BWLD: Playing Chicken

Buffalo Wild Wings (BWLD) is under pressure as chicken wing prices move sharply higher to start the year. With the $2 per pound mark being surpassed with the possibility of further upside, we worry about risk to BWLD’s multiple. Hedgeye Restaurants Sector Head Howard Penney notes the difference in price change compared to 2012:

“In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl.”


BWLD: Playing Chicken - image004


The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.


BWLD: Playing Chicken - image003

Stay The Course

Client Talking Points

Follow Through

It’s important to stay the course once you’ve put a plan into action. Do you think Lord Nelson turned his ships around when difficulty stared him in the eye? Absolutely not. Our three Q1 2013 Macro Themes are #GrowthStabilizing, #HousingsHammer and #QuadrillYen. Japan is getting their currency devalued in favor of the Nikkei hitting astronomical levels on the upside, the housing market continues to put up solid data week after week showcasing the recovery, and growth is still stabilizing. With regards to the latter, a lot can change very quickly if crude oil is $130 a barrel and if the debt ceiling debate in late February can’t get sorted out appropriately. For now, we’ll stay the course and will continue to trade the risk and the range we’re comfortable with, whatever the stock.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“@Hedgeye Cake at the office today? We wouldn't want to forget Big Alberta @HedgeyeDJ's birthday now would we#HappyBirthdayBigGuy #ToGrowth” -@BrennanDTurner


“The only way to make a man trustworthy is to trust him.” -Henry Stimson


Procter & Gamble (PG) fiscal-second-quarter earnings more than doubled to $4.06 billion or $1.39 a share.


"Most of the time ‘I don’t know’ is the right answer.”

-Wesleyan University Professor, 2008


It was nearing midnight and towards the end of a ten hour stint in a 4’ x 8’ freezer on a winter night in early 2008 that I realized I wasn’t going to be a career research doctor.   


At the time, I was a PhD candidate performing an RNA isolation as part of some larger work on DNA enzyme kinetics.  What that means exactly isn’t really important, but it takes a long time and the work flow requires that most of that time be spent inside a walk-in ice box. 


Tired, bored, and numb, I was thinking more about the puts I bought in NLY (REIT/Mortgage Investor) earlier in the day than on the final mix components for the experiment.  I ended up aliquoting (fancy science term for “added in”) way too much of the wrong substrate into the mix.  No take-backs or mulligans in experimental biochemistry - Game over, reset clock, 10 more hours of overnight freezer duty.  A short-time later I joined Hedgeye. 


Similar to probing the populous on their view of functional Enzyme Kinetics, I imagine that asking the average person how the U.S. calculates inflation conjures images of Good Will Hunting scenes, blackboard equations and chalk dust mathematical revelation.  


Reality, however, more often resembles a bearded, middle-aged Robin Williams than it does a svelte, young Matt Damon.   Consider the following question: 


“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”


That gem of a perfectly subjective question, asked as part of BLS’s monthly price survey process, drives the calculation of “owner’s equivalent rent” and singularly represents approximately one quarter of the index used to calculate CPI inflation in the United States.   


China reports official GDP numbers 5 minutes after the quarter ends, we have owner’s equivalent rent.  Next. 


Parsing the reality from the illusory in reported domestic labor market data and understanding the subtleties of the seasonal and other statistical adjustments presents its own unique challenges.   



‘Tis the Season(ality)


As we’ve highlighted previously, strong and quantifiable seasonal adjustments have had a meaningful impact on the temporal trend in reported economic and employment data over the last four years.  In short, the shock in the employment series in late 2008 – early 2009 which occurred alongside the peak acceleration in job loss during the Great Recession has been captured, not as a bona fide shock, but as a seasonal factor.   


The net effect of this statistical distortion is that seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period.  From a positive seasonal adjustment factor perspective, we’ve got about one month left. 


6-Handle - Wkly Claims



Sell in May & Go Away (Until September)


From a strategy perspective, the temporal pattern in market dynamics, despite being rather obvious to any market observer, hasn’t been insignificant. 


The annual déjà vu pattern in market prices, reported economic data and monetary policy announcements observable over the last 4 years isn’t particularly surprising when considering the reflexive interaction between the associated dynamics: 


reported economic data begins to inflect, market prices move higher, confidence and optimism measures begin to improve alongside stock prices and reported econ growth, the marginal bid moves from treasuries to equities as improving conditions pull expectations around a Fed exit timeline forward, equities benefit further while the reported data continues to confirm - until it doesn’t - and then the dynamics reverse, culminating with a new QE announcement in late Q3 just as the data and seasonal adjustments impacts hit trough. 


Compressed economic cycles and amplified market volatility at its statistically distorted and centrally planned best. 


6-Handle - SPX Deja Vu





As the domestic employment and housing data has continued to confirm our 1Q13 Macro Theme of #growthstabilizing, a risk management question we’ve been considering is the possibility of seeing a 6-handle in the unemployment rate in 2013.  With Bernanke offering an explicit employment target of 6.5% for a cessation in QE initiatives, a significant decline in unemployment over the NTM may augur higher yields as the bond market attempts to front-run a prospective Fed exit.  


A material, mean-reversion back-up in yields is of obvious import for asset allocation decisions and remains the principal candidate catalyst for a driving a large-scale rotation to equities.


Further, in so much as an end to money printing is dollar bullish, we could see a perpetuation of the USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher dynamic we think needs to persist for sustainable real consumption growth.  A step function move lower in commodity prices would also be equity supportive from a rotation perspective.


In a recent analysis we framed up the variable dynamics and put some quant around the magnitude of change in the relevant unemployment rate drivers necessary to take unemployment below 7.0% over the NTM (email us if you’d like a copy of the note). 


In short, while we wouldn’t necessarily view a 6-handle on the unemployment rate by 2013 year-end as our baseline case, the reality of the math suggests that it wouldn’t take extraordinary improvement in the factors that drive the unemployment rate to take it below 7% over the NTM.


In terms of how we model unemployment, we effectively need to see 2 of the 3 input variables to trend favorably with respect to their impact on the unemployment rate.


For example, scenarios in which Employment Growth accelerates a reasonable 20bps (2Y basis) on average in 2013 and growth in the Civilian Non-institutional Population (CNP) declines linearly to the historical average over the NTM or the Labor Force Participation Rate (LFPR) continues to decline at the 3Y CAGR both result in a move to/below the 7% unemployment level in 4Q13. 


In the chart below we provide a timeline view of the 2013 Unemployment Rate under a selection of progressively favorable scenarios. If you’d like to observe the impact of your own growth and participation rate assumptions on the unemployment rate timeline you can link to the associated model here >> Unemployment Rate Variable Analysis_HEDGEYE


6-Handle - U.S. Unemployment Rate



Yesterday on CNBC Ray Dalio remarked that the question for investors now, as always, is how events will transpire relative to what the market has discounted.    


We continue to like our 1Q13 Macro themes of #growthstabilizing and #housingshammer.   Ultimately, however, Investment perspective remains wedded to last price. Now a hundred SPX points higher from where we first penned the #growstabilizing hashtag back in early December, the relevant risk management question is whether growth can organically and sustainably accelerate from here.


On my first day in the freezer in grad school, my professor offered the following piece of memorable advice with respect to evaluating one’s place within the program’s intellectual pecking order:   


“Regardless of what they say, nobody really knows anything.  Most of the time ‘I don’t know’ is the right answer”


Stay Tuned. 


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1, $111.51-113.95, $3.65-3.71, $79.41-80.14, 1.32-1.34, 1.84-1.91%, and 1, respectively.


Christian B. Drake

Senior Analyst


6-Handle - vpp



TODAY’S S&P 500 SET-UP – January 25, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 0.92% downside to 1481 and 0.48% upside to 1502.              















  • YIELD CURVE: 1.65 from 1.61
  • VIX  closed at 12.69 1 day percent change of 1.85%
  • BOND YIELDS – We had lively debates in Boston and NYC seeing clients this week; we definitely surprised people w/ my bullishness on both growth and stocks; especially relative to Treasuries and JGBs; Fund Flows (into stocks, out of bonds) = big part of my call here; we just saw the 3rd consecutive wk of real US Equity inflows (+$3.7B ex-ETFs); that’s why this market won’t go down.

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: New Home Sales, Dec., est. 385k (prior 377k)
  • 10am: New Home Sales M/m, Dec., est. 2.1% (4.4%)
  • 11am: Fed to buy $3b-$3.75b debt in 2018-2019 sector
  • 1pm: Baker Hughes rig count


    • Treasury Secretary Tim Geithner to step down
    • CFTC meets on surveillance, enforcement matters, 10am
    • FDA to release documents on Boehringer Ingelheim’s once-daily drug olodaterol for chronic obstructive pulmonary disorder
    • Second day of HHS, FDA meeting on public health benefits, risks of drugs containing hydrocodone, 8am
    • HHS, NIH meeting on deafness and other communication disorders, Bethesda. 8:30am


  • Fed pushes into "uncharted territory" as assets hit $3t
  • Apple expands audits, says China labor agent forged documents
  • Microsoft’s Windows bolsters sales in challenging PC environment
  • Boeing design should prevent 787 battery fires, NTSB says
  • tarbucks profit meets ests. on sales increase in Americas
  • Samsung, Apple Hold half smartphone mkt as shipments jump 43%
  • Weyerhaeuser 4Q EPS ex-items 26c; CEO says building momentum
  • U.K. eco. shrank more than forecast in 4Q
  • German business confidence gained for 3rd mo. in Jan.
  • Samsung drops after warning won may cut earnings $2.8b
  • AT&T 4Q loss narrows as smartphone sales hit record
  • Financial job losses near 4-yr high as Europe leads cuts
  • Icahn says no respect for Ackman after Herbalife bet
  • Morgan Stanley CEO pay said to decline 30% excluding new award
  • Whitman Capital founder gets 2 yrs’ prison in insider case
  • Fed Meeting, U.S. Jobs, Boeing, China: Week Ahead Jan. 26-Feb. 2


    • Covidien (COV) 6am, $1.06 - Preview
    • Prosperity Bancshares (PB) 6:02am, $0.84
    • Honeywell International (HON) 6:30am, $1.10 - Preview
    • Immunogen (IMGN) 6:30am, $(0.25)
    • Halliburton Co (HAL) 6:56am, $0.61
    • Kimberly-Clark (KMB) 7am, $1.36
    • Procter & Gamble (PG) 7am, $1.11 - Preview
    • Amcol International (ACO) 7am, $0.48
    • Oshkosh (OSK) 7am, $0.31
    • Moog (MOG/A) 7:55am, $0.82


  • WTI Crude Poised for Longest Run of Weekly Gains Since 2009
  • Copper Seen Extending Rally With China Accelerating: Commodities
  • Wheat Falls as Moisture May Ease Drought Stress in U.S. Plains
  • Cotton Falls in N.Y., Heading for First Drop in Eight Sessions
  • Copper Slips 0.1% to $8,091 a Ton in London, Erasing Advance
  • Munich Re Says World Crop Insurance Costs Top Record on Drought
  • Leaf Rust Outbreak Threatens Central American Coffee Output
  • Palm Exports From Malaysia Drop at Slower Pace on Indian Demand
  • Oil May Increase as Economic Growth Boosts Demand, Survey Shows
  • Corn Swoon Returning on Moving-Average Break: Technical Analysis
  • Chavez Cancer Freezes Venezuela’s Overseas Oil Funding: Energy
  • European Weekly Crude Palm Oil Price at 3-Month High: BI Chart
  • Gas Demand Declines for Fourth Year in Mature European Markets
  • Gold Declines as Focus Shifts to Investor Selling; Silver Falls












JAPAN – ah the fresh smell of Taro Aso’s burning Yen again on the tape this morning as the Yen hits new lows; Nikkei rips +2.9% on that to fresh new highs (up +26.2% since mid-Nov!) and they haven’t even hit the CTRL+P button hard yet; with -0.2% y/y DEFLATION in their DEC CPI, they are going to have to print like the world has never seen to hit “2% inflation”.


KOSPI – this is the Currency War, and the South Korean currency (and stock market) does not like this; KOSPI confirms our breakdown signal from 3days ago, dropping another -0.9% overnight (down -4.4% from its JAN high); interconnectedness in global macro markets matters; stay tuned on this, Chinese stocks broke 2313 TRADE support this wk too.








The Hedgeye Macro Team




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