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Brazilian Equities: Broken On TRADE, Bullish on TREND

Conclusion: Signs of inflationary pressures continue to mount as the Bovespa Index has broken its former TRADE line of support (now resistance).


Below we’ve compiled some recent nuggets from our resident Brazilian insider, Moshe Silver:


Inflation Rises in November

Fundacao Getulio Vargas reports the general price index measure of inflation rose 1.16% in November, on top of a 1.15% rise in October, bringing the year to date increase to 9.77% (trailing 12 months cumulative increase is 9.69%).


The three components of the general price index tracked as follows: the broad producer price index rose 1.51% in October and 1.49% in November; industrial products rose 0.21% in October and 0.46% in November; and agricultural products rose 5.54% in October and 4.52% in November.


Congress to Debate Increase in Minimum Salary

Yesterday Congress opened the discussion on an increase in the “minimum salary” from a current R$ 540 to R$ 550.  Opposition politicians and labor unionists are pressing for an increase to R$ 600, a number the planning minister characterized as “foolishness,” saying the government does not yet have numbers for recalibrating its social programs. 


Any increase would be submitted by Congress and would only take effect upon being approved by the executive branch.  A senior budget official confirmed that an increase to R$ 550 would likely receive presidential approval. This morning, labor representatives met with planning ministry officials seeking support for an upward revision to the R$ 560-580 range. 


One of the key factors behind our bullish outlook for Brazilian interest rates is the potential inability of the next regime to contain government spending and the inflationary pressures that accompany it. As recently as 11/3, President-elect Dilma Rousseff said she is seriously considering raising the monthly minimum wage to more than 700 reais ($412) by 2014 for a CAGR of 8.2%, which is greater than the 5.5% increase in 2011 under current President Lula’s budget. Further potential strains to the government’s budget include her commitment to reducing payroll taxes, levies on investment and taxes on prescription drugs, sanitation and electricity.


Market Sees Inflation, Rates Higher in 2011

According to this week’s central bank Focus report, the market expects increases in inflation and in the level of interest rates for 2011.  Inflation, as measured by the broad-based consumer price index, is expected to rise 5.48% in 2011, versus a prior forecast of 5.31%.  This is the ninth consecutive week of increasing estimates and takes the level of inflation forecast for next year from 4.99% to 5.05%.


The SELIC interest rate, which at 10.75% is already among the highest rates in the world in what is deemed a relatively stable economy, is now projected to rise to 12% in 2011.  For the last eight weeks, the projection had held steady at 11.75% for 2011.


The exchange rate is expected to hold at R$ 1.70 to the dollar for 2010 and to be R$ 1.75 next year, slightly changed from last week’s projection of R$ 1.77 to the dollar.


GDP expansion remains forecast at 7.6% for this year, and GDP growth is projected to be 4.5% in 2011, a projection that remains unchanged for the last 49 weeks.


Mercosur Signs Accord to Cut Tariffs

Brazil closes its stint in the rotating Mercosur presidency by obtaining a preferential tariff agreement with seven developing nations: India, Indonesia, South Korea, Egypt, Morocco, and Cuba.  Algeria and Iran also participated in the talks and may yet ratify the treaty as well.  The negotiations were completed last Thursday at the WTO offices in Geneva and the document is to be signed next month at the Mercosur summit to be held at the Iguazu Falls on the Brazil / Argentina border.  The treaty provides for a 20% reduction in tariffs on 70% of trade items between Mercosur and the other signatories.  The Mercosur trade bloc comprises Brazil, Argentina, Uruguay and Paraguay.


India imported US$ 2.775 billion of merchandise from Brazil in the first 9 months of this year.  Exports to South Korea will reach US$ 3 billion this year and are set to increase, and Korean trade continues to climb as the nation sells automobiles in the Brazilian market.


The accord is seen as having wider implications because countries such as Inda and Egypt also have important alliances with other nations in their regions, opening the possibility of downstream expansion of trade relations.  We note that Brazil has pushed back hard against trade policy of their erstwhile BFF, China, accusing the Chinese of unfair trade practices.  This may be part of a broader move to protect Brazilian export growth by diversifying their overseas target markets away from the “one-stop-selling” model.


Moshe Silver

Managing Director/Chief Compliance Officer


Brazilian Equities: Broken On TRADE, Bullish on TREND - 1

TGT: 1st Mention of Synthetics; It's Not Just Cotton

Very realistic and sobering comment from Target on cost inputs. It's not just cotton when most other commodities have gone ballistic.  If only the rest of the industry was as good as Target... Unfortunately, the unknown here is not what input costs are doing to COGS -- but rather how competitors and supply chain partners react when those that are not prepared; a) have too much inventory, b) are clearing it irrationally, and c) push back on supply chain partners to make margins whole.


TGT Management

"Cotton is up about 80%, synthetic fibers up about 50. So some pretty hefty cost increases. I would say as that translates into the garment, there's a lot of things that we can do to help mitigate that, whether that's where it's produced or efficiencies within manufacturing and how we're cutting the fabric, using different fabrications, so we're going through the motions of making sure right now that we're designing the best apparel but at the same time with our eye on those cost increases and trying to mitigate that. And then I do think some of that will get passed on in higher retails where they're warranted. We don't want to get to the place where we change the garments so much just to hit a price that they're not appealing and so we'll design them appropriate for what the guest wants and make sure that we charge accordingly."

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Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation

Conclusion:  We’ve been pretty vocal about our view of Housing Headwinds and the data is now suggesting that the headwinds may actually be worse than our street-low expectations.  While Billy Ackman’s best idea might be to buy U.S. homes, ours certainly isn’t.  Substantial downside remains in the housing sector.


We’ve had both massive pushback and substantial amount of compliments on Hedgeye’s Housing Headwinds call, which was orchestrated by our Financials Sector Head Josh Steiner and his team.  Steiner gave his presentation on June 25th.  In that time period, the SP500 is up 11.2%.  Conversely, we have in the table below highlighted the stocks that Steiner was bearish on:


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 1 


Alpha anyone?


Setting aside my doing a victory lap on Josh’s behalf, the bearish case on housing continues to play out and be validated.  Even if Billy Ackman’s best idea is to buy U.S. Housing, ours still isn’t (email if you are an institutional client that wants to see Steiner’s 101 page presentation on Housing that lays out the bear case). 


Some recent data highlights from Steiner and his team include:


Housing Takes A Dive, but the Worst is Yet to Come ...

Today's two negative housing data points on mortgage applications and housing starts add to yesterday's lackluster housing market index report. Next week we'll get new home sales, which we expect to be anemic as well. The week after that we'll get Case-Shiller, which should show the largest sequential decline we've seen this year. We expect these headwinds will keep a lid on near-term upside in housing-related names.


Bigger picture, we think the trends we're seeing in today's data are consistent with both our cumulative displacement theory under which we expect housing activity to remain heavily subdued for the next decade and our outlook for material further downside in home prices throughout the rest of this year and 2011.


Mortgage Demand Falls Sharply As Rates Rise

MBA Purchase Applications fell 5% versus last week. The MBA's data showed that mortgage rates backed up by 18 bps WoW (4.46% versus 4.28% the previous week).  The effect was more pronounced in the Refinance Index, which plummeted 16.5% WoW in response to the rate move. 


The real takeaway from this series is just how high the elasticity of demand is to even modestly higher interest rates. A backup in rates to 4.46% from 4.28% took refis down 16.5% and purchase activity down 5%. The point is that if we've already seen the lows in rates put in from QE2, then there's no reason to expect to see any improvement going forward.


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 2


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 3


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 4


Housing Starts Plunge to New Lows

Housing Starts fell -11.7% to 519k in October, the lowest level since April of 2009. The September Starts print saw a large downward revision, taking the level down to 588 from 610. Permits inched up slightly in October to 550k from the revised level of 547k.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 5


Starts and Permits are correlated with New Home Sales (better than .90 r-squared over the last ten years), suggesting that this month's New Home Sales number released a week from today will be worse than last month.  Perhaps counterintuitively, there is not a lag in this correlation - Starts and Permits in a given month best predict the New Home Sales number that same month.  This implies that all three series respond to varying degrees of confidence in the housing market.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 6


While it is widely believed that permits lead starts, in fact, the two series move simultaneously.  The chart below shows both series back to 1959.  Clearly, by any historical standard, the current activity level is very low. 


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 7


Housing Market Index Essentially Flat

The National Association of Homebuilders (NAHB) released their monthly Housing Market Index yesterday.  The composite index rose one point to 16, but this was after a downward revision of the prior week. Excluding that revision the series was flat sequentially. Confidence remains extremely low is the bottom line.  The chart below shows the relationship between homebuilder confidence as measured by the HMI and single-family starts.  


Housing Headwinds? Perhaps Gale Force Wind Is A Better Representation - 8


Daryl G. Jones
Managing Director


Josh Steiner, CFA

Managing Director


Allison Kaptur



TODAY’S S&P 500 SET-UP - November 17, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.11% downside to 1177 and 0.99% upside to 1190.  Equity futures are trading higher tracking a rebound in European equities. The developments on the Irish debt situation are being closely watched, with a joint European-IMF team expected to visit Ireland to prepare for a bailout.


In important economic data today: October CPI, October Housing Starts and October Building Permits.

  • Bob Evans Farms (BOBE) boosted year oper. income forecast to $108m-$112m (ex $13.9m charge) from $105m-$110m
  • Comerica (CMA) boosted dividend to 10c-shr from 5c-shr, said it will buy back up to 12.6m shrs
  • CVR Energy (CVI) said shareholders including affiliates of Goldman, Kelso will sell 15m shares in secondary offering
  • Giant Interactive (GA) reported 3Q rev. $50.6m vs est. $50.9m
  • Human Genome Sciences (HGSI), along with GlaxoSmithKline, won FDA advisory panel backing to sell Benlysta lupus drug
  • Woodward Governor (WGOV) forecast 2011 sales $1.55b-$1.65b, vs est. $1.53b


  • One day: Dow (1.59%), S&P (1.62%), Nasdaq (1.75%), Russell 2000 (2.03%)
  • Month-to-date: Dow (0.85%), S&P (0.42%)%, Nasdaq (1.50%), Russell (2.03%)
  • Quarter-to-date: Dow +2.18%, S&P +3.25%, Nasdaq +4.27%, Russell +4.31%;
  • Year-to-date: Dow +5.71%, S&P +5.67%, Nasdaq +8.84%, Russell +12.78%
  • Sector Performance: Materials (2.16%), Energy (1.87%), Tech (1.81%), Financials (1.67%), Industrials (1.61%), Consumer Disc (1.36%), Healthcare (1.45%), Utilities (1.16%), Consumer Spls (1.11%).
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Urban Outfitters +11.73%, Mattel +3.27% and Honeywell +1.79%/First Solar -6.42%, Jacobs Engn -5.04% and Kimco Realty -5.03%.


  • ADVANCE/DECLINE LINE: -2249 (-2604)  
  • VOLUME: NYSE - 1354.34 (+53.99%)
  • VIX: - 22.58 +11.78% - YTD PERFORMANCE - (+4.15%)
  • SPX PUT/CALL RATIO: 1.80 from 1.46 +23.24%  


  • TED SPREAD: 15.35 -0.304 (-1.943%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.34 from 2.39


  • CRB: 296.22 -3.20%
  • Oil: 82.34 -2.97% - BULLISH
  • COPPER: 373.10 -4.93% - BULLISH
  • GOLD: 1,337.35 -2.51% - BULLISH


  • EURO: 1.3486 -0.94% - BEARISH
  • DOLLAR: 79.210 +0.88%  - BULLISH



European markets:

  • FTSE 100: (0.13%); DAX +0.37%; CAC 40 +0.47%
  • Shares are trading slightly positive following a weak open and a poor show yesterday and as the market waits for a resolution to Ireland’s debt situation.
  • Further support comes from GlaxoSmithKline after it found support for its key lupus drug.
  • Technology, banks and Insurance sectors are among the gainers today, while Telcos, Retail sectors are weak.
  • UK Sept ILO unemployment +7.7% vs consensus +7.7% and prior +7.7%
  • UK Oct claimant count (3.7K) vs cons. (5.0K)
  • BoE minutes: 7 MPC members voted for unchanged policy In Nov
  • Posen voted for £50B more QE, Sentance voted for 25bps rate hike

Asian markets:

  • Nikkei +0.15%; Hang Seng (2.0%); Shanghai Composite (1.97%)
  • Asian markets apart from Japan followed the US and Europe down today.
  • Resource shares fell on lower commodity prices.
  • Japan fell at the start of the day, but a weaker yen encouraged dip buying and allowed the market to finish barely up. Megabanks outperformed the market.
  • South Korea darted in and out of positive territory but ended down on the day.  Shipbuilders gained after falling yesterday.
  • Resource shares led Australia lower by (1.62%).  Qantas fell 2% as another airplane turned around in midflight, this time after a problem with its electrical system.
  • Blue chips extended China’s recent decline on a report that Premier Wen Jiabao said the government is preparing steps to fight inflation.
  • Hong Kong fell again on fears of higher interest rates in China.
  • Singapore and Indonesia were closed for Hari Raya Haji and Idul Adha, respecitvely.
  • Japan September revised composite index of coincident economic indicators (1.2 points) m/m to 102.1 vs preliminary (1.3 points) m/m.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













TGT: Bullish Quote of the Day

Target's 3Q press release includes the bullish quote of the day:


"Based on our merchandising and marketing plans, combined with the expected impact of REDcard rewards and our newly completed remodel program, we expect Target’s fourth quarter comparable-store performance will be the best of any quarter in the last three years.”


So what does that mean exactly? Expect same store sales to exceed the prior three year peak comparable store sales performance of 2.8% achieved in 1Q10. While a low to mid single digit comp was once commonplace for TGT, this confidence has been elusive for at least three years. Interestingly, both WMT and TGT expect to see a sequential acceleration (with confidence from both) in sales during the most promotional, competitive, and IMPORTANT quarter of the year.


More details to come from the 10:30AM conference call, but it's safe to say that this commentary may have taken some of the suspense out of CFO Doug Scovanner's quarterly guidance ritual. 


Eric Levine


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%