUSLY: "We expect the increased spending on operating expenses will largely offset the increased gross profit contributions from higher revenues in fiscal 2013."


  • BETTER:  Since launching in July, they already have 2MM active monthly users and 550,000 daily active users averaging $55k of daily revenues to WMS.
  • PREVIOUSLY: "Our social gaming pursuits were bolstered by the Phantom EFX acquisition and we recently directly published a suite of slot-based games with our Jackpot Party Casino on Facebook. I'm pleased to note that the initial beta results are far exceeding our expectations."

FY2013 ASPs

  • SAME:  WMS expects variability in ASPs especially if they start shipping more units to IL.
  • PREVIOUSLY: "So I think ASP, the upside is limited for fiscal 2013 on ASP. But I do believe that in the second half of the year when we launch our new products and cabinets and form factors, we'll have an ability to see an uptick in our pricing. But I'm not sure, given the first half, if it will offset it enough."


Takeaway: We were cautious on the ability of SBUX to deliver in 4QFY12. The company delivered and demonstrated its growth capability.

Starbucks exceeded our, and the Street’s, expectations during 4QFY12.  The Americas division offset slower international revenue growth as earnings came in at $0.46 versus $0.45 consensus.  The dividend was increased 24% from $0.17 per share to $0.21.  We were advising caution ahead of the quarter, mistakenly, as our concerns about trends sequentially decelerating in the Americas dictated our view of the quarter.  This quarter, and management's commentary, has demonstrated to us that Starbucks is managing its growth accordingly.  The opportunities for the company are vast and 4QFY12 results suggested that management is likely to continue to achieve its goals over the coming months.


We backed away from our years-old bullish stance on Starbucks in April based on our concerns around the company’s ability to manage a large portfolio of brands while managing its already-complex business model.  Management’s commentary on the conference call communicated to us an acute awareness of the challenges that growth presents and a willingness to invest proportionately alongside the company’s expansion.  CEO Howard Schultz’ reluctance to reciprocate some analysts’ exuberant expectations demonstrated a sober and grounded approach on the part of management.  Below is a telling quote from Schultz that directly addressed the concerns we have expressed on the company’s rate of growth:


“We've been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand while at the same time developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand… we are highly confident that despite any turn in the current economy that we can anticipate, that we have the tools, the resources, and most importantly the power in the marketplace to navigate through this by what we've been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008.”

Below we go through the results and FY13 outlook provided by management.


4QFY12 Recap


Revenues for the fourth quarter were slightly below expectations but grew at 11% versus 4QFY11 with same-store sales in the Americas providing a substantial upside surprise.



  • SSS growth of 7% vs 5% consensus
  • Treat Receipt promotion in August a success
  • Living Social offer was availed of by 1.5 million customers in less than 24 hours
  • Nearly 500 million K-Cups were shipped in FY12, 15.6% of single cup market
  • Technology playing an increasing role in driving top line
  • Channel development continuing to support sales – blonde roast, refreshers
  • $3 billion loaded onto Starbucks cards in FY12



  • Sales grew 23% y/y boosted by new units and 10% comps
  • Co-op markets – China, Thailand, Singapore, and Australia – had positive comps
  • Management positive on the rate of volume growth in China
  • Unit growth in the quarter was 18.2%



  • SSS growth of -1% vs 1% consensus
  • FX was a drag
  • Softness in Germany was offset by positive SSS in UK despite poor traffic during Olympics
  •  EMEA team has embarked on a “Renaissance Plan”, focused on transforming all areas of the business
  • Launched My Starbucks Reward program in select markets

Operating Margin

  • Strong sales and operating efficiency in the U.S.
    • Targeting labor schedules
    • Increased sales leverage over fixed costs
    • Commodity costs didn’t have a material impact on margins in 4Q
  • CAP margins continue to improve on double-digit comps
  • EMEA is targeting mid-teen margins over the longer-term



  • FY13 EPS expected to be $2.15 versus $2.06 prior
  • 15-20% growth each quarter with 1QFY13 at low end due to leadership conference and Verismo launch
  • Targeting revenue growth in the range of 10-13% with MSD comps and 1300 net new stores
    • Further acceleration in CAP growth
    • 2,000 remodels in FY12 and 2,000 more planned in FY13
  • Verismo will be expanded to pursue the multibillion dollar global opportunity


SBUX THREADS THE NEEDLE - sbux earnings report card











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 78.35%