Navigating the Brazilian Terrain

Conclusion: While we remain bullish on the Brazilian Consumer sector for the long-term TAIL, the confluence of slowing growth and accelerating inflation remain a headwind over the intermediate-term TREND. As a result of inflationary pressures, we see additional tightening on the horizon in 1H11.


Over the past day or so, a couple of nasty economic data points have come out of Brazil: 

  • While certainly a stale number, 3Q10 GDP growth came in a full 250bps slower than 2Q10 at +6.7% YoY (after a +40bps revision to 2Q10). We expect growth to continue to slow over the next 3-6 months, a call aided by incredibly difficult comparisons starting in 4Q10 (+5%  in 4Q09, +9.3% in 1Q10).
  • CPI accelerated to a 21-month high in November, coming in at +5.63% YoY – well above the government’s 4.5% target. On a MoM basis, November’s +0.83% rise was the largest increase since April 2005! The largest contributor to the increase (0.51) was from the Food Products category, which rose +2.22% MoM.

Navigating the Brazilian Terrain - 1


Our call for Brazilian growth to continue slowing coupled with having already received two months of accelerating inflation readings for 4Q10 suggests Brazil’s economy could be in a state of marginal stagflation as early as… well… now:


Navigating the Brazilian Terrain - 2


From Brazil, to China, to India and elsewhere around the globe, we see that Chairman Bernanke’s experiment with Quantitative Guessing continues to have unintended consequences, due to the impact of the equation highlighted below:


QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


The recent surge in Brazilian inflation from the August lows has had the Brazilian bond market anticipating rate hikes in the near future, with yields rallying to higher highs over the past three-plus months. In addition to the accelerating inflation readings, the locking-out of foreign investors from the bond market coupled with concerns that President-elect Dilma Rousseff will fail to curb spending and perpetuate inflation via loose fiscal policy has certainly had Brazilian bond investors demanding higher yields to hold government paper:


Navigating the Brazilian Terrain - 3


While not much has changed regarding inflation and the de facto blockade of international investors, we will give much-deserved credit to the current regime, as well as Rousseff and her team for taking meaningful steps to combat inflation and assuage investor fears of an inflationary tsunami of late.


On December 3rd, the central bank raised reserve requirements on cash and time deposits to slow consumer lending – the demand for which, coincidentally hit a record high in November, growing +20% YoY. The reserve requirement on time deposits rill rise to 20% from the current 15% and the requirement for cash deposits will rise to 12% from 8% currently. The measures are expected to remove R$61 billion ($36B) from the economy.


Rousseff’s choice to replace current central bank Governor Henrique Meirelles with Alexandre Tombini has been well-received by those calling for prudent monetary policy going forward. The 46-year old, who was just confirmed by the Senate, has served on the central bank board since 2005 and is credited with helping design the country’s inflation-targeting regime in 1999.


While Tombini sees eye-to-eye with his new boss on the need to lower Brazil’s G20-high real interest rates to spur long-term investment, the governor-in-waiting has repeatedly stressed the need for “full operating autonomy” to tackle any inflationary challenges along the way. Current trading in Brazil’s interest rate futures contracts suggest market practitioners are anticipating a +50bps rate hike when he takes over in January.


Elsewhere on the macro-prudential front, we have seen austere steps taken by Mrs. Rousseff and her team, which, on the margin, is a meaningful shift away from her campaign stance of maintaining continuity with current President Lula’s policies by continuing to spend more on social welfare programs.


For example, Finance Minister Guido Mantega has announced recently that there will be a “general cut” in expenditures during the Rousseff government, sparing only priority projects such as Bolsa Familia – Brazil’s highly-regarded transfer program. Even the beloved BNDES Bank will see its budget cut by ~50% next year. This is a major step toward combating inflation and toning down domestic demand, as the bank’s main role is to provide subsidized credit for long-term projects. BNDES’ lending rate has been kept at 6% since July 2009 – a full 475bps lower than the benchmark SELIC lending rate.


All told, we like the direction of Brazil’s fiscal and monetary policy; we do, however, caution that because Brazil has been slightly late with its response to inflationary pressures, quickening prices will likely remain a concern over the intermediate-term. As a result, we continue to anticipate rate hike(s) in 1H11, as the government looks to quash this headwind. The one caveat here would be that if growth comes in considerably slower in 1Q11, the ability of the Brazilian government to tighten in a way they perhaps should would likely be mitigated.


Let’s just hope for Brazil’s sake we don’t have to say, “I told you so.”


Darius Dale


Athletic Still Strong Post Holiday

Athletic apparel and footwear sales suggest that strong underlying sales have continued beyond Thanksgiving weekend. Most notably, positive sales came in despite facing the headwind of unfavorable comps for the first time since October in the case of apparel and September for footwear. Here are a few key callouts from the week:

  • Athletic specialty retailers continue to outperform both the family and mass/discount channels.
  • ASP increases decelerated considerably on a sequential basis following the holiday weekend for both footwear +1% vs. +8% in the prior week, and apparel which actually turned negative -1% vs. +8% on the week suggesting that in addition to potential mix shifts, promotional activity may in fact be picking up as well.
  • Importantly, athletic specialty retailers bucked the trend of eroding ASPs in apparel maintaining MSD price inflation offset by considerable declines in the discount/mass channel down -6% - positive for margins and DKS, HIBB, FL, and FINL.
  • New England continues to be one of the top performing regions each of the last 4-weeks.
  • Lastly, while the bifurcation in performance versus non-performance has narrowed materially over the past 2-weeks likely due to a pickup in boot sales, performance footwear continues to outperform by a wide margin.

Athletic Still Strong Post Holiday - FW App Ind 1Yr 12 9 10


Athletic Still Strong Post Holiday - FW App Ind 2Yr 12 9 10


Athletic Still Strong Post Holiday - FW Perf v NonP 12 9 10


Athletic Still Strong Post Holiday - FW Table 12 9 10


Athletic Still Strong Post Holiday - App Table 12 9 10

Casey Flavin



RL: RL Sucker Punched (CORRECTION)

EDITOR'S NOTE: This is a corrected version of a note published today at 11:47am. In the prior post, we included clips from YouTube, and mistakenly inserted one that is highly inapropriate, and inconsistent with our principles, research, and Brand. Please accept our appologies.



I was pretty amazed when I got this promo email from Bob's Stores this morning with a massive Polo Pony on the chest of the garment on sale.  About two seconds later I realized that it was the US Polo Association, and not Ralph Lauren.


The two parties have been in and out of legal battles for well over a decade. Much of it was noise, but my strong sense is that Ralph and Roger Farrah won't let this one go unanswered.


What's also interesting is that the consumer genuinely cares. In this YouTube society, we can now hear from the contingent that matters most. Type 'Ralph Lauren vs. USPA' into your Google machine, and you'll see about 13,000 hits. Do the same on YouTube and see consumers debating back and forth about the issue. Generally speaking, you'll see RL purists across many different age, ethnic and socioeconomic backgrounds standing behind Ralph.


RL: RL Sucker Punched (CORRECTION) - uspa


RL: RL Sucker Punched (CORRECTION) - rl


RL: RL Sucker Punched (CORRECTION) - rl3

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European Charts of the Day

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)


With the BOE on hold this morning, maintaining its benchmark (repo) rate at 0.50% and asset purchasing program of 200 Billion Pounds, while inflationary pressures loom with CPI running above the bank’s target at over 3% annually, we thought it worth charting the developing divergence among select European economies by the fundamental metrics of:  CPI, Unemployment, and GDP. We’re of the opinion that due to the ongoing Sovereign Debt “crisis” in Europe and the outcome of slower growth prospects across the region due to the issuance of austerity packages, many countries will have a difficult time arresting (or turning around) the divergences in the charts below over the intermediate term.


We maintain a bullish bias on Germany, yet caution that the DAX is reaching its immediate term TRADE overbought level and has sizable mean reversion risk (see yesterday’s post titled “Robust Germany”). We have a bearish bias on Europe’s fiscally bloated countries, which we think will continue to get “punished” by the market for carrying excessive public deficit and debt levels, and are short the EUR-USD with an immediate term TRADE range of $1.29-$1.34.


European Charts of the Day - r1


European Charts of the Day - r2


European Charts of the Day - r3


Matthew Hedrick


More or Less: SP500 Levels, Refreshed...



Being short the SP500 is 1 of the 10 SHORT positions in the Hedgeye Portfolio that is not working for me right here and now. We have 10 LONG positions that are easy to feel smarter about because everything has been straight up. I suppose the challenge is to attempt to keep feeling dumb and smart at the same time and remain employed.


When a market price is at its YTD high and you’re short it, it’s easy to feel things.


Do I have more or less conviction in my intermediate-term global macro call (Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding)?




Do I have more or less conviction in my immediate-term call to be short the SPY?




Maybe I just need to give this market another 6 or 12 hours of trading and less will feel like more. Maybe it won’t. Then I’ll feel shame.


My immediate-term TRADE lines of support and resistance are now 1209 and 1248, respectively.



Keith R. McCullough
Chief Executive Officer


More or Less: SP500 Levels, Refreshed... - 1

R3: LULU, LVMH, PVH, Converse


December 9, 2010





  • According to SiteJabber, the following are this year’s most counterfeited brands:  
  1. UGGS
  2. Coach handbags + leather items
  3. Tiffany's
  4. Athletic jerseys
  5. Perfume
  6. Nike sneakers (Air Yeezy and Air Jordans)
  7. Ed Hardy and Juicy brands
  8. Watches (Rolex, Omega, Tag Heuer)
  9. North Face
  10. DVDs (especially box sets of TV series)
  • Merry Christmas IKEA employees!  In an effort to reward its employees for their hard work, the company handed out 12,400 bicycles for an early holiday gift.  Perhaps there is subliminal effort underway to lower healthcare costs by having employees bike to work?
  • With e-commerce up +200% yy at LULU – albeit on a small base, the company’s investment in e-commerce is certainly beginning to pay off with no sign of slowing. Not only has management targeted e-commerce sales in excess of 10% of total sales in the near-to-intermediate term, the company is also looking for a Head of e-commerce to take the business to the next level. It’s not easy maintaining 50%+ top-line growth, but with the company still underpenetrated at retail, expect LULU to continue to be one of the biggest beneficiaries of accelerating online shopping this holiday. 



European Retailers See Strong Holiday - Neither bitter cold nor worries about a debt and currency crisis in the Eurozone seem to have put a chill on consumer spending. Retailers and brand executives on the Continent cite a good kickoff to the crucial holiday sales period, particularly in premium categories. Executives throughout Europe cited strong demand for: Cold weather gear, given Europe has seen bitter temperatures and lots of snow; Accessories, including footwear, luxury jewelry and gloves and scarves; Men’s wear, especially knitwear, and Premium foodstuffs.“We feel the consumer is bizarrely serene,” said Jean-Claude Biver, chief executive officer of luxury watch brand Hublot. “This makes me think we are only partially in crisis. We are now in an economic environment where some people continue to suffer and others have emerged from the crisis, and I think the latter are starting to buy again. So I am not completely serene regarding Europe, but halfway serene, nonetheless.”Describing business as “excellent,” Biver is projecting growth of almost 20 percent next year. “We are extremely positive,” he said. “But 2011 could prove more difficult than expected due to the debt situation of European states.”<WWD>

Hedgeye Retail’s Take: Not to different from what we’re seeing here stateside, minus the positive boost from abnormally cold weather.  Good news for boots and outerwear brands with a European distribution focus. But like what we’re facing in the US, we’re going to need to see the Consumer show up en masse in 2011.


Vuitton Files ITC Complaint - Louis Vuitton Malletier SA and Louis Vuitton U.S. Manufacturing Inc. have filed a complaint with the International Trade Commission asking for an investigation of several companies for allegedly importing and selling counterfeit and knockoff handbags, luggage, accessories and packaging. Louis Vuitton alleged that five of the companies named were owned or managed by the same two individuals, Jianyong Zheng and Alice Bei Wang, both of Arcadia, Calif. Three of the companies named in the complaint were separate entities that purchased goods from the firms operated by Zheng and Wang, according to the complaint. The list of eight firms named in the complaint included companies in Guangzhou, China; El Monte, Calif.; Los Angeles, and Dallas. The complaint alleged the counterfeits and knockoffs are manufactured abroad and imported into the U.S. for sale.  <WWD>

Hedgeye Retail’s Take: The never-ending effort to curb counterfeiting continues.  The good news for LVMH is that US authorities are gung-ho on prosecuting.  China, not so diligent but getting there. 


PVH Enhances Dress Shirt Offerings - Phillips-Van Heusen Corp. is out to capture a larger portion of the high-end dress shirt business. The New York-based manufacturer has formed a new unit, the Insignia Dress Furnishings Division, to build its relationship with the better department and specialty store market and the first deliveries will hit stores on Jan. 25. “We were dabbling in the better business in shirts,” said Mitch Lechner, president of the PVH dress shirt division, “but we saw a tremendous opportunity to build stronger strategic partnerships with stores such as Neiman Marcus, Saks and Nordstrom.” The company has also formed an independent road force to service better specialty stores around the country with product from this division, Lechner said. Insignia was the high-end division of Superba Inc., a neckwear manufacturer that PVH purchased for $110 million in 2006. Since the acquisition, PVH has continued producing hand-tailored neckwear within that division, but had not ventured into dress shirts. Now Insignia will produce shirts under the Ike Behar, Elie Tahari, John Varvatos and Star USA, and Michael Kors names, Lechner said. <WWD>

Hedgeye Retail’s Take: While not a huge growth opportunity it’s still noteworthy as the world’s largest dress shirt maker looks to expand towards the higher end.  Quality of stitching and fabric will be key if Insignia is going to succeed. 


Converse's New Game: Retailer - Converse wants to be a team player in the vertical retail game. The Nike Inc. subsidiary on Nov. 15 opened its first unit on Newbury Street in Boston. A 7,000-square-foot flagship was unveiled in SoHo on Black Friday, featuring its widest selection of merchandise in the world, including artist collaborations, a customization bar with five iPads holding over 250 designs and new apparel collections for men and women. Converse, which celebrated its 100th anniversary in 2008, has been honing its store concept for the last five years. “We could have opened stores a lot sooner,” said Dave Powers, vice president of global retail. “The goal was to make the stores a [great] brand experience and a positive financial experience. We’re building a model that will allow us to do that from a merchandising perspective.” Powers said Converse will open five or six stores in 2011 in downtown street locations and malls. “We’re in the process of mapping out our U.S. rollout plan,” he said. “We could have a pretty sizable number of stores. We plan to invest in retail and go forward with it. ” Powers declined to give specific sales projections, but said the store will be on par with other SoHo retailers that do more than $1,000 a square foot. <WWD>

Hedgeye Retail’s Take: With a target market of kids aged 18-22 years-old, Converse’s new stores are actually quite industrial looking, but have some technological flair that will pique consumer interest in the form of a customization center. With a little help from staff, customers can customize just about anything in the store from shoes to tees – a touch of individuality that is likely to resonate with the brands youthful consumer.


Online Holiday Sales Maintain Elevated Levels - The holidays are proving to be the most wonderful time of the year for online retailers, with e-commerce sales having passed $17.5 billion, a 12% jump from the corresponding days a year ago, comScore Inc. reported today. Consumers have spent more than $800 million on four different days since late November. Leading the way was the Monday following Thanksgiving weekend, Nov. 29, also known as Cyber Monday, which was the heaviest online spending day on record at $1.03 billion. The following day, Nov. 30, was the second heaviest day of spending when consumers spent $911 million. "We anticipated that the post-Cyber Monday period would experience a slight hangover after many of the retailers' most aggressive deals and promotions expired, but we can expect to see activity begin to pick up again next week as we get into the middle part of December," says Gian Fulgoni, comScore chairman. The web measurement firm says free shipping is helping shift consumer spending online. Since Nov. 1, more than 50% of all online orders have included a free shipping incentive, with the offer peaking at 55.1% of all orders for the week ending Nov. 28. That’s a 20.8% increase from the same week a year ago, when 45.6% of online orders included free shipping. For the week ended this past Sunday, Dec. 5, 51.4% of orders shipped for free, compared with 43.8% in the comparable week in 2009. <Internetretailer>

Hedgeye Retail’s Take: While sales at retail have pulled in on a sequential basis as expected according to our weekly athletic data, it appears that online sales have managed to maintain strong demand following Cyber Monday with free shipping a key driver. If you’re looking for attractive promotions, may we suggest targeting retailers with an inadequate or lack of e-commerce presence altogether.


China: Li-Ning launches new basketball footwear collection - Li-Ning, one of China’s leading sportswear brand, has extended its reach into the basketball footwear segment by launching a new product line F2. Since the brand first came out in America they have gained the favor of vast basketball fans. The new collection will features a variety of colors as an integral design element as well as the foam frame technology. The upper will be in all one piece and features an injection molded EVA material that assures perfect fit for each individual wearer.<FashionNetAsia>

Hedgeye Retail’s Take: At $65, Li-Ning is introducing its new F2 shoe at the low end of the range for a basketball shoe, but with a considerable amount of style and 5 colorways (see below at left). Perhaps the most notable feature is that due to its EVA construction, the shoe is considerably lighter weight than most of its competition. Unfortunately, my personal experience is that comfort is not among the high points unlike most EVA constructed shoes (i.e. Crocs, Native, etc.) as evidenced by my trial with a pair of the brand's similarly constructed running shoes (at right). 


R3: LULU, LVMH, PVH, Converse - R3 12 9 10



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