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Commodities, in general, went higher over the last week as the dollar weakened slightly. Corn and chicken wing prices posted the largest week-over-week gains while cheese and pork prices were the decliners.
Chicken Wings – BWLD
Buffalo Wild Wings’ stock has been volatile of late, trading below $60 as recently as one week ago and now trading at $66. Wing prices remain a concern for the stock in 1Q12. Following comments from Sanderson Farm’s earnings call yesterday, we are confident that the first half of 2012 will represent a difficult commodity environment for BWLD. Corn prices are likely to remain elevated for 2012 and food processors like SAFM are being forced to cut production in order to turn profit margins positive. SAFM assured listeners to its earnings call that the industry would cut production by however much is necessary in order to turn a profit. The food service industry seeking to shift mix away from beef products may also provide some support for chicken prices.
Beef – WEN, TXRH, JACK, CMG
Beef prices gained week-over-week as incremental data points pertaining to the price of beef support high prices. On the demand side, exports of US beef were up a record 27% year-over-year at the end of September. Japan and Korea were responsible for most of this growth. There could be further growth from Japan as the country looks to ease age restrictions on U.S. beef imports to the country that were implemented in 2003 due to BSE. Supply side dynamics are equally bullish in that a shrinking U.S. herd and elevated feed costs point to tighter supplies in 2012. It is estimated that cattle numbers in Texas have decreased by 600,000 or 12% of the state’s roughly 5 million cows.
Coffee – SBUX, DNKN, GMCR, PEET, THI, CBOU
Coffee costs are dropping below last year’s line for the first time all year. 2011 has been difficult for coffee retailers from a cost perspective; Starbucks and others increased prices during the year, but the stronger brands like Starbucks did so successfully. Economic concerns have kept a lid on prices recently and retailers will be hoping that Brazil, the world’s largest coffee producer, is heading for an increase in its harvest size next year. Spot market prices heading lower would not pass on to the consumer immediately, however, as contracts and inventories are worked through, but will provide a boost to the coffee stocks.
Dairy – CAKE, TXRH
Cheese prices moved lower over the past week despite beef prices and milk prices increasing. Cheese remains up 18%
year-over-year but that number has moderated throughout the quarter, providing some relief to The Cheesecake Factory. Dairy will likely have a negative impact on CAKE’s gross margins in 4Q11.
Chicken – Whole Breast
No Current Positions in Europe in Hedgeye Virtual Portfolio
While yesterday European equity markets ripped ahead of today’s opening of the ECB’s first 3YR Long Term Refinancing Operation (LTRO) facility, with 523 banks expected to take up €489 billion in loans at 1% (vs initial estimates of €293B from Bloomberg and €310B from Reuters), European equities have turned down today and sovereign yields actually increased day-over-day. (Italy’s 10YR rose 20bps to 6.85%; Spain’s 10YR rose 6bps to 5.16%; and the Greek 10YR gained over 100bps nearing 36%!)
This is an initial indication that the LTRO will not be the panacea that the market had hope for yesterday. What a difference a day makes!
While we’re bullish on the LTRO as a facility to help reduce risk by providing more liquidity to European banks, we’d caution against an absolutist view that banks will be buying all European sovereign paper issuance going forward as they’ll stand to benefit from the carry trade, or spread. After all, these same banks have taken significant measures to sell their Europig debt holdings in the last 6-12 months. Why would they jump back in now?
A more likely scenario is one in which banks look to take care of their own houses first before looking to participate in sovereign bond buying. European banks have an estimated €230 Billion maturing in Q1, or around €720 Billion in 2012, to meet. In this light, we’d expect the ECB’s SMP secondary bond purchasing program to remain critical to arrest sovereign yields, especially in the periphery, despite mandates from the ECB that it is meant to be a temporary facility with limited firepower. To date, the SMP has purchased €211B.
In the face of the inability to lever up the EFSF and no change on the ECB’s position to print money, we do think the opening of ECB’s LTRO facility is bullish, yet we don’t think we’re going to cross some magic bridge that will firewall the major issues. We’ve yet to see one or a collection of definitive programs to really put an arrest to the sovereign and banking crisis in Europe. The Fiscal Compact of the December 8-9 Summit meeting still leaves a lot of questions unanswered, and the sovereign and bank downgrades of the ratings agencies (though lagging indicators) will continue to drag markets lower. Therefore, we do not expect to see sustained European capital market gains over the intermediate term.
We’d short the EUR/USD on any bounce to $1.33.
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