prev

Brazil: A Leading Indicator for the Global Economy?

Conclusion: Looking under the hood of the Brazilian economy and stock market, we see more confirmation of accelerating inflation and slowing growth on a global basis. Given, we expect both bonds and equities to underperform as asset classes in 1H11.

 

Position: Bearish on Emerging Market equities and bonds heading into 1H11.

 

The “accelerating growth” storytelling around rising bond yields of late gets stopped dead in its tracks once you pull up a chart of Brazilian equities. Since the U.S. dollar bottomed on 11/4 (coincidentally the day we went long UUP), Brazil’s Bovespa index has lost (-7.1%) of its value alongside the dollar’s +6.1% rise.

 

Of course, one would think with a rising dollar that Bovespa would come under pressure as its two largest constituents Petrobras and Vale suffer from declining crude oil and copper prices. Unfortunately for conventional wisdom’s sake, that hasn’t been the case: crude oil is up +1.4% and copper is up +5.1% over the same duration.

 

Given this underappreciated divergence, we posit the following explanation for the Bovespa’s underperformance:

 

 Slowing growth perpetuated by global tightening as a result of accelerating inflation brought on by QE2. Better translated as: QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally].

 

The Brazilian economy is well past step one (YoY CPI accelerated to a 21-month high of +5.63% in November) and the market is pricing in steps two and three currently. Looking at Brazilian interest rate futures, we see Brazil’s bond market is anticipating a +25bps rate hike in January and an additional +175bps hike(s) by January 2012.

 

Brazil: A Leading Indicator for the Global Economy? - AA

 

From a growth perspective, we recently saw 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% YoY in 4Q09, +9.3% YoY in 1Q10) and fiscal and monetary policy tightening (the central bank already hiked reserve requirements on 12/3 and set the stage for further “macro prudential” measures in the minutes of its latest meeting).

 

In recent reports, we’ve made note of Brazil’s late reaction to combating inflation, with the takeaway being that we’re likely to see an expedited tightening cycle in 1H11. Should growth continue to slow materially (as we expect), we could see the central bank handcuffed on the margin, which is obviously not good for Brazilian consumers, who have had to increase their financing of food expenditures through credit (~34% of supermarket sales) to keep pace with accelerating food inflation.

 

Looking at the Brazilian consumer from a broader lens, we see that Brazil’s Unemployment Rate hit a record low in November, ticking down (-40bps) to 5.7%. Consumer credit expansion hit a record high in November, climbing +6.2% MoM and growth in consumer delinquencies hit a five-year high in November, climbing +3.5% MoM.

 

Brazil: A Leading Indicator for the Global Economy? - B

 

In short, the Brazilian consumer is increasingly employed, levering up at record levels and not paying it back. That is a sure-fire recipe for accelerating inflation, which is why we think a meaningful tightening cycle is in Brazil’s intermediate-term future.

 

We aren’t the only ones who think so: the Bovespa is broken from both a TRADE and TREND perspective and it continues to make lower-highs. Further, it recently backed off its TREND line hard – an explicitly bearish quantitative signal.

 

Brazil: A Leading Indicator for the Global Economy? - A

 

From a broader perspective, Brazil’s outlook rhymes with what’s going on across much of Asia (including China and India) – the region many investors consider integral to global growth. The Ber-nank may be able to inflate U.S. real GDP growth by understating CPI, but the rest of the world isn’t buying the hoax.

 

Don’t be swindled; have a great weekend.

 

Darius Dale

Analyst


R3: GPS, TGT, Neimans, Platinum

R3: REQUIRED RETAIL READING

December 17, 2010

 

 

 

 

RESEARCH ANECDOTES 

  • While Gap is noticeably absent from this holiday’s TV commercial onslaught, it hasn’t stopped the apparel retailer from being creative.  Enter Project Reindeer.  The company has tagged 8 reindeer with GPS and is tracking their movements to determine which deal will be offered each day over a 5 day period.  Thanks to “Bailey’s” long distance movements, customers will get 50% off sweaters today!
  • According to the National Retail Federation and BigResearch, nearly 30% of consumers ranked Target's holiday commercials as their favorite, compared to 17% for Wal-mart.  Additionally, more than one-quarter of consumers selected Amazon as their favorite online or email ad, while 14% chose Wal-mart.  Last year consumers chose Wal-mart’s money-saving commercials as their favorite.
  • Happy Free Shipping Day!  Shop online today, and 1,721 merchants will send your order for free wherever it needs to go, with many including priority deliveries in their offer.  2010 marks the third year of the event.

 

OUR TAKE ON OVERNIGHT NEWS

 

Shakeup Continues at Neiman Marcus - Following this week’s shuffling of responsibilities across the senior merchant team, Neiman’s has moved on to its store organization, naming Ann Paolini senior vice president and managing director of Last Call. She was NMG’s senior vice president and director of stores. No successor was named. At Last Call, Paolini succeeds Tom Lind, who has just become senior vice president, project management. NMG said Lind will lead the newly established project management office which will “analyze and define the standards of process within the organization.” The changes show that Neiman’s new management team, led by NMG chief executive officer and president Karen Katz and Jim Gold, president of the specialty retail group, is determined to accelerate the luxury chain’s recovery and take it in new directions. In October, Katz succeeded Burt Tansky and Gold stepped into his new slot after serving as ceo of the Bergdorf Goodman division.  <WWD>

Hedgeye Retail’s Take: Even with all the personnel changes, we wonder if the company’s ownership realizes that this super-luxury retailer needs help from the economy to ever get back to peak productivity?

 

Everlast Moves Exclusively to Sears and Kmart- Everlast apparel and footwear will be available exclusively at Sears and Kmart stores beginning next year. On Thursday, the $500 million fitness brand revealed it has signed an exclusive long-term licensing deal with Sears Holdings Corp. for apparel, footwear and accessories for men, women and children. Under the terms of the deal, the Everlast brand will be sold in 850 Sears stores, and a new diffusion brand, Everlast Sport, will be available in 1,325 Kmart locations. The product will also be available online. “Our parent company [Brands Holdings Inc.] bought this brand three years ago,” said Neil Morton, chief executive officer of Everlast. “And since then, we’ve been looking at the structure of the business and the opportunities both regionally and globally. In the U.S., we believe that a direct-to-retail partner is the best way to get the product into the consumers’ hands.” <WWD>

Hedgeye Retail’s Take:  Looks like a deal out of the Iconix playbook here.  Unfortunately, this will still not move the needle for stemming either retailer’s market share losses. 

 

Coty Extends its Global Reach - Coty Inc. is on a roll with its recent rapid-fire round of acquisitions, and chief executive officer Bernd Beetz is in no mood to let up. “It is important that we broaden our footprint and build strength in color cosmetics and skin care,” he said in an interview. He was speaking just a few days after winding up a series of deals for buying Dr. Scheller Cosmetics AG in Germany; the Philosophy skin care brand and nail enamel firm OPI Products Inc. in the U.S., and Tjoy, a Chinese skin care brand. Beetz laid out his vision for the company by detailing how these acquisitions were designed to diversify and build up the separate product pillars of the company, but also make Coty more of a power in the BRIC countries. Already, the buying spree, which industry sources estimate had a combined price tag of $2 billion or more, has had an impact. According to the company, after the acquisitions, the dominant fragrance share of Coty sales shrank in influence by 7 percent to 55 percent, color cosmetics swelled by 3 percent to 26 percent of Coty volume, skin care jumped from 4 percent to 10 percent and the share of toiletries was reduced by 2 percent to 9 percent. Following the first acquisition, Dr. Scheller, which bolstered Coty’s share of the German color market with sales estimated at $70 million, the company’s total sales were nudged upward toward $4 billion. That deal was seen as paving the way for Coty to realize its ambition by hitting $7 billion in sales by 2015.<WWD>

Hedgeye Retail’s Take: One of the more aggressive rollup strategies we’ve seen in the last few years. Given the company’s recent deal pace, we should see another close before year-end.

 

FTC Introduces New Regulations for Jewelers - The Federal Trade Commission on Thursday released guidelines for jewelry that will impact how certain platinum products can be marketed or advertised. The issue involves the marketing of jewelry that mixes other metal alloys with platinum. The practice, according to the FTC, has made “platinum” more affordable for consumers, but necessitated a clarification of acceptable marketing for the products. The new agency rules require that for products containing between 50 and 85 percent platinum, marketers disclose the composition of the item using the full names of the alloys and metals used, not abbreviations. In addition, marketers must make it clear to consumers that the product may not have the same qualities as a product made entirely of platinum. The FTC released two new publications to help businesses and consumers understand the changes. The FTC can issue cease-and-desist orders to companies that could result in fines if ignored. <WWD>

Hedgeye Retail’s Take: Hard to believe that “platinum” wasn’t always “platinum” when it came to jewelry.  Seems like a fair and reasonable crackdown, especially in light of commodity prices going through the roof.

 

John Hardy Launches First Store - After 20 years in business, luxury jeweler John Hardy is heralding a more mature phase with the opening of its first store on Monday in Jakarta, Indonesia. There are plans for another four units in the next three years. “We’re just getting out of the teen years,” chief executive officer Damien Dernoncourt said. “It’s probably a new chapter.…The brand grew up over 20 years, and we’re now very comfortable with who we are and what we stand for, and we know where we want to go.”  Dernoncourt said John Hardy wanted its first store to be in Indonesia because the company started in Bali, and it was appropriate to start building a retail presence “in your own garden.”<WWD>

Hedgeye Retail’s Take: Brands becoming retailers is a trend that we’ve seen in apparel/footwear over the last decade and is now starting to take hold in the jewelry industry. Following the likes of fine watch brands Omega and Panerai, Hardy becomes the latest to grow direct distribution.

 

UK Social Network Ad Spending to Double by 2012 - The rise of social networking, and the involvement of advertisers in these channels, was one of 2010’s mega-stories—not least in the UK. Though spending in social networks is still a fraction of total online ad spending, many UK brands have leapt at the chance to engage with consumers in an environment where they spend increasing amounts of time and are highly motivated to share their thoughts. eMarketer estimates social network ad spending in the UK will rise from £130 million ($203 million) this year to £275 million ($430 million) by 2012, an increase of more than 110% in two years. This will boost social network ad spending from 3% of all online ad spending to 6% over the same time period. Facebook, the most popular social network in the UK as in the US, will take the greatest share of spending as marketers continue to follow their customers to social media. “There’s a new breed of advertisers that have recognized this shift and understand that he who adds the most value to the consumer wins,” a representative from Facebook told eMarketer. “Agencies have been quick to recognize and harness the power of social but in the last six months alone, we’ve seen marketing directors start to truly understand the opportunities in this space and build a great social experience for customers.”<eMarketer>

Hedgeye Retail’s Take: No surprise given the push and popularity domestically. Moreover, many domestically based multi-nationals that have tested the waters in 2010 will be rolling out programs across other regions if for no other reason than e-commerce sites are just now being rolled out on a global scale. Case in point, RL with extensive e-commerce expertise and experience just launched its UK site back in October – you can bet foreign social media based advertising is on the 2011 budget.

 

 


TALES OF THE TAPE: WEN, SONC, RT, BWLD, MRT, YUM

Some news items and notable stock price moves in the restaurant space.

  • Starbucks gained on strong volume yesterday.  The Kraft issues are, in my view, insignificant for the longer term prospects of the company.  One blog, arounddublinblog.com, is running a story about Starbucks being rumored to be buying Peet’s Coffee. 
  • WEN down on strong volume and underperforming peers over past week.
  • SONC upgraded today.
  • RT up 5.6% on strong volume.
  • BWLD also up on strong volume – we will have a note out on this name shortly.
  • MRT continues to perform well, better than any casual dining competitors over the past week.
  • Story in the WSJ about new wage and tipping rules in restaurants tells how the Department of Labor is mandating a hike in minimum wages and other procedural changes in the hospitality industry starting January 1st.  The move is likely to be met with stiff legal opposition.
  • If you thought fried chicken was important in Asian markets, you were right.  In South Korea, Lotte Mart undercut the market for fried chicken by 60 per cent.  This led to three-hour lines, street protests, a regulatory investigation, and some input from the office of the President on the issue.  View the story here.

 

TALES OF THE TAPE: WEN, SONC, RT, BWLD, MRT, YUM - stocks 1217

 

Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE M3: SJM 7&8 APPLICATION DENIED; SJM & COTAI IR

The Macau Metro Monitor, December 17th, 2010

 

MACAU REJECTS SJM REQUEST FOR COTAI SITES 7,8; LIKELY TO GET OTHER LAND 1ST QUARTER-SOURCE Reuters

According to a person familiar with the matter, the Macau government has rejected SJM's application for sites 7 and 8, as the two sites require a public tender.  The source said SJM is likely to secure land rights for another plot of land on Cotai in the 1Q 2011.  SJM CEO Ambrose So had forecasted that land rights for planned casino projects in Cotai would likely be granted to SJM, Wynn Macau and MGM Macau by the end of 2010.


SJM IN TALKS WITH COTAI'S THEME PARK Macau Daily Times

SJM is talking with Macau Theme Park and Resort Ltd, who is owned by Angela Leong, to see if they can integrate their sites on Cotai.  Macau Theme Park and Resort has already acquired a 200,000 square metre site, and Leong said the park would not include gaming facilities.  The integrated resort project will be developed in three phases and each of them will take about two and a half to three years to complete.  In the meantime, SJM has already applied for a piece of land of some 70,000 square metres also next to the Macau Dome. 

 

Ambrose So predicts GGR will reach MOP 190 BN this year, slightly above his first forecast of MOP 180 BN.  “I am still bullish about next year.  I still believe Macau’s [gaming revenues] will grow at least 15 to 20%. I think we [SJM] will keep growing together with the market and gain a few percentage points more in market [share] like we did in the past," he said.


THE DAILY OUTLOOK

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

As we look at today’s set up for the S&P 500, the range is 14 points or -0.71% downside to 1234 and 0.41% upside to 1248.  Equity futures are trading little changed to fair value following Thursday's positive finish, which saw the S&P close at its highest level since Sep 2008 to prolong the December rally. The main catalyst for the move was largely better-than-expected economic data.

 

News coming out of the EU Council summit is that members have agreed to create a permanent crisis-management mechanism by 2013 but specifics are thin. Germany's Chancellor Merkel has ruled out expanding the EFSF/ESM, which would have allowed the EFSF to buy governments' bonds. Today's macro highlight will be Novembers's Leading Indicators.

  • Accenture (ACN) raised FY2011 adj. EPS forecast; 1Q rev. beat est.
  • Cousins Properties (CUZ) rated new neutral at JPMorgan
  • Gilead Sciences (GILD) said DOJ decided not to “intervene” in a lawsuit filed by a former employee of CV Therapeutics regarding the promotion of Ranexa
  • Lockheed Martin (LMT)’s F-22 jets suffer corrosion, U.S. report says
  • Oracle (ORCL) sees 3Q adj. EPS above est.
  • Quiksilver (ZQK) 4Q adj EPS, rev. beat est.
  • Research in Motion (RIMM) 3Q rev. beat est.
  • Steelcase Inc. (SCS) 3Q adj. EPS, rev. top est.
  • Sonic (SONC) repurchased $62.5m of debt, will recognize gain of ~$5m
  • Take-Two Interactive Software (TTWO): Quarterly adj. EPS, rev. beat ests. Will sell 10m shrs via Credit Suisse.

PERFORMANCE

  • One day: Dow +0.36%, S&P +0.62%, Nasdaq +0.77%, Russell 2000 +1.07%
  • Last Week:  Dow +0.25%, S&P +01.28%, Nasdaq +1.78%, Russell +2.70%
  • Month-to-date: Dow +4.48%, S&P +5.28%, Nasdaq +5.57%, Russell +6.82%
  • Quarter-to-date: Dow +6.59%, S&P +8.91%, Nasdaq +11.34%, Russell +14.85%
  • Year-to-date: Dow +10.27%, S&P +11.46%, Nasdaq +16.22%, Russell +24.17%
  • Sector Performance: +1.1%, Materials +1.1%, Utilities +0.9%, Consumer Spls +0.9%, Consumer Disc +0.8%, Healthcare +0.7%, Energy +0.7%, Financials +0.2%, Tech +0.2%  

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1072 (+2037)  
  • VOLUME: NYSE 989.84 (-10.91%)
  • VIX:  17.39 -3.07% YTD PERFORMANCE: -19.79%
  • SPX PUT/CALL RATIO: 1.10 from 1.12 -1.97%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.70 -0.203 (-1.132%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.01%  
  • YIELD CURVE: 2.81 from 2.85

COMMODITY/GROWTH EXPECTATION:

  • CRB: 317.34 -0.47%
  • Oil: 87.70 -1.04%
  • COPPER: 411.60 -0.40%
  • GOLD: 1,371.91 -1.04%%

CURRENCIES:

  • EURO: 1.3233 -0.32%
  • DOLLAR: 79.797 -0.10%

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets have traded in a narrow range, with major indices mainly in slightly positive territory, and peripheral markets pressured by Moody's downgrade of Ireland's sovereign credit rating to Baa1 from Aa2 and negative outlook.
  • EU leaders agreed to set up a permanent bailout mechanism from 2013, though details were limited, and there will be no enlargement of the current temporary rescue fund. Leaders also indicated they would do whatever was necessary to protect the euro.
  • Advancing sectors lead decliners 12-6 with basic resources and technology shares leading gainers, while telecom and healthcare lag.
  • France December manufacturing Business Conf 103 vs consensus 101
  • Germany is trading lower by -0.11%  - Dec IFO Business Climate Index 109.9 vs consensus 109.1
  • European Automobile Manufacturers' Association Nov Commercial Vehicles Registrations in EU+EFTA countries +7.5% y/y
  • The UK is trading down -0.16% - The pound was pressured by Nationwide's Nov Consumer confidence index 45 vs prior 52, its lowest reading since Mar 2009 and BOE report that said UK banks were vulnerable to the debt turmoil in Europe

ASIAN MARKTES:

  • Asian markets were mixed today.
  • South Korea rose 0.85% - Post-close, Daewoo Engineering & Construction said it was considering selling a stake in Korea Express.
  • A broad-based rise sent Taiwan +0.41% to a new 31-month high. Chimei Innolux edged up on news that it will build a new factory in China.
  • Hong Kong rose slightly +0.20%. Cosco International rose 3% after saying it will sell its 17% stake in Sino-Ocean Land, which jumped 6% on the news.  China Datang Corp Renewable Power dropped 6% on its trading debut after considerably cutting back the size of its IPO.
  • Japan closed down -0.07%, with trading-house losses being balanced by rises in big banks and real-estate companies. Square Enix plunged 10% after reducing its FY net profit outlook. Sharp rose 3% on a report it will spend ¥100B on production lines for small and midsize LCDs. Mitsui & Co fell 2% on fears that the US government’s suing BP may lead to bigger oil-spill losses than predicted.
  • Australia finished down -0.44%, with Hills Holdings plunging 12% on a profit warning.
  • Thailand declined -0.69% - Thai Airways fell 1% on saying it expects revenues to grow 10% next year.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER




GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next