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Weekly Latin America Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below. Also, we are always happy to forward along prior notes which may contain additional color on the specific topics/countries you see below.



Dovish monetary and fiscal policy talk (and action, in some cases) is dominating Latin America’s storylines.



By and large, Latin American equity markets had a strong week, closing up +2.7% wk/wk and +3.2% wk/wk on an average and median basis, respectively. Recent moves and speculation around the future of monetary policy contributed heavily to the best/worst divergence: Brazil’s Bovespa Index was up +6% wk/wk on the heels of a -50bps rate cut vs. Argentina’s Merval Index closing down -0.4% wk/wk on currency devaluation speculation.


In Latin American FX markets, the -2.3% wk/wk decline in the Brazilian real (vs. the USD) led the way to the downside, also largely due to the “surprise” rate cut. Conversely, the Chilean peso put on a +1.3% wk/wk move vs. the USD largely due to the minutes of the central bank’s Aug. 18 meeting, which showed that Chilean policymakers consider it too early and too aggressive to cut interest rates in the near term.


In Latin American bond markets, Brazil’s interest rate cut stole the show, facilitating a wk/wk decline of -28bps in Brazil’s 2yr sovereign debt yield. The cut was, however, priced in to some extent, as yields fell just slightly over half of the full extent of the -50bps Selic Rate cut; if anything, Brazil’s bond market was signaling this for at least the last few weeks (2yr sovereign debt yields down -152bps MoM). Brazil’s on-shore interest rate swaps market had a more forceful reaction, with the 1yr tenor closing down -57bps wk/wk.


From a credit quality perspective, CDS broadly declined wk/wk throughout the region, with the suddenly moderate Peru (more on this below) leading the way to the downside on a percentage basis (down -25bps/-14.8%).


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Brazil: If it’s not obvious, the key callout from the Brazilian economy last week was the Banco Sentral do Brazil’s decision to cut their benchmark Selic interest rate -50bps, citing a “generalized reduction of great magnitude in the growth projections of principal economic blocs” and “the [hawkish] outlook for [Brazilian] fiscal policy”. Interestingly, there is a great deal of talk surrounding how politicized this decision was, given the enormous amount of blunt pressure recently directed at the central bank by various members of the Brazilian government – including President Rousseff herself. We walk through this dynamic as well as the outlook for fiscal policy in 2012 in great detail in our 9/1 note titled, “Eye On Brazilian Policy: Oh No You Didn’t” (email us for a copy).


Elsewhere in the Brazilian economy, economic data continues to come in rather soft on the margin. Industrial production growth slowed in July to -0.3% YoY (vs. +1.1% prior); industry confidence ticked down in Aug. to 102.7 (vs. 105 prior); manufacturing PMI ticked down in Aug. to 46 (vs. 47.8 prior); capacity utilization ticked down in Aug. to 83.6% (vs. 84.1% prior); and trade balance growth slowed to +$1.5 billion YoY (vs. +$2.2 billion prior).


Chile: The key news out of Chile last week was that, unlike Brazil, the Central Bank of Chile considers it too early to cut interest rates. On the flip side, Finance Minister Filipe Larrain did say the government was “prepared to confront a drop in international demand”, suggesting that countercyclical fiscal policy is being readied in the event global growth slows further. Chile’s fiscal metrics are slightly positive (deficit at 4.5% of GDP; debt at 8.8% of GDP), so there is some headroom for Chilean policymakers to act as a buffer if needed.


The latest Chilean economic data would suggest that need is growing on the margin: industrial production growth slowed in July to +0.7% YoY (vs. +4% prior); industrial sales growth slowed in July to +2.4% YoY (vs. +2.6% prior); retail sales growth slowed in July to +9.6% YoY (vs. +12.5% prior); unemployment rate ticked up in July to 7.5% (vs. 7.2% prior); and total payrolls growth slowed in July to -37.4k MoM (vs. +38.8k prior).


Peru: This we know: growth is slowing – real GDP growth slowed in 2Q to +6.6% YoY (vs. +8.7% prior). This we didn’t: Ollanta Humala’s regime is governing from slightly left of the middle of the political spectrum. While it would be far-fetched for us to label the newly inaugurated Peruvian president as a moderate, we’d be remiss to label the direction of his economic policy as anything substantially left of the center – which is what he initially campaigned just a few months ago.


Perhaps the most left-leaning of all legislation he’s introduced this far is a draft of the 2012 budget, which was recently approved by the Peruvian Cabinet. Still, despite higher spending and higher taxes, the outline calls for a surplus as large as 1% of GDP, suggesting Humala isn’t recklessly Keyneisan when it comes to the government’s fiscal health. On the more economically liberal front, Humala’s government is seeking to pass legislation that would foster the creation of a deeper corporate credit market, exchange-traded funds, and a repurchase agreement marketplace. Additionally, the president looks to garner 1 billion soles ($370 million) worth of private sector investment in government infrastructure projects over the coming months. It’s clear that Humala and his economically liberal team of advisors are putting forth their best efforts to prevent the Peruvian economy from slipping into the pitfalls of socialism – something we happily tip our hats to.


As it relates to the direction of policy in the nearer term, Peruvian Central Bank President Julio Velarde said last week that the bank “stands ready to adjust their interest rate policy if the global economy worsens”. Peru, with a benchmark interest rate of 4.25%, is one of the many emerging market economies which have proactively hiked rates over the last year and have some dry gun powder to use in the event of an economic growth emergency. Peru’s Finance Ministry, led by Miguel Castilla, stated that it is also ready to chip in with a $5.6 billion contingency fund held at the central bank. We’re not sure if this fund intends to use excess FX reserves in a scheme similar to Argentina’s and Venezuela’s. If so, we find fault with this in that a) it’s hard to walk away once the spending spree begins; and b) it’s flat-out highly inflationary (unofficially, Argentine and, officially, Venezuelan CPI readings are both north of +25% YoY).


Argentina: Perhaps a major red flag and the key callout of the week for Argentina is that Argentinean deposit rates are climbing amid widespread declines in interest rates throughout the region. This is due to the phenomenon of Argentine investors/savers pulling pesos out of bank accounts and converting them into U.S. dollars, etc. amid record-breaking capital flight from the country. For reference, the 12.7% interest rate Argentine banks paid for 30-day deposits on Aug. 25 was indeed a two year high.


Elsewhere in the Argentine economy, Vice Presidential candidate and current Economy Minister Amado Boudou came out last week and confirmed that the country won’t accept an audit of its economic data and policies by the IMF, which typically does so annually with each of its member countries via its Article IV consultation. Reading between the lines, this is essentially the Argentine government admitting that the country’s official growth and inflation statistics – which have been widely disputed since the late President Nestor Kirchner replaced Indec employees with political appointees in 2007 – are,  in fact, subject to faulty reporting. This is something to keep in mind ahead of current President Cristina Fernandez de Kirchner’s likely second term and what the impact on actual (vs. reported) inflation would be in the event she pursues a meaningful currency devaluation.


Darius Dale


UA: Business Trend Update

Here’s a follow-up to our earlier note on UA. How is business? Here’s some charts showing both apparel and footwear point-of-sale info for UA. It would be unfair to say that it is getting clocked out there, because performance – broadly speaking – is fine. But when you end the prior quarter with inventories +74%, you need better than “fine”, you need “outstanding”. That’s not in the cards.


Versus last year, we’re seeing UA’s share gains in apparel continue to slide – to the point where the latest trends are actually down (we look at this data on a trailing 3-week basis).


Similarly, the company is seemingly not gaining traction in footwear. That’s no revelation to the Street at large. But the reality is that UA went out and hired Gene McCarthy – who we’ve thought to be among the best talent in the space – and after 25 months, they still have little to show for it (at least based on product quantity, quality and performance).


Will UA get Footwear right? Yes, we definitely think so. But the clock is ticking, and UA is running out of time where the Street will simply give them a pass simply because they have a killer brand. In other words, footwear will cost either time or money – and the Street has little tolerance for either.  


We continue to think that there’s a big duration mismatch here. When the short-term investment factors come to roost just as 40% sales growth numbers are incrementally slowing (still stellar, but what matters is on the margin), we think there will be a much better shot to buy UA lower.




UA: Business Trend Update - UA apparel 9 6 11


UA: Business Trend Update - UA Compression 9 6 11


UA: Business Trend Update - NKE compression product 9 6 11


UA: Business Trend Update - UA FW sales 9 6 11


UA: Business Trend Update - UA FW 9 6 11


Brian P. McGough
Managing Director


Preliminary gaming revenues from one of the riverboat markets shows that August may be another soft month for domestic gaming.



According to unofficial data, we believe Missouri gaming revenues, adjusted for the closing of St. Jo Frontier Casino, dropped 1% YoY in August—another disappointing month for the “Show-Me” state.   On a sequential revenue basis, Missouri came in 5% light.  We look at monthly sequential revenue based on the previous 3 months, adjusted by a historical seasonality factor. 


We won’t get the property details until later this week but we wonder if PNK’s Lumiere and River City properties, which outperformed in July in part to high table hold and easy comps, can continue to show solid growth in a poor macro environment.  Obviously, ASCA maintains the highest exposure to Missouri but we don’t think Missouri will be the only regional market to disappoint.


Other riverboat markets may be better, or worse, than Missouri but we want to stress that all riverboats (on a same-store basis), except Louisiana, showed slowing sequential revenue in July.  We have been cautious on regional gaming post Q2 and a weak August would corroborate our bearish stance.


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Early September forecast of HK$20-22BN, up 35-48% YoY.



This is hardly worth commenting on but we’ve got data on the first 4 days of September.  Average daily table revenue dropped from HK$747 million in August to HK$690 million.  Hold was probably a little low especially given that Wynn’s market share dropped to 5.4% which is obviously not sustainable.  Galaxy’s share was also unsustainably low. 


We do expect September to fall sequentially from August both because August was an amazing month and September is historically a softer month.  Our current projection is for September gross gaming revenues of HK$20-22 billion which would provide healthy YoY growth of 35-48%.



UA: Definite Net Negative


These management changes are definitely the right thing for UA, but they play into our call that you don’t want to own this stock when then the company is hunkering down, retrenching, reorganizing its business, and investing capital to facilitate the next leg of growth. 


In another 18-24 months, having a ‘Chief Supply Chain Officer’ and ‘Chief Performance Officer’ might prove to be the best move since they launched Compression Apparel. In his usual ‘take no prisoners’ approach to the business, Kevin Plank very quickly addressed UA’s fulfillment problem.   


As for Wayne Marino, let’s not forget that he is a CFO by trade. After doing such a solid job seeing UA through the IPO process, he essentially built the finance organization that exists today. But unfortunately, in a strong sign of the Peter Principle at work, he was elevated to a role (COO) where he was simply ‘average’ as opposed to ‘great.’  He is sticking around for six months for transition purposes. Clearly, this is not a ‘clear your desk and security will escort you out’ situation.


We continue to think that there are few businesses in US retail that have the kind of Blue Sky growth that UA has ahead of it. But before we see things like Footwear, International, Retail and Women’s succeed, we’re going to need either more time, capital, and more likely – both.


For the long-term holders who own this name because they think it will triple in another 5-years, then check the box and move on – everything is fine and on-track. But the upside/downside risk here for anyone with a shorter duration clearly favors the downside.



Brian P. McGough

Managing Director





Notable macro data points, news items, and price action pertaining to the restaurant space.






Over the last few months, in particular, foodstuffs have seen prices hold steady while the overall commodity index, as represented in the chart below by the CRB Commodity Index, has declined.


THE HBM: DNKN, SBUX, DIN - food vs comd




  • DNKN was initiated “Sell” at Goldman Sachs with a price target of $23.
  • DNKN was initiated “Equal-Weight” at Morgan Stanley with a price target of $29.
  • DNKN was initiated “Neutral” at BofA with a price target of $29.
  • DNKN was initiated “Equal Weight” at Barclays with a price target of $27.
  • DNKN was initiated “Buy” at Stifel Nicolaus with a price target of $33.
  • DNKN was initiated “Market Perform” at Wells Fargo.
  • DNKN was initiated “Outperform” at William Blair.
  • SBUX plans on tripling its China store base by 2015 and step up growth in other markets like South Korea, Indonesia, Malaysia, Singapore, Thailand, and Australia by introducing Via Ready Brew.


  • DIN has named Tom Emrey as CFO.  Mr. Emrey joins DineEquity from Universal Studios Home Entertainment.  Prior to Universal Studios Home Entertainment, Mr. Emrey held a number of senior finance positions at Nestle USA.

THE HBM: DNKN, SBUX, DIN - stocks 96



Howard Penney

Managing Director


Rory Green


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