The Hedgeye Portfolio is a new product that is currently being beta-tested at Research Edge. One of the holdings within the portfolio is COW, as we remain bullish on Livestock prices. COW is an ETN designed to track the return of a Livestock index as measured by the Dow Jones-AIG Livestock Total Return Sub-Index (weightings are 62% Live Cattle and 38% Lean Hogs).

The USAgNet reported that U.S. pork exports set a record in the first half of 2008, while U.S. beef exports continued to climb closer to the pre-BSE levels reached earlier this decade, according to the latest figures released by the U.S. Department of Agriculture.

According to the USDA, pork and pork variety meat exports in June doubled the volume exported last year, driving year-to-date pork exports up 67% above the first six months of 2007 in terms of volume, and 58% higher in terms of value. During the first half of the year, beef and beef variety meat exports increased 30% in volumes and 39% in value.

Beef exports are exploding at a time when the herd is declining so it does not seem like prices are going lower any time soon.

  • A weak dollar has made US protein attractive in foreign markets simultaneous to the rise of “BRIC” consumers anxious to enrich and diversify their menu –clearly illustrated by these pork export charts.
  • In the case of poke specifically, even if a post Olympic/Georgia slowdown in China and Russia dampens exports somewhat, demand should remain relatively firm for the “other white meat” –aided by the Canadian Government’s effort to reduce their breeding swine population.
The good news: Price should continue to rise
The good news: Price should continue to rise

DRI – Then and Now

Darden preannounced its 1Q09 results earlier today and significantly lowered its full-year outlook. Although back in June on its 4Q08 earnings call, Darden management highlighted the challenging environment as a reason to be cautious, citing higher costs and the expectation for traffic and mix changes to be flat to slightly negative in FY09, based on the magnitude of change in the company’s full-year outlook from then to now, management was not cautious enough.

Most surprising, relative to the company’s preliminary 1Q09 results, was the 2.4% same-store sales growth at Olive Garden, down from the 5.8% number in 4Q08. Olive Garden was facing a tough comparison in 1Q09 from last year when comparable sales grew 4.8%, but the 2-year average also declined sequentially by 1.1%, proving that Olive Garden is not immune to the issues facing the casual dining segment as it had appeared for some time. The more troubling component of the same-store sales result is the drop off in traffic. If you assume price was running up about 3%-4% in 1Q09, traffic fell from up over 3.0% in 4Q08 to negative in 1Q09.

What has changed since DRI’s June 25th 4Q08 conference call?

June 25th: “We are pleased with Olive Garden's strength in this challenging consumer environment and we believe they will continue to deliver industry leading performance during this fiscal year.”

“In fiscal 2009, we expect combined same-restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse to be approximately 2%. This includes approximately 2% to 3% of pricing for fiscal 2009 and our expectation that together, traffic and mix changes will be flat to slightly negative.”

Today: "With a more challenging than anticipated economic and consumer environment this quarter, our initial expectations for our same-restaurant sales performance proved optimistic. Our revised earnings outlook for the full year reflects expected first quarter results as well as our expectation that same-restaurant sales will remain under pressure for the balance of the fiscal year." DRI announced that it now expects combined full-year U.S. same-restaurant sales growth in fiscal 2009 of approximately 0% to 1% for Red Lobster, Olive Garden and LongHorn Steakhouse.

June 25th: Excluding the impact of integration costs and adjustments for both fiscal 2008 and fiscal 2009, the company expects EPS growth of 9% to 10% on a 53-week basis and 7% to 8% on a 52-week basis.

Today: Excluding the impact of integration costs and adjustments for both fiscal 2008 and fiscal 2009, the company expects EPS growth to be between 0% and 5% on a 53-week basis and -2% and +3% on a 52-week basis.

What has remained the same?

June 25th: “Looking ahead to fiscal 2009, the strategic priority at Olive Garden remains unchanged, and that is to accelerate new restaurant growth while maintaining same-restaurant excellence. Olive Garden expects to open approximately 40 net new restaurants during fiscal 2009 and ultimately, as we have said before, we believe that the brand has the potential to operated 800 to 900 restaurants in North America.”

“Looking ahead to unit growth, new restaurant plans that Drew and Gene outlined mean that we expect a net new restaurant increase of approximately 75 to 80 restaurants or about 4% to 5%.”

Today: DRI expects to open approximately 75 to 80 net new restaurants in fiscal 2009.

As I said earlier, today’s announcement proves that DRI and the Olive Garden are not immune to the challenges facing restaurant operators today. That being said, DRI needs to re-evaluate its new unit growth targets in light of today’s environment. If the Olive Garden cannot maintain “same-restaurant excellence,” then management should not continue to accelerate new restaurant growth.
Darden’s Olive Garden experienced a significant slowdown in same-store sales trends in 1Q09.

FL: Lease Optionality

It’s common perception that leases for mall retailers have zero optionality. I agree from an asset sale vantage point. But there’s more wiggle room with accounting and margins.

The wiggle room Foot Locker has with its real estate profile over the next five years should not be underestimated. I think that this provides the company with some downside margin support to the extent that I am wrong in my view that margins will recover over the next 12-18 months due to stronger business levels over a leaner cost structure.

Specifically, FL’s operating lease commitments decline to 55% in five years. Seems intuitive given that FL is a zero square footage growth retailer and leases are coming due faster than new ones are being signed. But the reality is that there’s no shortage of retailers that have a severe (negative) mismatch between growth and rents. There’s Dick’s, DSW, Whole Foods, and CVS, to name a few. Foot Locker is at the opposite end of the spectrum.

Think of this ratio as you would a discount rate on retirement assets. A company can choose to account for them with a high expected rate of return, hence requiring lower annual accruals and setting a high hurdle going forward. Or they can do the opposite and go with an ultra-conservative rate, booking higher annual payments but depressing margins. That’s Foot Locker.

I can’t ignore the fact that minimums coming down so much outlines how many of FL’s leases expire over 5 years – which means that management will need to be smart about whether it renews, relocates, or shuts down. The company’s history is spotty at best in that regard.

But my point on this one is that if FL so chooses, it can more aggressively tackle its leases and pad its margins. It won’t be pretty, but it’s an option. Other companies don’t have that option.

I’ll take conservative lease accounting at trough margins over aggressive accounting at peak margins any day.
FL's year 1 rent payments divided by year 5 contractual minimums are far more favorable than peers.

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The Global Macro Pants

Waking up in the early morning to a global macro investment process that you can hang your hat on will pay off in 2008. As many US centric investors are being forced to realize, many more factors affect global markets than their recent “one on one” with a US company’s CFO. It’s “Macro Time”, and successes will be born where proactive investment preparation meets opportunity.

Let’s put the global macro pants on and take a walk to Asia. Yesterday, we called out Thailand’s developing economic problems. This morning, in a sentence, I can show you the domestic political unrest associated with those problems. If you want to find where people’s emotions rest, follow the money. This morning’s headline from Bloomberg out of Thailand is as follows: “Thai protesters stormed Prime Minister Samak Sundaravej's office compound and occupied a state- run television station, meeting little police resistance as the government avoided violent clashes that might force its collapse”…

Thailand’s stock market closed down another -2% over night, and the Thai Baht hits new year to date lows, daily. While China’s stock market lost another -2.6% last night, taking its fall from the “its global this time” October 2007 highs to -61%, the point here is that the contagion associated with slowing growth and accelerating Asian inflation is starting to spread. The Thai Stock Exchange is down -25% now since May 21st. This is Southeast Asia’s 2nd largest economy. This chase to the Chinese YTD percentage declines is called geographic mean reversion.

Maybe we should all run out and “buy the dip” and scoop up some of them Asian Country ETF’s (Exchange Traded Funds) – uh, no. From Japan (EWJ), to Korea (EWY), to Taiwan (EWT), these snake oil salesman index products have provided everyone from the Harvard Endowment to Joe Globally Diversified nothing but headaches in the last 3 months. Does anyone remember the Asian currency crisis? The Korean Won is down -7.3% since mid July alone, and hitting its lowest level since 2004 this morning. Those who do not respect history’s lessons, are unfortunately doomed to repeat them.

Global growth is slowing faster than Wall Street understands. Stock markets are leading indicators, and you can pull up any Asian ETF and run the math on how far they have fallen in 2008. If you’re more of a short term trading type, don’t bother with the YTD numbers. Try a 5 day chart of Pakistan since Musharraf left – that’s down -14.5%, in a straight line.

As Asia slows, Europe is feeling it, big time. That’s one reason why the Euro currency is hitting a 6 month low versus the US Dollar this morning. London was closed for trading yesterday, but opened this morning’s session down -2%, breaking my short term momentum support level. The S&P 500 did the same yesterday. That level in the FTSE is 5412, and for the S&P 500 its 1274. When it’s “Macro Time”, I respect the math, above all else.

The Minister of Finance in Copenhagen definitely respects the math. This morning he is cutting Denmark’s economic growth forecasts well into 2009. His outlook suggests that economic stagflation is going to be a protracted process. Remember that Denmark was the 1st economy in the European Union to officially move into a recession. Now the dominos are falling. As cost of capital increases, globally, and access to it tightens, the “Trend” in Europe remains the same as that in the US. It’s negative, and deteriorating.

On a cheerier note, the full court media press is on Dick Fuld. So I won’t have to harp on his missing the macro call much longer, I hope. Fortunately, the short squeeze rumor of the Korean Development Bank buying Lehman didn’t come to fruition. The implications of Singapore owning Merrill Lynch, and Korea owning Lehman Brothers, are not those that will enhance Transparency in the US Financial system. As Asian growth slows, so will the currency adjusted growth of the cash in their “Sovereign” coffers. The US Dollar is now +8% since July 14th. I maintain that’s where you need to be. For now, US denominated cash, remains king.

Good luck out there today,


Don’t be surprised to find out that there won’t be a 6 month visa restriction enacted for Macau visitors. The Macau Special Administration Region (SAR) government announced an agreement to provide significant aid to the government of the earthquake stricken Sichuan province. Beijing is a bit of a black box, but I don’t think the Central Government was very pleased with Macau’s lagging contribution to the rebuilding effort. With the Macau government now on board it will be interesting to see if the concessionaires make any “voluntary” contributions to the effort. I’m sure they can find it in their hearts.

Macau shorts: be a touch wary. I still think the trend is down but status quo on the visa restrictions would send these stocks on a nice little squeeze ride.


Our friends at First Rain highlighted a Nevada poll showing 60% of Nevada voters approve a 3% tax increase to 13% of room revenues. The room tax issue will be on the ballot in a non-binding referendum. The referendum will likely apply pressure to legislators to actually enact a tax hike. This is consistent with our populism theme. As state budgets continue to deteriorate, look for legislators to attempt to hit up their favorite punching bags: the casinos; for the children, of course. Nevada, Illinois, and New Jersey remain in rough shape fiscally.

As can be seen in the chart, the impact to the Nevada gaming companies looks manageable. However, with 40,000 hotel rooms in the state, MGM would be hit the hardest, reducing 2009 EPS by about 7%.

MGM would be the hardest hit

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