Kevin Kaiser (Energy):
Robert Campagnino (Consumer Staples):
Howard Penney (Restaurants):
Todd Jordan (GLL):
Kevin Kaiser (Energy):
Robert Campagnino (Consumer Staples):
Howard Penney (Restaurants):
Todd Jordan (GLL):
TODAY’S S&P 500 SET-UP – March 4, 2013
As we look at today's setup for the S&P 500, the range is 32 points or 1.07% downside to 1502 and 1.04% upside to 1534.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
In light of the recent earnings results from the restaurant space, we thought it would be useful to take stock of the commentary on commodity price trends from some of the management teams that, to-date, have reported 4QCY12 results.
DNKN: Franchisees seeing the benefit of lower coffee costs but higher wheat costs persist and could stick around for 2013.
CMG: Company is optimistic that food inflation will be relatively modest over next few quarters. Made no decision on pricing as of 2/5, but said that inflation during the year up to that date made it likely that price would be taken in 2013. Beef and dairy prices were headwinds in the latter months of 2012. Food costs increased faster than expected in the fourth quarter but leveled off in December.
PNRA: Management said on 2/6 that wheat is locked 90% a year in advance. The company is expecting 2-3% inflation. We believe that, on the pricing side of things, achieving significant mix growth (implied in guidance) will be a stretch versus last year’s comparisons.
BWLD: The company is hoping that moderating wing prices will allow it to keep menu price increases to a minimum.
BKW: Commodity inflation is not a crucial issue for this heavily-franchised business model, but the company is expecting 3% inflation in food and paper driven primarily by beef. There were some concerns that elevated beef prices may pressure franchisee profitability, coming alongside some significant capital investment from the franchisee community. The horsemeat scandal has brought beef prices down but, to the extent that the scandal hurts demand in the US, that would be negative for BKW.
BLMN: Bloomin’s management team is expecting FY13 beef inflation in the range of 10-12%, which should be offset, in part, by favorable pricing on seafood. The company is contracted for 72% of its buy for 2013, as of 2/22.
TXRH: Management is expecting beef costs to be up by 15% this year but has 80% of its needs locked in. On the earnings call, continuing tight cattle supplies and the high percentage of corn being used in ethanol production were highlighted as continuing tailwinds for beef prices.
JACK: Management is expecting beef and corn to be up roughly 4% for the year, with chicken up 6%. The company’s overall basket is expected to be up 2-3% for the fiscal year. Beef and corn, according to the company, have the potential to be most volatile.
PZZA: Management is expecting overall commodity costs to be up in 2013, with cheese prices expected to increase throughout the year. Corporate locations tend to hedge on cheese while franchisees tend to be less conservative.
WEN: Management is expecting an increase in the cost of its commodity basket in the range of 3-4% with beef (20% of spend) and chicken (20% of spend) driving the increase.
“Icy with anger, warm with satisfaction, sharp with concern”
Allegedly, that’s how President Eisenhower reacted to Russian intelligence briefings in July of 1956. While he didn’t sign off on the depth of the American U2 spy plane mission to begin with, “the President’s skepticism (about Russia) had been confirmed by just five days of aerial reconnaissance. The Bomber Gap was a myth.” (Ike’s Bluff, pg 215) The Russians didn’t have anything real.
Like the “missile gap” concerns that came thereafter, the Bomber Gap was part of the political fear-mongering that kept the American People on edge, building home bunkers, and buying canned foods – essentially preparing to be attacked. But freaking people out with a false story that’s based on logical premise isn’t new in this country. That’s how the #PoliticalClass gets paid.
Ultimately, knowing the truth (but keeping it to himself) became Dwight Eisenhower’s advantage in a world that was perpetually on the brink of war. When I see the emerging advantages of sequestration (Strong Dollar born out of fiscal spending sobriety), but hear politicians trying to scare people (when they should just get out of the way), I think about leadership. I also think about Ike.
Back to the Global Macro Grind…
Does President Obama get what a Strong Dollar does for the US Economy? Did George Bush? Nixon and Carter didn’t. Reagan and Clinton did. A pervasively Strong Dollar gave the US Down Oil prices in the two most impressive growth decades since Eisenhower.
Last week, the US Dollar Index was up another full +1%. That was the 4th consecutive up week for the US Dollar. At the same time (and not ironically), Commodities (19 component CRB Index) were down for the 4th straight week. Commodity Deflation has been absolute (CRB Index -4.9% in 4 weeks), and now prices are finally scaring expectations.
To expect or not to expect Commodity Inflation, remains the question. Let’s look at last week’s CFTC futures and options net long positioning (hedge funds speculating on money printing, Bernanke Policies to Inflate, etc.) for some clues:
Oh yeah, baby. Strong Dollar – we people who put gas in car, and food in mouth – we love you long time. But what, in this manic market, is a long time?
For those of you still long the consumption related assets you bought after the March 2009 lows (we bought Starbucks, SBUX, at $11.52 in April of 2009, and still have it on #RealTimeAlerts; not a typo!), you are probably quite happy.
Freaking-out about the Commodity Gap now isn’t much different than freaking out about it then. I remember then almost like it was yesterday. People were pinging me with live quotes of “Dr. Copper crashing” saying the world was going to end. It didn’t. People who were long of Copper did.
Since the #PoliticalClass always asks for “solutions.” Why not try something no US President (under their Keynesian Economics regimes) has tried since the 1990s. Why doesn’t the President of the United States hold a press conference today saying something like:
“Today, folks, is a great day in America. We finally cut spending and we are about to get this Bernanke character out the way on your savings accounts. Your currency is strengthening and your purchasing power is being restored. God Bless a free-market America.”
Anyone think that might happen? Bueller? Or does he really get this (and he’s just keeping it to himself)?
In the meantime, all I can tell you is this:
Enough of the #ClassWarfare speeches already. Mr. President, if you really want to help people who drive to work every day, tell the truth about Strong Dollar (+4% in the last month) and all its benefits as a real-time Tax Cut! Long live the Commodity Gap (down).
Our immediate-term Risk Ranges for Gold, Oil (WTIC), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1, $89.72-92.93, $3.48-3.57, $81.44-82.65, 91.85-94.68, 1.81-1.94%, 11.96-17.18, 901-930, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
February saw 4/7 sectors in our universe outperform the broader market (non-alcoholic beverages just underperformed the S&P 500 during the month). Tobacco lagged on regulatory concerns and the protein sector suffered when TSN suggested that trends in the current quarter were weaker than originally anticipated.
This month we added something new - we took a look at the sector’s performance by P/E quartile – unsurprisingly, the 3rd quartile (P/E ratios between 16-20.7xs) had the strongest monthly performance (HNZ was in this quartile). The HNZ transaction drove multiples broadly higher in large cap staples name, several of which traded in the same P/E range – CL, CLX, PEP. MDLZ was the weakest performer during the month and the only negative performance within that P/E quartile.
Similarly, within the 2nd P/E quartile (P/E ratios between 13.3 and 16.0x), HNZ appeared to have been the primary driver of monthly performance – CPB was the best performer in that quartile (+12.1%). The quartile’s performance also benefitted from KMB (+5.3%) and GIS (+10.3%).
The 1st P/E quartile (P/E ratios less than 13.3xs) was all about STZ (+36.7%) – the quartile would have been up 1.7% but for STZ. A second of our preferred names, (STZ, at the time, being the first) ADM, was a significant contributor to the quartile’s performance, +12.4% on the month.
Higher multiple names in the sector had a good month was well, with SAM (+10.8%) and BNNY (+17.0%) the best performers. Multiples expanded across all quartiles as prices continued to move higher and estimates for 2013 were lower to unchanged coming out of Q4 earnings season for most sectors (protein being the notable exception).
Consistent with a broad-based rally in the consumer staples sector, there hasn't been a significant divergence between high and low beta names. If anything, lower beta names have outperformed in the wake of the HNZ acquisition, likely setting the stage for some mean reversion in lower beta names as the takeout speculation wanes.
This is a familiar chart for those of you who have been following our work - it is also the chart that keeps us broadly cautious across the sector.
The anomalous relationship between the XLP and the 10 year that has existed since 2009 persists...
...despite the fact that the yield of the XLP has become marginally less attractive (combination of the yield on the 10 year creeping up and the price performance of the XLP).
Some clients have suggested to us that the move up in the group post-HNZ has been short-covering - the data doesn't appear to bear that out.
Finally, our "XLP vs. Economic Surprise" chart suggests that continued strength in the economic surprise index could signal a pause for the staples sector.
Where does that leave us?
We are going to focus on three charts - overall sector valuation, "beta chase" and economic surprise. These suggest to us that we could see a pause in the staples sector as sentiment surrounding the broader economy improves, valuation becomes more relevant and takeover speculation recedes. We would look for relative underperformance in the lower quality, lower beta names that have seen a move up in the wake of HNZ (TAP, GIS, CPB). Our most/least preferred list remains relatively unchanged:
Call with questions,
HEDGEYE RISK MANAGEMENT, LLC
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.