All-Time Highs: Can Food Prices Go Even Higher?

Takeaway: U.S. consumers are feeling the food inflation heat.

Editor's note: This is an excerpt from a research report released by Hedgeye Macro on 6/19.


We continue to field arguments against the inflationary read-through on the commodity squeeze. Sharp increases in livestock and poultry prices over the last ten years in the face of stagnant wage growth, a decline in savings rates, and a declining U.S. dollar illustrate this reality in staggering fashion.


All-Time Highs: Can Food Prices Go Even Higher? - benchart


If Janet Yellen’s commentary earlier this week is any indication, the Fed will continue to promote yield-chasing from financial intermediaries and those lucky enough to hold equities and fixed assets. The PCE survey from the BLS reports the top quintile of income earners takes 66% of the aggregate income in the basket from interest, dividends, and investment related income. Needless to say, a majority of Americans consume meat.


2013 Meat Consumption Per Capita (KG/Person):

  • United States: 106.9
  • China: 53.5
  • World Average: 34.9

The average consumer we have continuously highlighted is reaching insolvency. Median net income margins have consistently compressed over the last five years to about 1.38% with savings rates decreasing over the same period.


Last Ten Years:

  • USD Index: -9.8%
  • Trailing 1-year U.S. Personal Savings Rate: -9%
  •  S&P GSCI Livestock Index: +69%
  • U.S. Private Sector Avg. Hourly Earnings (Real): -43% 

All-Time Highs: Can Food Prices Go Even Higher? - Beef cartoon 06.18.2014

Retail Callouts (6/20): COH, SKX, NKE

Takeaway: COH Analyst Day takeaway. SKX sues AdiBok for violating patent. NKE adds EBAY CEO to board.



COH - Analyst Day Takeaway


Takeaway: Coach is a name we’ve been short more often than not. I’ve been debating whether the bear case is too widely accepted. Apparently not. As they guided  2015 NA comps down in the 20s during yesterday's analyst day. The brand is being completely repositioned, and anyone buying today will need to wait 3-5 years to see if it’s working.  Only question in my mind is that it has a 3.85% dividend yield. Balance sheet has no debt, and there’s a 70% gross margin to backstop the dividend. Being cheap isn’t enough for me to want to buy a dead brand. It had a 3.5% yield a week ago – that seemed cheap too.


SKX - Skechers Sues Reebok for Patent Breach



  • "Skechers USA Inc. has filed a lawsuit against Reebok International for selling footwear that infringes on its GoWalk product line."
  • "Skechers is claiming that Reebok is selling the copycat products under the name 'Reebok Walk Ahead RS.' Reebok’s U.S. head of media relations could not be immediately reached for comment."


Retail Callouts (6/20): COH, SKX, NKE - Chart 1 6 20 14


Takeaway: Yea, the shoes look pretty similar, and who knows SKX may actually win this one. I mean they both look like glorified water shoes. But seriously? Talk about the pot calling the kettle black.


NKE, EBAY - John Donahoe Named to Nike Inc.'s Board



  • "John Donahoe, EBay Inc.'s president and chief executive officer, was named to Nike Inc.'s board Thursday."
  • "'John’s executive management experience in digital commerce, technology, strategic planning, and marketing for a global brand makes him an excellent addition to our board,' said Philip Knight, Nike co-founder and chairman."


Takeaway: sales accounted for about 2% of NKE's sales in 2013, or about 12% of total DTC sales. E-commerce will never play a huge part in the NKE sales algorithm because of the 80/20 split between wholesale and retail, but this is an area where the company needs to improve. Bringing in Donahoe should help.




FDO - Icahn Letter to Family Dollar CEO Howard Levine


  • "Although we appreciated the cordial nature of our discussion at last night’s dinner, it was apparent that we have a strong difference of opinion as to the future of our company."
  • Family Dollar has consistently underperformed its peers on most, if not all, operating metrics (same store sales, total revenue growth, sales per store, sales per square foot, operating margins, capital structure efficiency, etc.) and faces growing competition. In addition, the company’s shares have underperformed not only the shares of its peers but also the S&P 500 index over the last 1-year and 3-year periods.
  • "But perhaps more importantly, we believe that for a number of reasons we discussed last night it is imperative that Family Dollar be put up for sale immediately."


GIL - Gildan Activewear Announces Agreement to Acquire Marketer and Manufacturer of

Branded Sheer Hosiery, Legwear and Shapewear



  • "Gildan Activewear Inc. today announced that it has signed a definitive agreement to acquire substantially all of the assets of Doris Inc. (Doris), a marketer and manufacturer of branded sheer hosiery, legwear and shapewear products to retailers in Canada and the United States. The initial purchase price is approximately CDN $110 million (U.S. $101.4 million), with possible additional contingent payments of up to CDN $10 million (U.S. $9.2 million), which are based on the achievement of targets for growth in sales revenues. The purchase consideration will be paid in cash and will be financed out of Gildan’s bank credit facility. "
  • "Revenues of Doris for the year ended March 31, 2014 amounted to approximately CDN $95 million (U.S. $87.6 million), and adjusted EBITDA for the same period amounted to approximately CDN $14 million (U.S. $12.9 million), so that the acquisition is expected to be immediately accretive to Gildan’s earnings in fiscal 2015."


ANF - Report: Abercrombie installing in-store mobile charging stations



  • "Abercrombie & Fitch is reportedly rolling out charging stations for mobile phones and tablets in its stores. According to TheStreet, there are currently two Abercrombie & Fitch stores with mobile charging stations installed, and the retailer plans to roll out the stations at several more Abercrombie and Hollister stores by the end of the year."
  • "Abercrombie is also providing lockers so customers can leave their mobile devices to charge without worrying about them being stolen."

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LEISURE LETTER (06/20/2014)

Tickers:  WYNN, RHP, RLJ, SHO


  • Friday June 20:  2014 Asia Cruise Forum (Taiwan)
  • Tuesday June 24:  CCL F2Q CC;


G13 / Genting Singapore – Genting Singapore delayed the June 24 ground-breaking for it’s planned casino in South Korea's Jeju Island until the third quarter of 2014 with a scheduled opening in 2017. Despite the fully planned and widely-marketed ground-breaking, the Company said the rescheduling is to allow the company the opportunity to brief the newly-elected governor of Jeju and his team on the casino's development plans and its contribution to Jeju Island.

TAKEAWAY: An unfortunate delay for Genting Singapore, but it would seem there's more to the story than simply getting to know the newly-elected governor of Jeju. 


163:HK, Emperor International Holdings –  Vanessa Fan Man Seung, an executive director of Emperor International said, “The impact of Macau shortening mainland tourists’ stay could be digested within a short time."  She also said that in the long term, tourist visits and spending will continue to increase in Macau.  In her opinion, the smoking ban on casino policy will only trigger a short-term impact.

TAKEAWAY:  There continues to be relatively little concern over the new transit visa permit rules and updated smoking ban.


WYNN – Anthony Gattineri, the last of the three owners of WYNN’s casino site consented to signing a pledge that FBT Everett Realty, has no secret owners.  Previously, the state gaming commission indicated it wouldn’t issue WYNN a license unless all of FBT’s owners signed the pledge.

TAKEAWAY: A positive step forward in the process. 


RHP – announced the addition of an additional senior secured $400 million Term Loan B to its existing credit agreement. The new term loan matures in January 2021. The Term Loan B was fully drawn at closing and bears interest at a rate equal to LIBOR plus 300 bps, subject to a LIBOR floor of 0.75%.  The proceeds received from the Term Loan B may be used, as the Company may determine, to repay revolving loans under the Company's existing credit facility and to repay the Company's outstanding 3.75% convertible notes or to settle, in whole or in part, the warrant transactions entered into in connection with the issuance of the 3.75% convertible notes.

TAKEAWAY: A modest simplification of the balance sheet if RHP is able to settle the entire warrant transactions.


RLJ – sold a non-strategic hotel, the 194-room Holiday Inn Austin NW Arboretum Area in Austin, Texas, for approximately $13.5 million, or $70,000 per key or approximately a 7.9% capitalization rate on the Hotel’s 2014 net operating income, fully loaded for pending capital expenditures.

TAKEAWAY:  Kudos to management for executing on its capital recycling strategy to enhance its portfolio through the disposition of assets that are not in line with the Company’s overall long-term investment thesis.


SHO – made a two part acquisition and financing announcement:

  1. a contract to acquire the 544-Room Wailea Beach Marriott for $325.7 million ($596,800 per key) or 16.9x forecasted 2014 Hotel EBITDA of $19.3M and a 5.2% capitalization rate on 2014 forecasted Hotel net operating income. 
  2. announces 18 million share secondary offering through JPMorgan

SHO expects to fund the acquisition, in part, with $60 million of common stock issued directly to the seller - an affiliate of Blackstone Real Estate Partners IV (the "Seller") at a price of $14.87 per share and the Company expects to fund the balance of the purchase price with proceeds from the issuance of common stock.   Also, SHO expects to receive operational support from Marriott International, the Hotel manager, during a planned renovation of the Hotel in 2015 and 2016.  o The company expects this acquisition will be additive

TAKEAWAY:  First, we now know why insiders at every level of Sunstone management were selling stock over the past 30 days or so.  Second, interesting that Marriott will offer financial relief to Sunstone during the renovation.  Third, SHO management gets the award for taking wordsmithing to a new level with the use of “expects this acquisition to be additive” – not to be confused with “accretive”…


Macau Junket Jitters -

  • Macau junket investor Amax International Holdings Ltd says it filed a litigation suit against its associate Greek Mythology (Macau) Entertainment Group Corporation Ltd in a local court on Wednesday in relation to its failure to provide its annual accounts to shareholders.
  • Six VIP rooms have been vacated by junkets in two major casinos.  Larger junket operators are stepping in and absorbing remaining capacity.  This fact has prompted the decision of some smaller junket operators to abandon three VIP rooms in Wynn Macau and three VIP rooms in City of Dreams.   

TAKEAWAY: Could this be the psychological bottom for junket related issues?  We believe junket issues are now yesterday's news story.


Macau Slot Machine Issue - A businessman, Ip Choi Peng, claimed that he had won a game on a slot machine in a Cotai casino on April 18. However, one of the symbols in the winning combination suddenly disappeared. Another similar incident took place five days later when he was playing at a NAPE casino. Again, he alleged that the slot machine malfunctioned and only showed half of the symbols in a winning combination. Ip Choi Peng has claimed that DICJ “coordinated” in these two incidents, and added that both casinos privately offered to find a solution via discussion.  He questioned why the casino managers would want to talk to him if the two incidents were truly caused by machine failures.

TAKEAWAY: We believe the slot machines and games in question were Aristocrat – and this issue could pose a long-term risk to the company.


Macau Visitation Penalties - Visitors who exceed the maximum time for which they are permitted to stay in Macau will be fined up to MOP500 per day (previously MOP200/day), following the amendment of the Administrative Regulation on the Entry, Stay and Residence Permit.  Statistics show that the number of overstaying cases has increased from around 32,000 in 2012 to more than 42,000 in 2013.

TAKEAWAY: Govt's serious about these visitation rules.


Massachusetts Gaming - A Mohegan Sun-commissioned poll says that Boston area residents prefer its proposed casino at Revere to Wynn Resorts’ Everett proposal by 55 to 22%.  Residents also oppose repeal of Massachusetts’ casino law by 58 to 35%. The pol covered Suffolk, Middlesex, Norfolk, Essex and Worcester counties.

TAKEAWAY: The media and public relations battle in an attempt to sway the Massachusetts Gaming Commission as well as public perception. 


Atlantic City - Revel, warned staff it will close this summer, as soon as August 18, if a buyer cannot be found.  

TAKEAWAY: Back in January of this year, it was widely reported Caesar's Entertainment (CZR) was considering a bid for the casino


Atlantic City Gaming - In a recent poll conducted by the Fairleigh Dickinson University, 57% of New Jersey gamblers chose Atlantic City when asked about their preferred gambling destination, 12% of those asked would gamble in New York while 31% of the study participants could not decide or refused to answer the question. 

TAKEAWAY: Atlantic City's appeal to gamblers appears to be waning.


New Gaming Equipment Company - the Nevada Gaming Commission approved a license for Gamblit Gaming, a start-up gaming equipment company that plans to combine traditional slot machines with entertainment-style video games. The company hopes to seek approval for use of the games in Nevada casinos in the first half of 2015. Following the commission meeting, Gamblit's CEO said the company expects to partner with a larger slot machine manufacturer to bring the games into market.

TAKEAWAY: The Company previously indicated it will develop game content targeting the 21-45 year old cohort group.  If successful with content development, this would be a positive for gaming.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

In The Race!

This note was originally published at 8am on June 06, 2014 for Hedgeye subscribers.

“A horse never runs so fast as when he has other horses to catch up and outpace.”  



There are many great metaphors in life and business.  However, tomorrow we have the opportunity to witness a world-class achievement - the Triple Crown of Thoroughbred Racing - when California Chrome runs in the 146th Belmont Stakes.  If successful, California Chrome will become only the 12th winner of the Triple Crown. 


In The Race! - hedrick


The Triple Crown is a test of speed, strength, and stamina.  Winning the Triple Crown takes a special combination of horse, trainer, jockey, owner and veterinarian.  It is incredibly difficult to win the Triple Crown – win the Kentucky Derby at 1 ¼ miles, followed by winning the Preakness Stakes at 1 3/16 mile a mere two weeks later and then a massive 1 ½ miles (a distance not often run in horse racing) three weeks later at the Belmont.  The Belmont Stake will feature a field of 11 thoroughbreds with 10 challengers seeking to unseat the contender California Chrome. 


If you were jockey Victor Espinosa what would be your game plan – break away early and lead from the front, play it slow and keep something in the tank for the grueling one and one-half mile race, or simply let the race unfold as it happens, be flexible and nimble, taking advantage of number 2 post position near the rail, while keeping an open mind to anything that can and will happen – knowing all the while the other 10 jockeys are looking to run you down and spoil the party?


I am old enough to vaguely remember Secretariat win the Triple Crown in 1973. However, I more clearly remember Triple Crown winners Seattle Slew in 1977 and Affirmed in 1978.  My paternal grandmother loved to bet the ponies and she love to gamble as well.  Maybe that’s why I became an analyst covering the gaming industry.  My first horseracing experience occurred in the mid-1970s when I joined my parents and my grandmother for a day at the races on the Club Level Terrace at Arlington Park, now called Arlington International Racecourse.  Ever since then, I love to watch horseracing! 


Back to the Global Macro Grind...


A similar metaphor and strategy can be applied to managing money, and trust me I know, I’ve held the title “Portfolio Manager.” The one thing I learned as an equity analyst and I’ve carried through to my career as a PM is how to filter out the noise while also reading as much topical, salient and actionable literature, data, and related content.  More important than reading, I also spent as much time thinking about what I read – as such I remained flexible and adaptable to new information, new data and changed my outlook, strategy and holdings accordingly.  I did this while running as hard and fast as possible… Similar to Keith McCullough, Hedgeye’s CEO, and most of us on the Hedgeye team, I also hate to lose!


So here we are almost half-way through the race, mid-year 2014, Mr. PM what do you do?  Read more? Think more?  Are you open to new insights and a new strategy? 

The Hedgeye Macro and Industrials team will host a thought leader call today with foreign policy expert, Charles Hill.  Charles Hill is a diplomat in residence and lecturer in International Studies at Yale University. He is a career minister in the U.S. Foreign Service, serving in a variety of roles such as Deputy Assistant Secretary and Chief of Staff for the Middle East at the State Department, and executive aid to former U.S. Secretary of State George P. Shultz.


I am sure Victor Espinoza has a strategy in mind for running California Chrome in Saturday’s Belmont Stakes.  However, I am also sure he remains open to changing and adapting his strategy as the race unfolds.  Likewise, most PMs are suffering under the heavy hand of Mr. Market this year with the S&P 500 +5%, the NASDAQ +2.9% and the Dow Jones Industrials +1.6% –  by comparison nearly any asset class with above average yield are outperforming, namely:  REITs (IYR or VNQ) +15.6% (during my PM years I ran a REIT and Real Estate Fund), Utilities (XLU) +13.8% and Energy (XLE) +8.5%.


In The Race! - Mr Market


Did you know California Chrome’s dam is Love the Chase – a fitting name for our business! Personally, I remain bullish on REITs and I also like California Chrome to win the Belmont Stakes and thus become the 12th Triple Crown Winner because the colt has already outrun six ponies he faces on Saturday and others appear to simply be spoilers. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.41-2.61%

SPX 1898-1943

RUT 1108-1155 

Nikkei 14333-15210 

VIX 11.20-13.46 

USD 80.17-80.79 

EUR/USD 1.35-1.37

Pound 1.67-1.69 

Brent 108.13-110.87 

NatGas 4.58-4.78 

Gold 1236-1290 

Copper 3.04-3.12


Have a great weekend!


David Benz

Director - Gaming, Lodging & Leisure




Client Talking Points


CRB Commodities Index (19 commodities) broke out to a fresh year-to-date high of 312 yesterday = +11.4% year-to-date with Silver +5.2%, Gold +3.4%, Sugar +2.3%, Hogs +2.1%, Corn +2.0% - on the day; beats watching paint dry.


Consensus has been whining about Gold “not doing what it should” under our U.S. stagflation call, then it does it, all at once; +8.8% Gold price to $1308/oz year-to-date is nothing to whine about; breakout line = $1284 as the Fed’s Policy To Inflate was explicit on Wednesday.


If inflation slows real growth, you either buy inflation (Energy – XLE = +13.43% year-to-date) and/or slow-growth #YieldChasing Utilities (XLU) which busted out to new highs again yesterday at +16.13% year-to-date.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.


Three for the Road


44 days since the $SPX has had more than a 1% move



“Laughter is an instant vacation.”

-Milton Berle



Sales of new and existing homes in the U.S. will fall in 2014 for the first time in four years, the Mortgage Bankers Association said in a forecast today. (Bloomberg)

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