Brazilian Consumer Update

Conclusion: All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term.


Consumer Credit Demand Falls in October, though Still Robust

Credit analyst agency Serasa Experian reports the number of consumers seeking credit fell 3.2% MoM in October, after setting a record in September.  Experian says this decline does not represent a shift in the trajectory of consumer credit, as it is primarily a calendar effect because of the observance of Children’s Day in September, and because October had two fewer business days.  Year-over-year, demand for consumer credit was up 15.2% in October and up 15.7% YTD, versus the year-ago period.


Brazil’s Relatively High Cost of Living

A report in O Globo finds common articles in Brazil can cost as much as six times as much as in other countries.  Examples include PlayStation 3, which costs R$ 2,000 in Brazil, four times the US price of US$300 (R$ 510).


A comparison of automobile prices found the Toyota Corolla XEI costs R$ 75,000 in Brazil, versus the equivalent of R$ 58,740 in South Africa, R$ 33,782 in Japan, and R$ 32,797 in the US.  Consumer advocates say this is largely attributable to high taxes and import duties, as well as to a corporate culture of maintaining exorbitant profit margins.


We think there may be significant market inefficiencies at work, as the O Globo report notes the nation’s consumer market is still evolving and lacks broad reference prices.  Also, there is still a cultural bias that foreign manufactured products are more luxurious than domestic manufacture.  Brazilians have a penchant for buying certain items overseas – even paying the 50% duty to bring in items over the US$ 500 personal limit on dutiable purchases.


Vehicle Production Rises, Sales Fall

Brazilian auto manufacturers produced 321,800 vehicles in October, 5.5% higher than September and up 1.5% over last year.  Sales for October fell 1.3%, to 303,200 units, which is still 3% higher than October 2009. 


All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. Brazil’s unemployment rate fell 50bps MoM to a record low in August, coming in at 6.2%. Average real incomes also increased +1.3% MoM and +6.2% YoY and the latest data (April-July) show Brazilian consumer borrowing rates are at the lowest level since 1995 (6.74% per month).


We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term. As of the end of last week, the six largest Brazilian retailers had P/E ratios that were over 3x those of the underlying Bovespa Index, suggesting there is some mean reversion to be had to the downside.


Moshe Silver

Managing Director


Brazilian Consumer Update - 1

Bear/Bull Battle: SP500 Levels, Refreshed...



As of 2PM EST the SP500 cash level of 1221 is: 

  1. -21.98% below its 2007 all-time-high
  2. +80.62% above its 2009 cycle-low 

Now what? With the US Dollar Index up on the day and correlation risk running this high, you’d think the stock market would be down more. Think again… and again… and again… because that’s what you should be doing if a topping process is underway. These are the times that you think the market will never go down again.


That’s obviously as silly as thinking that the US stock market would never go up again in March of 2009. I don’t want to be silly. I just want to be right from now until whenever I make my next move. Currently my position is to stay short this market. That’s despite registering another higher-high of resistance up at 1234. That’s despite getting hundreds of emails reminding me not to “fight the Fed.” That’s despite people saying its different this time.


The global macro calendar this week is going to be as hawkish as we’ve seen it in months: 

  1. Wednesday = US Import Prices for October (inflation)
  2. Thursday = G20 meetings begin (US Dollar bullish)
  3. Thursday = Chinese inflation data for October (inflation) 

I know, I know… “they” say what they said in late 2007. The world is “awash with liquidity” and inflation in the US is not a concern - chase yield.


Immediate term TRADE support is -1.8% lower at 1199.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


The first week of November averaged HK$562m per day in table gaming revenues and currently is on track for HK$17.0-17.5bn in total gaming revenues including slots. 



It’s only one week of data and we don’t know the hold percentage but if current revenue levels continue, November would be up 43-47%.  At that rate, we would view November as more impressive than October because:  1) November didn’t contain a Golden Week, 2) November is seasonally slower, and c) the November comparison is much tougher than October.  As a reminder, November gaming revenues were up 60% in 2009.


The market share numbers are shown in the table below.  Obviously, LVS looks very low (usually between 19% and 20%) and Wynn and MPEL are very high.  We assume hold played a big role in those market shares so we’d expect them to moderate.  What is clear is that MPEL’s jump in market share the last 4 months looks sustainable.



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R3: Loyalty, Royalties, Cotton, and Promos

R3: Loyalty, Royalties, Cotton, and Promos

November 8, 2010



  •  Over the weekend UA’s CEO Kevin Plank experienced a historic win at the track as an owner of Shared Account, the 46-1 long shot filly, who came away with the Breeder's Cup $2 million Filly & Mare Turf race. By far Planks' biggest win Since purchasing Sagamore Farms in an effort to reinvigorate Maryland horse racing, it  may only be a matter of time before he mixes business with pleasure.    Doesn’t every racehorse need compression gear or UA horseshoes?
  • The British are still coming.  This time Brit Prep retailer Jack Wills makes a stateside move with two new retail outlets in the northeast, one in Boston and one in Soho.  The retailer of “university prep” sells a wide range of men’s and women’s apparel as well as accessories.  There is also a fully functional e-commerce site highlighting the company’s collections.
  •  Holiday marketing campaigns are creeping up earlier than ever, with most retailers launching their efforts a full two months in advance.  This year Best Buy launched its official holiday campaign on November 1st, a full 10 days earlier than last year.




 The wellness market is growing beyond its core companies. While rocker-bottom specialists MBT, Ryn and FitFlop remain category leaders, many comfort players are seeking to carve out niches in the rapidly expanding wellness arena. Strong brand recognition, accessible price points and enhanced technical features are giving brands such as Easy Spirit, Spring Step and Waldlaufer an opportunity to join the movement. And retailers said there is space for them, provided they have something new to offer. <>

Hedgeye Retail’s Take:   As “wellness” shoes permeate the comfort market, it’s possible this could provide an opportunity for the category to expand far beyond traditional athletic channels and deeper into family, specialty, and brown shoe retailers.


Cashing in on the family name. The Jackson brothers are hoping the fashion business is as easy as ABC.  Jackie, Tito, Jermaine, Marlon and Randy Jackson — along with the estate of the late Michael Jackson — are launching their first licensed apparel line under the J5 Collection name, commemorating their decades as The Jackson 5. The men’s and women’s T-shirts and jackets will be in stores in February and incorporate imagery from their years as the so-called First Family of Music <>

Hedgeye Retail’s Take:  With MJ’s secret long lost songs being strategically released what better time to also jump on the Jackson bandwagon. 


Know your audience. From intimate apparel to gowns and fine jewelry, the Middle East is a growth engine for luxury brands, but it takes more than razzle-dazzle to sell in the region.  Understanding Islamic religious practices and cultural traditions, which can vary from country to country, is a necessity and partnerships among Western brands and local companies are the most effective way to surmount obstacles and avoid any misunderstanding. <>

Hedgeye Retail’s Take:  While it may sound simple, we would not be surprised to see many Western brands fail at their Mid-East expansion efforts as a result of under spending on market research. 


 Cotton talk commonplace across the globe. Chinese textile companies were quoting price increases of as much as 30% at the massive Canton Trade Fair, telling customers that a global cotton shortage and persistent labor shortages were driving up costs, according to several reports.  Spot prices for standard grade Chinese cotton have risen to 30,000 Yuan from as low as 15,000 yuan earlier this year as a global shortfall of the fiber and speculators have driven up prices. Meanwhile, Chinese factories continue to have trouble recruiting and retaining workers, who increasingly have options closer to home or are demanding higher wages and benefits.  <>

Hedgeye Retail’s Take:  Interesting comment here suggests manufacturers and mills have been building inventories of raw textiles in an effort to circumvent near-term price spikes.  


Middle-income not the same in every market.  China’s middle-income and affluent consumers will probably almost triple in 10 years with the bulk of the increase coming from smaller cities, Boston Consulting Group Inc. said today.  There will be 270 million more consumers whose annual household incomes exceed 60,000 yuan ($9,000) in the world’s most populous country by 2020, said Carol Liao, a partner at the Boston-based consulting company. That would lift the total number of middle-class and affluent Chinese to 415 million from 148 million now, she said.  “China is no doubt the highlight of the global consumer sector, and second-tier and third-tier cities are the main driving force within the Chinese market,” Liao said at a briefing in Beijing today. Three-quarters of the growth will come from smaller cities as incomes rise, she said. <>

Hedgeye Retail’s Take:  With China’s definition of middle income hovering around $9,000 in HHI we remind investors that not all markets are created equal.  Perhaps middle income by local standards, but certainly not the “affluent” audience that western brands need to drive exponential growth. 


Loyalty not what it used to be.  For as long as anyone can remember, companies have relied on the tried-and-true loyalty program to keep customers. You know how it works: The airline, the hotel, the drug chain, etc., gives customers a nifty-looking VIP card and, with it, the chance to earn bonus points that accumulate until the "valued customer" can redeem them for some goody or other. But in an age rapidly redefined by digital technology, I'm prompted to ask: What, exactly, are all these companies really accomplishing with old-fashioned programs like these?  Not as much as they think. The bad news is that the days of bribing and tricking customers with points are over. The good news? A huge opportunity has opened as a result. <>

Hedgeye Retail’s Take:  Keep an eye on truly targeted loyalty offers, which are now sophisticated enough to understand price and item elasticity on a case by case basis.  Loyalty rewards alone are no longer a differentiated factor.

ASOS shoppers won't be hit by soaring prices as online retailers sees its profits jump.
Price rises announced by some fashion firms will not hit ASOS shoppers, the British online fashion retailer said today as it posted a 59 per cent rise in first-half profit.  ASOS, which targets internet-savvy 18- to 34-year-old women looking to emulate the designer looks of celebrities like Kate Moss, Sienna Miller and Alexa Chung but at a fraction of the price, today pledged not to raise the price of its own-brand products which represent half of its total offer.  That is in contrast to rivals such as Next, Britain's No. 2 fashion retailer, which last week warned its shoppers to expect price tags to rise by close to 8 per cent as the group said there was no sign of an end to the bubble in cotton prices. <> 

Hedgeye Retail’s Take:  Complete opposite approach to fashion based retailer, Next, which was vocal last week in expecting to raise prices 8-10% to combat cost inflation.

Traffic generated from a Facebook-based promotion overwhelmed the site. crashed late last week after traffic generated by a Facebook-based promotion overwhelmed the site. The Lowe’s Black Friday Sneak Peak Party started at 12:01 a.m. and offered 5,000 coupon codes for 90% off on a first-come, first-serve basis, and another 20,000 coupon codes for 20% off, along with other offers. Black Friday is the day after Thanksgiving. The resulting traffic overwhelmed the site, the company says, although the retailer did not say how long the site was down, and information from web monitoring firms was not immediately available. <>

Hedgeye Retail’s Take:  Facebook promos are heating up and actually having a real impact.  In this case the impact was overwhelming, but the power of a targeted promo is clearly alive and well. 

Tightly Squeezed

This note was originally published November 08, 2010 at 07:57 am ET.

“The tighter you squeeze, the less you have.”

-Thomas Merton


Thomas Merton was a Trappist monk who wrote “The Seven Storey Mountain”, one of National Review’s 100 best non-fiction books of the last century. After seeing most of my short positions get Tightly Squeezed last week, I figured I’d spend part of my weekend studying my personal performance purgatory.


Rather than opine on what is and what is not an unrealized gain or loss, long time readers of this strategy note know that the score doesn’t lie – people in this business do. Here’s my entire book of positions (with cost basis and performance) in the Hedgeye Virtual Portfolio as of Friday’s close:


Tightly Squeezed - active portfolio



Now the point here isn’t that this portfolio doesn’t look as bad as it will if this market keeps going higher. There are no rules against buying or covering anything at any given time. The point is that it’s possible to express a very bearish point of view without getting smoked. But you need to get the timing right.


On the way down, perma-bulls can get crushed. Since its October 2007 high, the SP500 is down -22%.  On the way up, perma-bears can get squeezed. Since its March 2009 low, the SP500 is up +81%. My role as a Risk Manager isn’t to be perma-anything.


My role is to attempt to be duration-agnostic and manage the multi-factor and interconnected risk that I see across global markets and time horizons. If I miss being long the top or short the bottom, sometimes that’s just the way it goes. Both tops and bottoms are processes, not points.


Here’s a brief rundown of the Hedgeye Portfolio’s current SHORT positions (in order of actions taken):

  1. Capital One (COF) – I shorted it again on Friday as Josh Steiner’s research continues to lead us to believe that putback liabilities aren’t priced in.
  2. Bank of America (BAC ) – I shorted it again on Friday after Josh Steiner highlighted some admissions in BAC’s 10Q that putback liabilities are real.
  3. Russell 2000 (IWM) – I shorted it on Thursday with the Russell +17.5% YTD and immediate term overbought in order to short small cap beta.
  4. The Euro (FXE) – I shorted it on Wednesday in conjunction with covering the short position I’d held in the US Dollar since June 7th.
  5. SP500 (SPY) – I shorted it again on Thursday as I continue to believe that Quantitative Guessing (QG) = JOBLESSS STAGFLATION.
  6. Italy (EWI) – I shorted it again on Thursday as Berlusconi’s leadership issues persist as do Italy’s sovereign debt problems heading into 2011.
  7. US Homebuilders (XHB) – I shorted it again on Thursday ahead of Friday’s pending home sales number (which was bad) and 30-year rates going up.
  8. Hudson City (HCBK) – I re-shorted this Josh Steiner idea (tri-state residential mortgage exposure) after covering it well, lower.
  9. Chipotle (CMG) – I shorted it again on Wednesday as Howard Penney’s research continues to indicate that the topping process is underway.
  10. Zimmer (ZMH) – I re-shorted this Tom Tobin idea (peak margins and pricing pressure) after covering it well, lower.
  11. Emerging Markets (FFD) – I shorted it again last Monday as global macro risks of mean reversion to the downside continue to mount.
  12. American Express (AXP) – I shorted it on 10/28 as Steiner thinks an imminent growth slowdown at Amex will lead to further multiple contraction.
  13. Illumina (ILMN) – I shorted it on 10/27 as Tom Tobin things growth expectations and multiple expansion are peaking ahead of a 2011 slowdown.
  14. Japanese Yen (FXY) – I shorted it on  10/8 as “Japan’s Jugular” remains one of our 3 core Hedgeye Macro Themes for Q410.
  15. Short Term Treasuries (SHY) – I shorted it on 6/23 with the expectation that at some point in my life, the yield on my savings account won’t be zero.

So, what does this tell you? Well, what it tells me is that what I’ve learned shorting stocks for the last decade continues to hold true. Unless you get the timing right, short-and-hold is not an effective risk management strategy.


Neither is buy-and-hope. Unless, of course, you get the timing right. While it was nice to see Howard Penney’s long Starbucks (SBUX) position continue higher out of Thursday’s earnings report, the only reason why we have a +168% long term gain here is that we had it in us to buy it when consensus didn’t want to buy anything Consumer Discretionary in early 2009.


When I look back on November 8th 2010, after being Tightly Squeezed for the entire week prior, will I have had it in me to hold the line on these short positions? I’m human, so I doubt it – but that’s probably the best reason why I should.


My immediate term support and resistance levels in the SP500 are now 1195 and 1227, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tightly Squeezed - 3


European banks and sovereign CDS widened significantly last week, while US banks and municipal swaps saw spreads decline as investors sought yield in the wake of QE 2.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 3 of 10 improved / 4 of 10 worsened / 3 of 10 unchanged
  • Intermediate-term (MoM): Positive / 3 of 10 improved / 4 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Negative / 7 of 10 worsened / 1 of 10 improved / 1 of 10 unchanged / 1 of 10 n/a



1. US Financials CDS Monitor – Swaps were positive last week, tightening for all 29 reference entities. 

Tightened the most vs last week: AXP, ACE, CB

Tightened the least vs last week: PGR, XL, MMC

Tightened the most vs last month: ACE, BC, TRV

Widened the most vs last month: JPM, COF, PGR




2. European Financials CDS Monitor – In Europe, banks swaps diverged sharply from their U.S. counterparts.  Swaps widened for 33 of the 39 reference entities and tightened for only 6.    




3. Sovereign CDS – Sovereign CDS increased 50 bps on average last week as Greece, Ireland and Portugal continued to surge higher.   




4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 7.82 on Friday.  




5. Leveraged Loan Index Monitor – The leveraged loan index rose 11 points last week, closing at another new YTD high. 




6. TED Spread Monitor – Last week the TED spread fell slightly, closing at 17.1 bps.




7. Journal of Commerce Commodity Price Index – Last week, the index rose 5.2 points, closing at 21.7.




8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 90 bps week over week.




9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell to their lowest level for at least four months, closing at 157.     




10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index fell 18 points, closing at 250 versus 268 the prior week.  




Joshua Steiner, CFA


Allison Kaptur

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