Currency Crash

This note was originally published at 8am on April 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation.”

-George Soros, April 10th, 2011


That’s a very simple but critical comment Soros made last week at the Bretton Woods meetings in New Hampshire. He wasn’t talking about the US. He was talking about China.


He or she – whoever the overlord of policy making may be – should be thinking long and hard about what a US Currency Crash not only means for The Inflation that’s priced in US Dollars, but what they can do to fight it for the sake of their starving citizenry.


US Currency Crash?


It’s in motion folks – and if it happens, I think it happens in the next 3 months.


That should read as a bold statement, because it is… And the best way to put a picture with that prose and turn up some volume will be to dial into our Q2 Global Macro Theme conference call today at 11AM EST (email if you’d like to participate).


As is customary, Big Alberta and his Hedgeye knights have prepared the anchor with a 50 slide presentation that will lock us into making the risk management calls that we don’t think you can afford miss.


As a reminder, with the intermediate-term TREND overlay of Growth Slowing As Inflation Accelerates, our Q1 Global Macro Themes were:


1.  American Sacrifice  - a scenario analysis and calendar of catalysts for the US Dollar

2.  Trashing Treasuries – long of The Bernank’s Inflation, short US Treasuries

3.  Housing Headwinds II – part deux in the Josh Steiner chronicles of the best Housing work on Wall Street


This morning’s call will focus on what an expedited US Currency Crash could look like and the following Q2 Global Macro Themes:


1.  Year of The Chinese Bull

2.  Deflating The Inflation

3.  Indefinitely Dovish


While we realize we have a target on our foreheads for calling out places like The Lehman Brother, The Bear Stearn, and The Banker of America, we have grown accustomed to it and we wear it with pride.


Living a risk management life of consensus and strong buy versus maybe buy it after we tell our super duper clients to sell into you isn’t a life to live. At Hedgeye, the name on the front of our jerseys mean more than the ones on our backs. We don’t make contrarian calls for the sake of being contrarian. We make these calls because we think they have the highest probabilities of being right.


Maybe we’re a little artsy with our Soho office. Maybe we’re a little jocky with our dressing room in New Haven. But when we make a call, there is no maybe – it’s long or short – and it’s on the tape.


On the Currency Crash call, I’ll save the juicy details for 11AM. We didn’t need to have a super secret one-on-one in Washington with a “consultant” to the professional politicians to make this call either. Over the last 3 years we’ve made 19 long and short calls on the US Dollar – and we’ve been right 19 times – so we’re going to stick with the process on that.


On The Chinese Bull


Oh what a sexy call this one is going to be. The Hedgeyes versus the former roommate of a Yale Hockey player – Jim Chanos. We were bullish on China in 2009, bearish on China in 2010, and now we’re going to ride shotgun on this red bull before consensus does.


Last night’s Chinese GDP growth report beat our already above consensus estimate, coming in at +9.7%. While that’s a sequential slowdown versus the Q4 2010 China GDP report of +9.8% - that’s a deceleration in the slowdown – and on the margin, which is what matters most in making Global Macro calls, that’s what we call better than bad.


When better than bad is cheap (which Chinese equities are on an absolute and relative basis to both themselves and Asian Equities overall), that’s when shorts have to start covering. When better than bad is cheap and price momentum turns positive – that’s when Wall Street has to chase the asset’s price performance.


More on that and why we think Chinese inflation is setting up to deflate from the Elm City during our conference call. If it’s the beginning of the quarter, it’s Global Macro Theme time at Hedgeye.


My immediate-term support and resistance lines for oil are now $105.41 and $109.24, respectively (we bought our oil back this week at $106). My immediate-term support and resistance lines for the SP500 are now 1308 and 1325, respectively (we’re short the SP500).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Currency Crash - Chart of the Day


Currency Crash - Virtual Portfolio


In preparation for Marriott's Q1 2O11 earnings release after close tonight, we’ve put together the pertinent forward looking commentary from its Q4 2010 earnings call and subsequent conferences/releases, including commentary from the guide down on March 28th.



Post Earnings Business Commentary

  • Demand in international markets has been robust and international systemwide RevPAR is expected to increase 11% in constant dollars in 1Q 2011.
  • The company expects its worldwide systemwide 1Q RevPar to increase approximately 7%, at the low end of the company's 7 to 9% 1Q guidance.
  • MAR reiterates the company's diluted earnings per share guidance for 1Q of $0.24 to $0.28 per share.
  • “In February, [we] had guided to a North America number of 6% to 8%. And although North America is still strong and the business is still strong, there were a few things that changed that we think North America will come in at 5% to 6% instead of 6% to 8%, still strong but lower than the lower end of that guidance”
  • “What changed from our expectations in February:”
    • “In New York City a lot of supply came on. We were expecting that supply, that was no new news, but it came on at rates that were lower and weaker than we had anticipated, so as many of you know, we were the rate leader in New York where we had pushed rates first and had moved our rates up and had been aggressively moving our rates up in New York. And as this supply came on at the lower rates, it slowed that process down which we weren’t anticipating when we gave guidance. And then New York also had weather. As all of you know it had quite a few snowstorms that slowed the pace down as well and we have a very big footprint in New York.”
    • “In Washington, DC, you had a little bit of noise for about a month on the government shutting down and that slowed down. You have a lot of government contractors in Washington, DC and they slowed down their meetings and slowed down some of their transient while they waited to see what was going to happen with the government. The good news is the government kind of settled down and extended the budgetary process, so that noise is kind of out of the system now but during the quarter it was there.”
    • “Atlanta had some weather.... we have several large, big-box hotels, multi-thousand room hotels, and we saw the pace of in the quarter for the quarter small group bookings did not materialize at the same level we were expecting.”
  • “We saw good group bookings in December, we saw good group bookings in January and we used that as our basis to set our guidance for the full first quarter. Although February came in good– group bookings were up 15%, it was not at the expectation levels we had thought it would be as we set our guidance.”
  • “Transient is fine. I think what we’re seeing there is if you look at our Select-Service it’s coming in where we thought it would be which is mostly business transient as you think about it.  It was more of this short term in the quarter for the quarter group bookings that had more of the effect of still having a good quarter of 5% to 6% but instead of the 6% to 8%.”
  • “We gave guidance and talked about adding 35,000 rooms this year. We’re on target to do that, 9,000 of those are AC Hotels, which we successfully closed March 1st, that joint venture. That’ll add 9,000 AC by Marriott hotels: 80 in Spain where we had very little representation.”
  • “As far as what we’ve seen in Japan, you know we have very little presence in Japan. I think our total fees in 2010 was about $12 million, $13 million. We have about 10 hotels there, so not a big effect to us. What we have seen is business move out of Japan into Beijing, Shanghai, some into Singapore, a little bit into Thailand, meetings, things that were going to happen in Japan have moved over.”
  • “The Middle East, we have about 30 hotels in the Middle East. Our fees in 2010 were about $37 million, so not a big footprint there. The outbound traffic there would be mostly to Paris in the summer time. That’s typically wealthy Middle Easterners so we’ll see what the effect is there. But Paris is a very strong market so it will absorb anything that would change there, I think.”
  • “We’ve been very aggressive in the first quarter with share repurchase and we’ll continue to do that throughout the year as we have this excess $1 billion of cash.”



  • “Our new points product has been very well received by customers. Timeshare demand correlates highly with consumer confidence, which is coming back. New construction starts in the timeshare industry are very low as the industry continues to absorb existing inventory.”
  • “Looking further ahead, while we don’t expect the new company to be investment grade in the near term, we do expect that it will continue to securitize its consumer notes receivable and should require little additional incremental capital.”
  • “We’re roughly two-thirds of the way done with special corporate rate negotiations for 2011, and the resulting rates for the completed accounts are running up at a high single-digit rate over 2010 prices. Special corporate customers also tell us that they expect to be traveling more in 2011.”
  • “Roughly 35% of our pipeline rooms are under construction and nearly 20% are awaiting conversion.”
  • “For 2011, we expect Adjusted EBITDA is expected to climb 12% to 18% for the full year.”
  • “The first quarter reflects slower growth than the full year, largely due to timing issues for G&A and Timeshare. The first quarter 2011 G&A increase reflects a tough comparison to a $6 million guarantee reserve reversal and unusually low incentive compensation in the prior year quarter. For Timeshare, lower interest income and rental profits will likely depress results in the first quarter, but favorable development profit reportability and solid cost controls should yield much stronger earnings in the remainder of the year.”
  • “We assume about $500 million to $700 million in investment spending in 2011 including $50 million to $100 million in maintenance spending. Total investment spending in 2010 was about $400 million. We will be disciplined in our approach to capital investments and repurchases, but expect to return cash to shareholders if attractive investment opportunities do not appear.”
  • [2011 investment spend] “That amount is mostly committed at this point in time.”
  • “We know that the securitization debt will go with the timeshare company.”
  •  [Mix] “I think just shy of about 40% [group] for full-year 2011.” 
  • “Probably two-thirds or so of our group business was on the books as of the end of ‘10 for ‘11 and the balance will be booked over the course of the year.”
  • “The limited service areas, that’s where the supply growth was most significant, and that supply, by and large, completed opening in the early part of ‘10. And so I think we’re starting to see the benefit from a supply side of much less limited service product coming on."
  • “We’ll want a fee structure that is an appropriate incentive for this business to grow with us. And obviously, if we put a fee that is too high on their sales, that potentially cause them to say we’re giving up too big a share of our profits for those, we’re going to tend to run that business away from us sooner rather than later and we basically never want to run that business away from us.”
  • “We do think that we’ve got occupancy growth in most markets in the United States, including secondary and tertiary markets, so we’re starting to see rate growth in most, albeit it’s a bit more modest in the secondary markets than it is in the primary markets at the moment. But it will come.”


Coffee prices bounced once again last week as fears mount that the approaching winter in Brazil may damage crops.  Sugar dropped 5.1% over the past week, and the commodity is now down 24% year-to-date.  In a bearish data point for global food costs, the weather bureau in India said that the monsoon rainfall in the country will be normal for a second consecutive year.  Corn took a small step back last week but remains up 115% year-over-year.  Wheat's price action of late is partly due to the substitution effect which I expect to continue as long as corn prices remain at these elevated levels.





Coffee prices have rebounded strongly of late and will likely cause concern among the coffee names that have been reluctant to raise prices of late, despite elevated coffee costs.  Prices are now up 113% year-over-year.  Starbucks has effectively locked in its coffee costs for the year.  GMCR, according to its most recent earnings call, had locked in six months at fixed prices.  The company said that it will adjust pricing “as necessary”.  PEET passed on price to its customers during the first quarter.  The company did not disclose its current hedging strategy for 2011 (as of 3Q10, we know PEET had locked in 40% of its 2011 coffee needs), but management said it expects coffee costs to climb nearly 30% YoY.





Wheat prices rose in step with corn over the last week, supported by news that about 38% of the winter-wheat crop was in poor or very poor condition as of April 17, up from 36% a week earlier and 6% a year earlier, according to the Department of Agriculture.  Dry weather in the past week from central Kansas to Texas also hurt crops.  For companies like Panera, which does have wheat costs largely locked in for 2011 roughly flat versus 2010, prices remaining this elevated could result in a price increase in the back half of this year.





The Hedgeye Energy team published an interesting note last week on gasoline consumption trends showing signs of a 2008 repeat.  Specifically, once gasoline prices broke through the $3.60 barrier in 2008, year-over-year gasoline consumption declined for 30 straight weeks.  The surging prices at the pump are causing demand destruction in the consumer economy.  This is not lost on management teams; the concern expressed by DRI during its recent earnings call is telling and I expect BJRI and CAKE management to mention this topic during their earnings calls tomorrow.  Restaurant chains with a high level of exposure to gas prices are likely to suffer as prices press towards $4.  We are focused on companies with direct exposure to elevated gasoline prices, such as CBRL, and companies that have a high proportion of stores based in markets where prices at the pump are a strong factor (California), such as CAKE. 





Chicken wing prices continue to plummet.  BWLD is set to benefit further from the decline and year-over-year favorability looks, from the chart below, to be all but certain for the remainder of 2011. 





Howard Penney

Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


MCD will announce sales numbers for March, along with their earnings for 1Q, on Thursday morning before the market open. 


There was no difference between the number of weekdays and weekend days in March 2011 versus March 2010.  March 2011 had one less Monday, and one additional Thursday, compared to March 2010.


As a reminder, February’s U.S. result was in line with my neutral range of 2-3% and well below the Street’s expectation of 3.6%.   I have been bearish on MCD since the latter stages of 2010, and published a Black Book detailing my thesis in January.   For some time, I have been cognizant of the significance of MCD’s sales results in March.  March represents a significant step-up in the difficulty of the compare for U.S. same-store sales; March 2010 comparable restaurant sales came in at 4.2% versus February 2010 at 0.6%.  While MCD is a global company and it is crucial to monitor trends in all geographies, results from the U.S. division remain the primary driver of the share prices.  As I stressed in the MCD Black Book, the U.S. market still represents about 45% of operating income.  A comparable restaurant sales number below consensus in March would mark the sixth consecutive month of disappointing top-line results in the U.S. 


Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts. 



U.S. - Facing a difficult +4.2% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A print above 1% would be perceived as a good result, implying that two-year average trends accelerated significantly in March on a sequential basis.  Two-year average trends declined sequentially in December, and were roughly flat in January and February.   I believe that a strong acceleration in two-year trends, as would be implied by a comparable sales print of +1% or higher, will be necessary to fully reassure investors of the strength of the core business in the U.S.  It is important to note that, at this juncture last year, frappes and smoothies had been rolled out to 90% and 20% of the system, respectively. 


Last year consumer confidence was trending higher through 1Q10 and management cited consumer confidence “getting better over the last couple of months” as a key factor (along with more company-specific drivers) for top-line growth in the quarter.  Looking at the University of Michigan Survey of Consumer Confidence chart, one can see that sentiment improved by 1.52% in 1Q10 but declined by 9.4% during the first quarter of 1Q11.


MCD: MARCH SALES PREVIEW - univ mich consumer conf 419


NEUTRAL: A print between 0% and 1% would be perceived as a neutral result.  While the low end of this range would still imply sequential growth on a two-year basis, it would be a concern if anything less than a significant step-up were achieved following three disappointing months.  I believe that a print in the neutral range is most likely, with a bias toward the lower end of the range.  The street is currently forecasting 1.7% comp growth.


BAD:  A comparable restaurant sales result less than 0% would clearly be a great disappointment to investors and would demand a dramatic revision of sell-side sentiment on this name (which would be long-overdue, in my opinion).  I believe that a negative number is far more likely than most appreciate but, again, anticipate a comparable restaurant sales number in the neutral range detailed above.  It is important to remember that a sequentially flat two-year average trend would imply a negative result in March.




MCD: MARCH SALES PREVIEW - mcd vs consensus us comps



Europe – Facing a difficult +5.9% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A comparable restaurant sales number of 4% or higher for the Europe division would be received by investors as a good result.  A print at this level would imply two-year average trends approximately 30 basis points (at most) below those seen in February, which was a particularly strong month for MCD’s European business.  While the U.K. was mentioned as a strong market during the 1Q10 earnings call, along with Germany and Spain, it is important to note that Retail Sales in the U.K. during March showed the worst fall in sales for any month in at least 16 years.


NEUTRAL: A print between 3% and 4% would be received as neutral by investors as it would imply roughly flat-to-slightly-down two-year average trends which, I believe, would be in some ways expected given the fragility of the European consumer and the difficult comparison from a year ago.  I believe a print toward the lower end of this range is most likely. 


BAD: A print below 3% would imply two-year average trends significantly below those seen in February.  Given the impact of austerity measures and the softness of retail sales across much of the Eurozone, not just in the U.K., there is a possibility that comparable restaurant sales come in below 3%.  StreetAccount consensus is calling for a print of 3%.



APMEA – Facing a 2.8% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A result of 3% or higher would be received as a positive result for APMEA.  The earthquake/tsunami in Japan as well as, to a lesser extent, the knock-on effects of the flooding in Australia, is likely to depress results this month.  MCD Japan reported results of -7.3% for March.


NEUTRAL: A result between 2% and 3% would be perceived as neutral by investors. 


BAD: A result of less than 2% would be poorly received by investors.  Not only would it imply a sharp drop in two-year average trends, but the number would also fall short of the street’s 2.0% estimate, which is allowing for the tragic events in Japan.



Howard Penney

Managing Director


Vegas was even better than our Street high estimate even after normalizing the high hold.




  • Net revenue $1,260MM and Adjusted Property EBITDA of $405MM
    • Wynn Macau: Net revenue of $866MM and Adjusted Property EBITDA of $273MM
    • Wynn Las Vegas:  Net revenue of $395MM and Adjusted Property EBITDA of $132MM
  • "Wynn Resorts also announced today that its Board of Directors has approved a cash dividend for the quarter of $0.50 per common share. This dividend will be payable on May 17, 2011 to stockholders of record on May 3, 2011."
  • Cash:  $1.4BN
  • Debt:  $3.2BN with $2.6BN at Wynn Las Vegas and $551 at Wynn Macau



  • Business in Las Vegas has improved and Wynn raised their rates and they had no problems. Enjoying the benefits from the investment in their product as well - room remodel; beach club; baccarat remodel 
  • $503MM of revenue for the first 108 days of the year in Las Vegas
  • In April, they are still doing very well in Las Vegas
  • Up until April 21st, Macau comparisons are against Wynn Macau only
  • Business is terrific



  • 243 VIP tables in Macau this quarter
  • It's not just the additional junkets that are driving results in Macau - it's also their Mass and Slot business as well as non-gaming revenue
  • Have 10% of the table games in the market share and 14% for slots; they have 22% market share and only 8% of the slots
  • They will always maintain a conservative balance sheet. They increased their dividend to $0.50 per quarter. However, they are still a growth company so they want to keep plenty of dry powder.
  • No update on Cotai license
  • Only 22% of their business was in the leisure segment vs. 32% last year in Las Vegas
  • Cotai budget? Between $2-3BN; will finalize over the next few months.
  • Instead of a show in Macau, they prefer public entertainment since their customers come so frequently
  • Internet Poker? Partnered up with PokerStars but the DOJ was indicted on violation of UIGEA. There are other companies that approached them that haven't violated UIGEA that would like to partner with them.
  • Having a baccarat business in Vegas requires having deep connections with Asian customers. It's very expensive to start a baccarat business. 
  • Gross receivables are $175MM with $70MM reserved in Vegas alone - mainly due to their baccarat business
  • In Macau, 81MM in receivables and 50MM reserved.
  • When did the 20 tables get added in Macau in 2Q? Have 499 games in Macau - they are getting close to their table allocation but still have a little room
  • Second quarter in Vegas still feels pretty good. July/August is soft, but 4Q looks pretty good as well. 
  • 2.5x fair share on tables in Las Vegas and at fair share for slots

Peruvian Crystal Ball

Conclusion: The ongoing election in Peru has uniformly roiled the country’s financial markets over the last several weeks and, depending on the outcome of upcoming polls, the pain could continue. Using a wider lens for analysis, this election has broader implications for the long-term TAIL of economic policy throughout Latin America. In short, we see more economic liberalization on the horizon across the region.


Recent moves across Peruvian asset classes underscore just how concerned international investors are regarding the outcome of Peru’s current election, in which a second round runoff vote scheduled for June 5 will determine the next president of Peru for the upcoming five years: 

  • Bond Market: After Peru’s bond market posted its largest quarterly decline since 3Q08 in 1Q11 (10Y yields +93bps to 6.87%), yields continue to break out to the upside, closing yesterday +7bps to 7.17%;
  • Currency Market: Peru’s currency, the nuevo sol, has declined (-1.9%) vs. the USD in the past month;
  • Credit Market: Peru’s 5Y sovereign CDS widened +32bps in the past month, settling yesterday at 152bps; and
  • Equity Market: Since peaking on March 24, Peru’s Lima General Index has declined (-16.4%) as of yesterday’s close. 

Rightly or wrongly, these concerns are centered on the potential for the outspoken socialist, Ollanta Humala, to secure victory in the aforementioned presidential elections. As the above moves would indicate, market participants have prescribed a significant risk premium to holding Peruvian assets, should Humala prove victorious in the runoff.


This is due to his public condemnation of the “overly capitalist” nature of Peru’s robust mining industry, which is the key driver of the Peruvian economy. Peru is the world’s largest producer of silver (prices up +145% in the past year) and second-largest producer of copper (prices up +19.1% over the same duration) – two very important commodities as it relates to global growth, inflation, and the associated expectations therein.


According to the country’s Finance Ministry, Peru is set to receive roughly $50B in mining, energy, and infrastructure investment during the next five years, up from $7.3B last year and the influx of foreign investment over the past 10-20 years has been a major tailwind for Peru’s exchange rate appreciation, which, in turn, has proven beneficial for putting an end to Peru’s historical bouts with hyperinflation.


Therein lies the heart of the worry. As recently as March 23, Humala has promised to increase the Peruvian government’s hand in these key industries by renegotiating mining and energy contracts with foreign companies and raising taxes on mining production if he wins the election:


“We must recover sovereignty over Peru’s natural resources because the multinationals now own our gas and prefer to sell it abroad… there must be a mining windfall tax, as the current model isn’t sustainable.”


Taking a clue from Peruvian financial markets of late, Humala has backed off his socialist leanings somewhat, saying recently he supports an “open market economy” and “backs foreign investment that creates jobs”. In addition, he affirmed his desire for a “strong state”, while pledging to “respect investment and private property.”


Unfortunately for the future of Peru’s mining and energy industries, there’s nothing in Humala’s past that would indicate he’s being sincere about his recent pro-business proposals. In 2000, as a former army lieutenant colonel, Humala led 50 soldiers in a seizure of Southern Copper’s Toquepala mine in protest of the corruption which has tainted the legacy of then-president Alberto Fujimori – father of Humala’s competition in the upcoming election, Keiko Fujimori. In the 2006 presidential campaign, where he lost narrowly to current incumbent Alan Garcia, he denounced foreign companies for “looting” Peru’s natural resources.


Diving deeply into the 2006 election, we see that Humala did indeed lose the runoff after capturing the majority vote in the first round with 30.6% of the ballots. His reversal of fortunes in the final round was attributed to his close ties to the controversial Venezuelan president, Hugo Chavez.


Essentially, voters became so frightened that Humala would turn Peru into “little Venezuela” that they voted for Garcia out of spite; one-third of Garcia’s supporters in the runoff election said they were voting for him as “the lesser of two evils”. This is saying something about how negatively Peruvian’s view Venezuela’s economic policies, considering Garcia’s last term as president (July ’85 – July ’90) produced Peru’s last bout with hyperinflation (+7,649% YoY in 1990), a (-20%) decline in GDP, a measured reduction in per capita annual income to $720 (below 1960’s levels), and a +13% increase in the poverty rate (from 41.6% in 1985 to 55% at the end of 1990).


Humala, who won the initial 2011 ballot with 31.7% of the vote last week, continues to make attempts to distance himself from Chavez, with the latest as recently as today in his denial of allegations that Chavez was financing his election campaign. On March 31, he explicitly tried to steer public perception of his policy-making agenda away from the Venezuela-lite tag that has been assigned to it by the media and his competition by saying, “The Venezuelan model of government isn’t applicable in Peru… We’re not going to copy foreign models.”


How successful Humala is in distancing himself from Venezuelan president Hugo Chavez and the 1 socialist policies of Alan Garcia will go a long way towards determining the outcome of this election. There’s no denying he’s got the popular vote, as he remains a man of the people. What can’t be denied, however, is his vulnerability to easy political attacks by his competitors. Simply put, it wouldn’t take much negative campaigning to relinquish Humala’s current stronghold on the Peruvian electorate.


Enter Keiko Fujimori, Humala’s opposition in the June 5 runoff vote after finishing in second place in last week’s primary with 23.5% of the vote. To capture the necessarily simple majority needed to become Peru’s next president, her task is fittingly simple – use Humala’s socialist intentions and ties to Hugo Chavez against him to galvanize the voter bases of now-disqualified candidates (the other 44.8% of the first round votes) around her own campaign.


To accomplish this goal, she’ll have to successfully distance herself from her father’s increasingly corrupt regime (July 1990 – November 2000), while at the same time talking up the sound economic policies he implemented to plant Peru squarely on the path of economic prosperity. To a large extent, Keiko has been following this playbook by surrounding herself with many of her father’s former aides while publically disapproving of her father’s humanitarian crimes, for which he is currently serving a maximum sentence of 25 years in prison:


“I condemn the errors that occurred under my father’s government, and I salute the positive actions. I think we should look at the past objectively and without rancor.”


While in office, Alberto Fujimori enacted broad sweeping neoliberal reforms, known then as “Fujishock”. His policies effectively relaxed private sector price controls, dramatically reduced government subsidies and public employment, eliminated foreign exchange manipulation after issuing Peru’s new currency (nuevo sol), reduced restrictions on investment, imports, and capital inflows. In addition, he embarked on an unprecedented privatization campaign in which hundreds of state-owned enterprises were sold to private investors.


The right-wing policies enacted during his ten year in office are credited with bringing macroeconomic stability to Peru by taming hyperinflation, arresting the rise in the poverty rate, growing the country’s per capita GDP by +30.8%, and growing the country’s FX reserves to $10B from nearly zero. Given these remarkable achievements, it comes as no surprise that the elder Fujimori still garners very high public support, ranking fifth among all political figures in a recent Univerisdad de Lima survey. Moreover, in spite of a messy, public divorce that caused his daughter Keiko to assume the departed first lady’s role midway through his presidency, popular approval for his regime has grown from 31.5% in 2002 to 49.5% as late as May 2007. He remains the only Peruvian president in the post WWII era to preside for more than two terms in office (albeit after altering the rules near the end of his second term).


Regarding his current incarceration, Fujimori’s daughter has made repeated public vows to not pardon her father if elected, saying as recently as today, “I swear to God, I am not going to pardon him. I have repeated several times that that it is neither my intention, nor the intention of my family, to pardon Alberto Fujimori.” This hard line against her father’s crimes – most notably the violent and deadly crackdown(s) of leftist guerillas – might just be enough distance herself from her father on a personal level. On a political level, however, she does indeed share her father’s right-wing economic agenda as well as his popularity among the Peruvian electorate; in 2006, she was elected to Peru’s Congress with more votes than any other candidate.


All told, we think the Colombia University MBA-trained Keiko Fujimori (35) may just have what it takes to pull off the upset in the upcoming runoff election. Given, we think the recent sell-off across Peru’s financial markets and the widening of Peru’s CDS spreads might be overblown. We do, however, expect more near-term weakness until we see signs that she is indeed narrowing the gap between her and her fiery competitor, Ollanta Humala.


We’ll get our first clue on April 24, when Lima-based research firm Ipsos Apoyo publishes its first second-round presidential poll. Any strength in support of Fujimori might spark a relief rally in Peru’s equity, currency, and bond markets. Any weakness on her part will likely bring about further loess across Peruvian asset classes.


Such incremental sell-offs have the potential to destabilize the Peruvian economy and should be viewed as a warning sign to politicians throughout the region. Gone are the days of simply parlaying the poor vote into election victories – particularly at the highest office. As we are seeing currently, Latin American politicians must pay increasing attention to the desires of international investors, as well as the needs of the region’s growing middle class. As resource-rich Latin American countries continue to capitalize economically from elevated commodity prices, we expect this trend to continue. This should put incremental pressure on regional leaders like Dilma Rousseff of Brazil and Cristina Fernandez de Kirchner of Argentina to open up to investor calls for additional privatization of the region’s vast investment opportunities in the coming years.


Darius Dale




Sources: Bloomberg LP,,

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.