• run with the bulls

    get your first month

    of hedgeye free


MACRO BLACK BOOK: The Roadmap for Investing in Brazil

To download the presentation materials, please click here: HEDGEYE BLACK BOOK: The Roadmap for Investing in Brazil


Where We’ve Been:

We’ve been aggressively bearish on Brazilian equities for the last nine months. Down just under -26% YTD and nearly -30% from its early November peak (coincidentally right when QE2 was formally introduced), the Bovespa Index’s dramatic underperformance is appropriately reflecting the three key concerns facing the Brazilian economy we outlined many months ago: 

  • Growth is Slowing;
  • Inflation is Accelerating; and
  • Interconnected Risk is Compounding. 

To the first point on Brazil’s domestic growth curve, real GDP growth has slowed from +6.7% YoY (3Q10) to +4.2% YoY (1Q11) with further downside to the reported 2Q and 2H figures according to our models. From a higher-frequency perspective, the strong real (widening interest rate differentials) and higher cost of credit have weighted substantially on Brazil’s manufacturing sector, with industrial production growth coming in a mere +0.9% YoY in June, alongside a contraction in PMI to 47.8 in July.


MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 1


To the second point on Brazil’s domestic inflation readings (perhaps the core component of our Brazilian Stagflation thesis), CPI accelerated in July to a 73-month high of +6.9% YoY and our models see one more month of sequential acceleration from a YoY perspective (as does the central bank’s).


MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 2


To the latter point on interconnected risk, we’ve been appropriately bearish from a research perspective on the big things in Global Macro. Be it calling for global Stagflation in January, reaffirming our long-term Housing Headwinds call in 1Q, or staying ahead of key developments within the Sovereign Debt Dichotomy, we certainly won’t be accused of being broadly bullish in 2011. Though none of this has anything to do with Brazil on paper, the nature of our interconnected Global Macro model has kept us out of the way on the long side of many assets YTD – including Brazilian equities. Managing risk on any country or security doesn’t occur in a vacuum.


Where We’re Headed:

In this presentation (see link above), we detail the key issues facing the Brazilian economy from a long-term perspective. Additionally, we walk through what we’d need to see from a variety of perspectives to turn constructive on Brazilian equities. This report isn’t an “act now” piece. Rather, it’s our best shot at producing a desk reference for managing the currently foreseeable Macro risk in and around Brazil over the long-term TAIL.


At current valuations, Brazil is no doubt atop a lot of investors’ minds as it relates to timing the “turn”. Understanding that bottoms are processes, not points, the issues and catalysts outlined in this report should help to adequately frame the bull/bear debate – a debate that, up until the last couple of weeks, we felt the market wasn’t having properly.


If there’s one thing we learned from attending the recent Bloomberg Brazil Summit, it’s that the delta between consensus long-term expectations for the Brazilian economy and our own conclusions are as wide, if not wider, than any country in my universe (Asia; Latin America). We think the road ahead for Brazil is rockier than consensus thinks it is and the headwinds themselves are vastly misunderstood by many. Given, we’ve taken the liberty to highlight the key issues going forward, in addition to identifying the potential solutions one must watch for as an indicator(s) that it’s time to buy.


As always, we are around for further dialogue on this topic. Email us at if you’d like to set up a call.


Happy bargain hunting out there; just be sure to ignore Brazil for now. The Bovespa’s current quantitative setup (Bearish Formation) is telling us that some of the key intermediate and long-term issues we’ve outlined in this 75-page report aren’t fully priced in. When they are (at least on the margin) we’ll be among the first to signal.


Darius Dale



MACRO BLACK BOOK: The Roadmap for Investing in Brazil - 3

Athletic FW Trends Improve


Weekly footwear data improved on the margin last week stemming a run of three straight weeks of sequential deterioration. While still reflecting negative year-over-year growth, recall that the athletic specialty channel has been running at least 400bps ahead of this consolidated index suggesting LSD-MSD sales in the channel - better for FL and FINL on the margin. In addition, sales improvement wasn’t driven by promotional activity as ASPs remained stable reflecting what is likely initial BTS demand. Meanwhile, athletic apparel continues to post solid HSD sales driven primarily by higher unit volumes with pricing remaining stable up LSD.


Athletic FW Trends Improve - FW Agg Table 8 10 11


Athletic FW Trends Improve - FW App App 1Yr 8 10 11


Athletic FW Trends Improve - FW App App 2Yr 8 10 11


Casey Flavin


Shorting the UK (EWU)

Positions in Europe: Short UK (EWU); Short EUR-USD (FXE)

Keith shorted the UK via the etf EWU in the Hedgeye Virtual Portfolio yesterday. Our thesis remains intact: the UK economy is in stagflation that should persist for at least the next two quarters in an optimistic scenario. Real growth should remain impaired from domestic austerity programs that weigh on confidence and spending, and sovereign debt contagion across continental Europe that enhances banking counterparty risks (think French and German banks as well) and a reduced appetite for UK goods and services considering Europe is its largest export partner.  Further, we’ve yet to see any meaningful improvement from the housing sector or elevated unemployment picture.


More specifically to our point on stagflation, GDP grew a mere +0.2% in Q2 quarter-over-quarter with Services sector growth at +0.5% slightly offsetting the -0.3% drag in Manufacturing. [July data also showed a notable inflection in the Manufacturing PMI to 49.1, or below the 50 line indicating contraction].  GDP grew +0.7% on a year-over-year basis, and we think 2011 growth could come in lower than +1.2% consensus.


While today’s Inflation Report from the BoE recognized growth challenges over the intermediate term, it stated that inflation, as measured by the CPI, should meet the BoE’s 2% target in 2012 and 2013. We’ll take the other side of this trade, and note there’s still just under five months left in 2011 and CPI has remained sticky above 4% year-to-date (currently at 4.2%), which will remain an added tax.  


The inflationary effect of energy costs give us pause, especially considering the country’s dependence on foreign sources. Further, looking at UK PPI as an indicator, we expect to see the pass-on effect of higher consumer prices (output costs) as input costs (materials and fuels) remain elevated (see chart below).  


In short, we see elevated inflation pressures and weak to negative growth prospects into year-end. We’ll short into that view. 


Shorting the UK (EWU) - 1. UKK




As another piece of ammo to fight sovereign debt contagion across the region, the ECB announced today it will lend Eurozone banks €49.75 billion in emergency 6 month cash. While we don’t agree that concurrent bailout packages will stem all the fiscal imbalances across the region, we do think that these “band-aids” help give the common currency support. Additionally, bond yields have come in across the periphery since this weekend’s announcement of the resumption of the ECB’s SMP bond purchasing program.  While it’s by no means a foregone conclusion that yields will “normalize” over the near to intermediate term, especially given the uncertainty on the size and scope of the EFSF facility to be voted on in mid to late September, such measures could help give support to the EUR versus major currencies over the near term.  


Over the last four months we’ve outlined an immediate term TRADE range of $1.40 to $1.45 versus the USD, which has held strong. The pair continues to dance around our immediate term TREND of $1.43. Should both TRADE and TREND be violated to the downside, our quantitative models suggest the next line of support doesn’t come until $1.38.


Matthew Hedrick

Senior Analyst






Valued Client,


Today, our Macro team led by CEO Keith McCullough and DOR Daryl Jones hosted a conference call to walk through our updated global macro thoughts and how to play them. Additionally, we had Managing Director Josh Steiner on to walk through his outlook for the global financial sector.


Key topics we addressed included:

  • Does the SP500 off over 15% from its YTD highs present a short covering opportunity?
  • Given our outlook for the global economy, what are the key drivers over the intermediate term?
  • Sovereign debt issues and the likelihood of resolution, both in the United States and Europe.
  • Update of Hedgeye's quantitative and fundamental view of key assets classes - e.g. U.S. dollar, oil, gold, treasuries and copper.
  • Hedgeye's top macro and asset allocation ideas. 

To access the replay materials please use the links below.


Podcast: https://app.hedgeye.com/feed_items/15100 (you may need to copy/paste the link into the URL of your browser)


If you have any follow-up questions, please email us at .

Best regards,


The Hedgeye Macro Team

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.