Geopolitical Risk Update: Korea & Brazil

Conclusion: Geopolitical tensions continue to heighten in Korea and violence continues to flare up in Brazil.


On a sleepy Friday that equates to a half-day for many U.S. market practitioners, it’s important to remember the old adage, “markets wait for no one”. While it may be en vogue to chat about “Black Friday” and how many handbags Coach is going to sell this year, the fact of the matter is that there’s a great deal of geopolitical risk globally that you should keep on your radar screen as you head into the weekend.


First, an update on the situation brewing on the Korean peninsula:


North Korea’s state news agency KCNA warned that any “escalated confrontation” will lead to war and that the government is “greatly enraged at the provocation” from South Korea. Further, it strongly reiterated that any further encroachment of its sovereign territories will lead to retaliation. This marks the fourth time this week Kim Jong Il’s regime threatened further strikes against its Southern neighbor. In a show of bravado following the aggressive rhetoric, the North fired a few explosives on Yeonpyeong as part of its regular artillery drills from 12:00-3:00pm local time.


In the latest move to counter mounting political pressure for a stronger response, South Korean President Lee Myung Bak appointed former Joint Chiefs of Staff Chairman Kim Kwan Jin to defense minister. Jin, 61, replaces Kim Tae Young, who quit amid criticism that the response to Tuesday’s attack was inadequate. Young originally offered his resignation back in May, two months after the S. Korean warship Cheonan was sunk by the North and South Korea failed to respond in kind.


This latest appointment may potentially be a step in the more aggressive direction, which, on the margin, increases the probability of a full-out military conflict in the region.


From a quantitative perspective, South Korea’s KOSPI index remains bearish from an immediate-term TRADE perspective and ever-so-slightly bullish from an intermediate-term TREND perspective:


Geopolitical Risk Update: Korea & Brazil - 1


We remain bearish on Korean equities for two main reasons: 1) growth looks to slow sequentially for the next 2-3 quarters; and 2) inflation will continue to be a headwind and will require more aggressive tightening of monetary policy.


Moving over to Brazil, we see the death toll from the violence in Rio has increased to over 30 from as few as 13 on Wednesday. In response, President Lula has dispatched 800 army troops into the region to join forces with the 17,000-plus police that are swarming the city’s streets. Newspapers from Germany to Spain to Australia (i.e. nearly everywhere, but the U.S.) are calling the move both “unprecedented” and “desperate” and are also calling into question Brazil’s ability to guarantee security for visitors of the upcoming World Cup.


Other reports cited in the Brazilian press point to the estimated tens of millions of reais of lost revenue in Rio’s businesses.  The umbrella organization representing the trade, retail and tourism industries said one day’s closure of the major outlets in the areas of Rio affected by the violence represents R$ 39 million in lost revenue. The violence is having a broad effect as other companies not in the affected areas let workers return home early to avoid the evening hours when the streets are more dangerous.  This includes such major enterprises as Petrobras.  Companies are reporting worker absences of up to 30% and schools and universities have cancelled classes as terrorized residents remain indoors to avoid the danger of traveling across Rio.


Brazilian intelligence sources report Rio’s two major criminal gangs are planning a “mega-action” for tomorrow.  Presumably the military was called up in anticipation.  This could be incredibly ugly, as Rio’s heavily-armed police are reputed to have zero regard for human life once they enter the favela neighborhoods.


From a quantitative perspective, Brazil's Bovespa is bearish from an immediate-term TRADE perspective and bullish from an intermediate –term TREND perspective, though it is trading below its TREND line of support of 68,826 intraday. A close below that line is an explicitly bearish quantitative signal – particularly if it is confirmed by further weakness:


Geopolitical Risk Update: Korea & Brazil - 2


We remain cautious on Brazilian equities for the intermediate-term TREND. While we stand behind the robustness of Brazil’s bullish consumer story, we are cognizant of the intermediate-term inflation risks and the potential for further tightening of monetary policy in 1H11.


Darius Dale



Moshe Silver

Managing Director / Chief Compliance Officer

Not Interested in Sweater Sets? - Europe’s Mania Continues

Position: Long Germany (EWG)


Hungary Turned the Wrong Way?


-In what appears like a last ditch effort to cut its public deficit and debt levels, Hungary’s PM Viktor Orban ordered the shift of $14 Billion (3 Trillion Forint) in assets from private pension funds to the state budget. The government’s move appears more akin to a Communist-era decision, and rightfully has investors spooked. The country’s main equity index (Budapest Stock Exchange Index) fell -3.2% today (or -10.7% in the last month) as the yield on the government’s 10 YR bond ran up to 8.1% versus 7.3% one week ago (see chart below).


Not Interested in Sweater Sets?  - Europe’s Mania Continues - mh1


Hungary, which was the first EU member to obtain an IMF-led bailout in 2008, did cut its budget deficit from 9.3% of GDP in 2006 to 4.4% in 2009, however strong disagreements between the government and the IMF have ensued over the years.  The latest disagreement includes Orban’s decision to tax certain industries, including the financial, energy, retail and telecommunication industries until at least 2014 to cut the deficit to 3% of GDP. In particular, a 16% bank flat tax was met with extreme push-back, especially considering that western European banks make up the lion’s share of the country’s banks. According to Economy Minister Gyorgy Matolcsy, the government plans to announce spending cuts of as much as 800 billion forint at the end of February, without providing details.



Spain’s Pain, cont.


-As the sovereign debt contagion remains front and center in Europe, it’s worth note that yields in Spanish and Irish bonds rose 10 and 18bps respectively, day-over-day, outpacing yields from their peer countries that were flat to up +2bps day-over-day. Suffice it to say, we see a long road ahead of Sovereign Debt in Europe. 


Not Interested in Sweater Sets?  - Europe’s Mania Continues - mh2



Irish PM Cowen’s Majority Ever Slimmer


-Initial results show that Sinn Fein candidate Pearse Doherty won a 40% majority in a by-election on Thursday to take a seat away from PM Cowen’s ruling party, Fianna Fail, to narrow his party’s parliamentary majority to two seats.


Doherty’s opposition to Cowen’s proposed austerity plan for 2011, to be decided by vote on December 7th,  will put further pressure on the passage of a €6 Billion austerity package, which is conditional for an estimate €85 Billion EU/IMF bailout agreement. As we’ve stated before, this is an explicit sign that Cowen is being Voted Off the Island, and will test the waters as the country attempts to secure a bailout.  We expect volatility in Irish markets into and out of the December 7th date.



Euro Broken


-The EUR-USD broke its TREND line of support today of $1.33. As our TREND lines back test with the highest probably in our models, this is certainly a meaningful move to keep front and center on your screens!  (We booked a gain in the Hedgeye Portfolio on our Euro short position via the etf FXE on 11/23).


Not Interested in Sweater Sets?  - Europe’s Mania Continues - mh3



Portugal (Finally) Passes Austerity


-Today, Portugal’s parliament approved the 2011 budget, scheduled to shave €5 Billion off the budget next year through such measures as:

  • 5% wage cut for public workers earning more than $2,005/month
  • Hiring freeze of government jobs
  • Raising VAT 2% to 23%

The long awaited passage of the budget from PM Jose Socrates’ Socialist government still leaves a main question unanswered—to what extent can the government reach its target to reduce the deficit from 9.3% in 2009 to 4.6% in 2011?  Data indicates that the budget gap increased +1.8% in the first ten months of this year.  The next weeks will tell just how quickly dominoes can fall…


Matthew Hedrick


Bearish: SP500 Levels, Refreshed...



Unless the SP500 can overcome today’s weakness and rally and close above my immediate term TRADE line of 1197, I think being on the short side of this market will continue to be the right place to be.


Next week’s bearish macro catalyst is the Case/Shiller US Home Prices Report which comes out on Tuesday. Prices should be very weak as it will be the first month in which April activity falls out of the data series entirely. Like the SP500, both the Homebuilders (XHB) and the Financials (XLF) are broken from an immediate term TRADE perspective, foreshadowing Josh Steiner being right on this Housing call ahead of the “news”…


In addition to the PRICE and EVENT (calendar) risks, VOLATILITY (VIX) continues to have a very high intermediate-term inverse correlation to the price of US Equities. The immediate-term TRADE line for the VIX = 19.81 and we’re seeing the SPY break down as the VIX breaks out above that line.


My most immediate-term TRADE line of support for the SP500 is 1173 and the intermediate term TREND zone of support is closer to 1130.


Yours in risk management,



Keith R. McCullough
Chief Executive Officer


Bearish: SP500 Levels, Refreshed...  - 1

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Looking at the table below, it is clear that there has been a high level of covering in the restaurant space.


I would call out the following moves as noteworthy in our table:

  • Short covering is driving CMG and CAKE higher over recent weeks
  • MCD and YUM have low short interest but the level is slowly building
  • DRI, EAT, and BOBE have seen short interest grow over the past two months of reported data
  • DIN’s short interest has declined markedly following their debt refinancing and strong 3Q performance

SHORT INTEREST UPDATE - restaurant short interest


Howard Penney

Managing Director

R3: M, LVMH, JCP, Armani


November 26, 2010






  • Macy’s confirmed a partnership with Karl Lagerfeld is in fact underway.  Surprisingly, the collaboration is not the only one in the works.   The store’s “Impulse” designer concept to be launched in September 2011, is also likely to include diffusion lines by Vivienne Westwood, Paul Smith, Calvin Klein, Costume National, and Versace.  Certainly sounds like Macy’s is taking a page out of H&M’s playbook.
  • Add luggage, overnight bags, and totes to the growing luxury offering from shoemaker Jimmy Choo.  The product extensions are expected to hit the market in February 2011, just in time to continue building the case for an IPO.
  • According to ComScore, early holiday spending is up 13% y/y for the first 21 days of November.  77% of consumers say that free-shipping is a key factor in their decision to purchase online, while 41% of online retail offers actually include free shipping.



LVMH Buys Additional Stake in Societe Samaritaine - LVMH Moët Hennessy Louis Vuitton said on Thursday it has bought an additional 40.1 percent stake in Société Samaritaine from the Fondation Cognacq-Jay, giving it almost full ownership of the company, which owns the La Samaritaine complex. Financial details of the transaction were not disclosed. LVMH now owns almost 100 percent of Société Samaritaine, though a spokeswoman declined to disclose its exact stake. The French luxury group earlier this week said chief financial officer Jean-Jacques Guiony would take over as president of La Samaritaine as the landmark Paris department store gears up for its transformation into a complex combining stores, offices, housing and a hotel. The project is slated to be completed in 2013. The Fondation Cognacq-Jaÿ was created in 1916 by Ernest Cognacq and Louise Jaÿ, the original founders of La Samaritaine, and focuses on social projects. <WWD>

Hedgeye Retail’s Take: Add this trophy property to the list of “non-core” assets within the LVMH empire.  We wonder if some day this property becomes a mecca for LVMH loving consumers.


Armani Online in China - Giorgio Armani SpA is launching an Emporio Armani online store in China, becoming the first western fashion brand to open an official e-store in the country, according to those involved in the project. The site,, is powered by Italian online retailer Yoox. Giorgio Armani said that the growing importance of the Chinese online market prompted him to launch the site, which is being unveiled today. The company “identified a significant group of fashion consumers who will certainly appreciate this new approach to shopping, one that becomes more popular every day," the designer said. In addition to Emporio collections for men and for women, the store will also carry the EA7 sports line, a selection of the Armani Jeans collections, accessories, watches, eyewear and jewelry. The site will be entirely adapted to the market in terms of language and customer care, size conversions, payment systems and currency. There will also be specifically branded bags and packaging. "Our relationship with Emporio Armani has grown since 2007 when we launched their online flagship store in the U.S., followed in 2008 by EU and Japan in 2009,” said Federico Marchetti, chairman and founder of Yoox. “This exciting new chapter in China is the result of our two teams working in tandem for almost a year to be the first to enter the world's biggest e-commerce market." <WWD>

Hedgeye Retail’s Take: Interesting, lower cost way to enter the Chinese market.  Online sales should help gage geographic and product demand so long as the website remains accessible to the general population.  Recall that Chinese internet access is not without its limits.


JCP's Deluge of Deals - More than 40,000 deals will be available on on Cyber Monday. In addition, the retailer will offer free shipping on online purchases of $25 and more beginning today [Nov. 24] through Nov. 30. Cyber Monday savings is expected on men’s, women’s, teens’ and kids’ apparel, as well as home décor and video games. “As one of the largest apparel and home furnishing sites on the Internet, offers a vast assortment of merchandise including styles, sizes and colors not available in stores,” says Tom Nealon, group executive vice president for JCPenney. “We know customers are increasingly shopping online, which is why we’re confident that will be the shopping destination this Cyber Monday as customers discover our exciting promotions and great merchandise selection along with convenient features that make their online shopping experience easier than ever.” <WWD>

Hedgeye Retail’s Take: The volume of JCP’s deals are at such a level that customer presentation is now among the key elements to executing the company’s pricing strategy – after all, what good is a deal if you don’t see it.


South Korean Consumer Still Buying - On Thursday afternoon, less than 48 hours after hundreds of North Korean shells rained down on South Korea’s Yeonpyeong Island, department stores here were bustling with shoppers searching for winter clothes. Lines formed outside Louis Vuitton boutiques. Other luxury stores were not necessarily packed, but definitely crowded. According to a saleswoman in a Prada boutique located in a Shinsegae Department Store in eastern Seoul, aside from initial shock, surprise and nervousness immediately after Tuesday’s attacks, it has otherwise been business as usual: “Some people went to grocery stores to buy extra noodles,” she said. “Otherwise everything is normal.” That’s likely to reassure fashion and luxury goods companies, who have been touting the potential of the fast-growing Korean market and its style-conscious citizens in recent years. Meanwhile Seoul is emerging as one of Asia’s most vibrant capitals with a lively fashion and arts scene. Last year, Prada’s much-hyped Transformer structure, created in collaboration with Rem Koolhaas, elevated Seoul’s profile even more. Korea weathered the financial crisis surprisingly unscathed with luxury sales rising nearly 17 percent in department stores in 2008 and 2009, according to a 2010 McKinsey South Korea Luxury Goods Survey. Korea’s $4 billion luxury market accounts for four percent of global sales, the report said. <WWD>

Hedgeye Retail’s Take: Sadly business as usual in the face of a military offensive is the reality for Korean consumers. Keep in mind that similar to other regional currency arbs, Korea continues to be a key shopping market for the Chinese that consist of a material portion of retail sales in Korea.


Pakistan Leather Exports Continue to Grow - Pakistan's leather exports in October were up by 27.6% compared to the same month in 2009, according to the Federal Bureau of Statistics. During the month of October, the country exported finished leather, leathergoods and leather footwear worth $33.2 million, $46.3 million and $7.8 million respectively. Pakistan's leather sector exports for the first four months of current financial year (July-October 2010) rose by 20.1% to $353.4 million compared to the same period last year. <FashionNetAsia>

Hedgeye Retail’s Take: Pakistan’s leather export growth continues to coincide with China’s heightened regulations regarding highly polluting tanneries – expect this trend to continue in the intermediate-term.


TODAY’S S&P 500 SET-UP - November 26, 2010

As we look at today’s set up for the S&P 500, the range is 36 points or -2.12% downside to 1173 and 0.89% upside to 1209.  The Asia Pacific heads for biggest loss in two weeks, as North Korea’s state news agency warns its confrontation with South Korea could lead to war.  In addition, there are increased concern China will tighten monetary policy. European markets are down more than 1% amid continuing concern about region’s dent crisis. U.S. stock index futures are sharply lower.

  • Bank of America (BAC): Apax Partners agreed to buy Advantage Sales & Marketing from private equity firm J.W. Childs and Bank of America. A person familiar with the transaction said earlier it was valued at $1.8b
  • Del Monte (DLM): KKR-led buyout group agreed to buy Del Monte for $4b or $19-shr in cash
  • Genzyme (GENZ) has drawn up a list of possible defensive measures against Sanofi-Aventis takeover, has made no decision on whether to use them, CEO Henri Termeer told French daily Le Figaro
  • Simon Property (SPG) approaches Capital Shopping Centres saying it might seek to buy CSC LN for more than NAV, which was 368p-shr on June 30; may spark auction, Nomura says
  • Suntech Power (STP) aims to increase shipments of solar panels next year by ~30% to meet demand from markets including Europe, CEO Shi Zhengrong said


  • One day: Dow +1.37%, S&P +1.49%, Nasdaq +1.93%, Russell +2.31%
  • Year-to-date: Dow +12.07%, S&P +7.47%, Nasdaq +12.07%, Russell +17.77%


  • ADVANCE/DECLINE LINE: 1986 (+3683)  
  • VOLUME: NYSE - 823.48 (-19.60%)
  • VIX: 19.56 -5.19% - YTD PERFORMANCE: (-9.78%)
  • SPX PUT/CALL RATIO: 2.00 from 1.99 +0.44%  


  • TED SPREAD: 14.53 0.352 (+2.479%)
  • 3-MONTH T-BILL YIELD: 0.16% +0.01%
  • YIELD CURVE: 2.40 from 2.32


  • CRB: 302.34 +1.56%
  • Oil: 83.86 +3.21% - NEUTRAL
  • COPPER: 376.65 +1.50% - BEARISH
  • GOLD:  1,375.43 +0.12% - BEARISH


  • EURO: 1.3375 +0.03% - NEUTRAL
  • DOLLAR: 79.730 -0.17%  - BULLISH




  • DAX: (1.14%); CAC 40: (1.63%) FTSE: (1.70%)
  • European markets fell from the open as worries over the EuroZone debt crisis intensified and tensions in Korea continued to mount. All peripheral asset classes were pressured and the Euro is burning, despite denials on several rumors over future potential bailouts.
  • Bond spreads expanded to Euro lifetime highs and CDS's continued to rise.
  • All sectors trade lower with the Spanish market leading equity declines down over (2%).
  • Ireland was pressured by Irish Times article saying that the EU/IMF were pushing to make bondholders share the burden of the bailout package. Sources say a deal is very likely to be announced on Sunday.
  • Portuguese parliament is due to approve the austerity package today. Portugal's government denies news report on bailout and EU Commission says not aware of any talks over EU aid
  • Spain says not pressuring Portugal to seek for a financial rescue
  • Hungary, shares fell over (3.5%) on budget worries, pension reform and peripheral sentiment
  • France Oct Consumer Spending (0.7%) m/m vs consensus 0.0% 



  • Nikkei (0.4%); Hang Seng (0.8%); Shanghai Composite (0.9%)
  • Most Asian markets fell today.
  • Australia ended barely higher, as rising resource stocks fought with falling Telstra and banking shares. Sentiment was aided when the Governor of the Reserve Bank of Australia said it was unlikely that policy would be tightened over the next few months.
  • Lacking a lead from Wall Street, Japan stayed flat for most of the day before edging down on weakness in the brokerage and property sectors.
  • Chinese banks dragged Hong Kong to a loss. But Li & Fung outperformed the market and remained flat on indications that consumer spending is rising in the US.
  • China was weak as monetary tightening is starting to push up borrowing rates. Investors stayed away from banks, choosing small caps like fertilizer producer Ju Hua Corp, which jumped 7%.
  • The steel sector fell when the Dalian Commodity Exchange said it would raise margins and trading limits to deter speculators.
  • South Korea fell on worries about European debt and tensions on the Korean peninsula. 

Howard Penney
Manging Director

THE DAILY OUTLOOK - levels and trends













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