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Weekly Latin America Risk Monitor: Mixed Bag Full of Money

Conclusion: Recent action(s) and expectations regarding both money (currencies) and monetary policy are creating intra-regional divergences across Latin American financial markets.


Prices Rule

In contrast to Asian stocks, Latin American equity markets finished higher last week, closing up +0.8% wk/wk on a median basis. A solid degree of intra-regional disparity is noteworthy (Argentina, Chile, Venezuela all up over +3%; Brazil and Mexico up less than +1%). Latin American currencies all declined against the USD wk/wk, closing down -1.4% on a median basis. The Mexican peso (MXN), a currency we’ve been negative on for several months, led the way to the downside (-3.2% wk/wk).


Like equities, Latin American sovereign debt markets were mixed as well, highlighted by Brazil’s -10bps wk/wk decline and Colombia’s +21bps wk/wk gain on the short-end of the maturity curve (2yrs). From a credit risk perspective, Latin American 5yr sovereign CDS broadly widened last week, closing up +4.7% on a median basis. Percentage gains were led by Colombia (up +11bps or +7.2% wk/wk).


Looking at 1yr on-shore interest rate swaps, marginal shifts in interest rate expectations were mixed throughout the region (Brazil -8bps wk/wk; Mexico +8bps wk/wk).


***price tables below***


The Least You Need to Know


  • In case you missed it, Brazil’s central bank lowered its benchmark SELIC interest rate last week by another -50bps. This marks the second-straight cut and was in-line with their commentary, consensus expectations, and our outlook for both Brazilian inflation and growth to trend lower from current levels over the intermediate term. Still, with CPI at a six-year high, the central bank continues to receive heat from the more-hawkish members of the Brazilian populace. Refer to our 10/20 note titled, Brazil: A Case Study in Sticky Stagflation for more in-depth analysis.


  • As of the latest reporting period (10/10), foreign investors increased their holdings of fixed-rate peso bonds to a near record high of 674.6 billion pesos ($50.2B) or 39.8% of the total amount outstanding. As we’ve penned in the past, lax capital controls and high foreign investor participation in Mexico’s capital markets will remain a headwind to the Mexican peso over the intermediate-term TREND – particularly if our views regarding Europe’s Sovereign Debt Dichotomy are realized. Easy inflows make for easy outflows when the tide reverses. The peso, is down -13.1% vs. the USD over the last three months – good for fifth-worst among all currencies globally.


  • As of the latest count (40% of total votes) incumbent president Cristina Fernandez has garnered 53% of the votes in this weekend’s Argentine presidential election. This is not a surprise; she had been leading by a substantial margin in the polls leading up to Sunday’s vote and her policy of seizing state assets and central bank reserves to help increase social spending all but assured her of the popular vote. The passage of this catalyst now puts a potential currency devaluation in play – something we’ve been highlighting the risk of for a few months now. Declining central bank reserves (FX intervention), a rising cost of capital (30-day benchmark deposit rate at a 34-month high of 19.7%), and 12mo non-deliverable peso forwards (-17.9% discount to spot rate) are all suggesting the same thing. 

Darius Dale



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In preparation for BYD's Q3 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



YOUTUBE from Q3 earnings call

  • “We expect our wholly-owned business will continue to show improvements throughout the rest of this year.”
  • “We have also begun to see initial signs of growth from unrated play in our stronger performing Midwest and South properties.”
  • “As we predicted on our last call, Convention and Meeting business revenue increased more than 20% during the second quarter, in-line with the growth we saw in the first quarter. We expect that run rate to continue.”
  • “The promotional environment in the Locals region remains elevated. We believe, however, that we have the right mix of promotional activities in place and remain disciplined in our marketing efforts.”
  • “Starting in October, we will convert to a Boeing 767 on our Hawaiian charter route. This will allow us to offer our Hawaiian customers a flying experience as competitive as anything currently offered in the Las Vegas to Hawaii route. As important, this new aircraft will be more efficient on a per seat basis while providing us with a 12% increase in available seats, allowing us to transport 6,200 more customers annually based on our current five flight per week rotation.”
  • “We expect wholly-owned EBITDA, which includes corporate expense, to be in the range of $65 million to $70 million versus $61 million reported in the third quarter last year. We expect Borgata to generate EBITDA of $52 million to $55 million. With that range of EBITDA, adjusted EPS for the third quarter is expected to range from breakeven to $0.03 per share. This guidance assumes no contribution from IP during the third quarter.”
  • “Clearly Atlantic City is in a lot of increased competition, and I think what we’re seeing over the summer is the same thing that we’ve seen for the last couple of quarters in terms of an elevated promotional environment. And as Paul indicated in his remarks, we’ve responded in kind to make sure that we retain the customer base. As we move forward, obviously, we’ll start to cycle through the Pennsylvania table games in the third quarter. So when those started to open in late July of last year, and so we’ll start to have some better or maybe easier comps as we move forward and I think Atlantic City is just going to continue to slug it out over the next couple of quarters. And we’re focused on margins there also, trying to operate as efficiently as possible. But it’ll continue to be a battle as we look forward over the next couple of quarters.”
  • “The rule of thumb you can use is a 1% increase in revenue is a 2% increase in EBITDA.”
  • [Capex spend] “I think we are probably on a run rate to spend $15 million in each of the next two quarters.”
  • “With respect to the Lake Charles market, we’ve said for a long time the more people you put on I-10 heading into Lake Charles given our position in the market and being first into the market, we certainly like our position. We’ve got a great asset there. So that property obviously is a number of years off from being developed, and we’ll continue to grow our property to reap the benefits of more people being on I-10, crossing from Houston into the Lake Charles area. We’re positive about there being additional traffic.”
  • [Borgata renovation] “The project will include all the rooms in the original Borgata Hotel, to be completed between generally the fourth quarter – the fall of this year and the spring of next year. We’d expect all those rooms to be completely remodeled before Revel opens. It is a pretty complete renovation. We’ll be touching all of the parts of the room, from the furniture to the carpet and wallpaper and the likes. So it’s a comprehensive overhaul of the rooms, and we will be done by the time Revel opens.”

HBI: We Don’t Like It


Conclusion: We come out on the short side of HBI into the quarter. Growth will start to decelerate, and we’ll get a transparent look into the real operation here – which shows more risk than reward.


TRADE (3-Weeks or Less):

We expect the crack in HBI’s top-line trajectory that started to show in Q2 will become increasingly evident this quarter. HBI is now facing four straight quarters of double-digit comps and +11% and +16% over the next two quarters. Q3 will be propped up by incremental Gear For Sports revs (+7%), but shelf space gains and unit growth are likely to slow. After November 1st, HBI anniversaries the GFS deal at which point HBI becomes more reliant on further price increases. That’s the same time when JCP is looking to get sharper on pricing heading into 2012, which we expect to be the start of a nasty price battle at mid-tier department stores. HBI’s top-line is destined to decelerate back into the single-digits barring more deals – yet the company is still being valued as a growth company.


TREND (3-Months or More):

Increasingly bearish reports out of the department stores since HBI last reported suggest Q4 sales expectations might be lofty, which could lead to an adjustment in the company’s Q4/FY outlook. Despite slower sales growth expectations, we think margins will still expand with SG&A leverage offsetting continued gross margin headwinds as the remainder of higher cost cotton cycles through. Lower top-line equates to lower earnings. While consensus has come down $0.02 to $0.62 over the last few weeks, we think it has to come down more than that – we’re at $0.52.


TAIL (3-Years or Less):

The reality of top-line growth reverting back into the single-digits requires CEO Rich Knoll to realize that this is not a growth company. Either he’ll start managing the business for maximum cash flow, or we’ll see the company lever up and buy more growth. This is the biggest risk to the story and with prior CFO Lee Wyatt no longer there to protect the balance sheet, one that has become increasingly likely.


Key Issues:

  • Top-line slowing – becoming increasingly reliant on price increases
  • Debt reduction – or will HBI make another acquisition to fuel growth
  • Mid-tier pricing battle in 1H F12 will pressure both top-line growth and margins


We’re shaking out a penny shy of Street estimates for $0.82 in Q3, but are lower in Q4 ($0.52 vs. $0.62E) due primarily to lighter sales expectations.


HBI: We Don’t Like It - HBI ModelAssmpts 10 11


HBI: We Don’t Like It - HBI S 10 11


Casey Flavin


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European Risk Monitor: At the Halfway Point? No Chance.

Positions in Europe: Short EUR-USD (FXE)

The Eurocrats will be kicking the can further down the road... Based on comments from this weekend’s EU Summit, the tea leaves suggest this Wednesday’s second Summit meeting will underwhelm market expectations. The read-through from this weekend is that the ECB remains firm in not playing ball—that is taking on balance sheet risk to support (leverage) the EFSF; banks are responsible for recapitalizing themselves; and no guidance on the haircuts (exact percentage) banks should take on Greek holdings. 


In order, this portends:


On the ECB:  So long as the ECB is not going to directly support bolstering the EFSF, we don’t see any hope of expanding the facility in short order. The most recent example is the grave effort it took (months) for member states to ratify the July 21st EFSF, which didn’t even boost the current size of the facility.


The ECB continues its sovereign bond purchasing program [SMP], buying €4.49B in the week ended October 21st (vs €2.24B Oct. 14) of program’s total €169.5B, however with 10YR yields on Italian bonds trading right at the 6%, we’re not optimistic that this program can contain Italy’s sovereign risk (more below).


On Bank Recaps: In typical Eurocrat form, comments suggest banks will be responsible for recapitalizing themselves. No measures were offered in the very likely case that not all banks can accomplish this (risk management?). If the market is going to feel comfortable with this “plan”, there will need to be firm mandates on the size, scope, and timing of these recapitalization, as well as secondary plans should the banks not be able to accomplish the recap themselves. What are the nationalization strategies? How will the EFSF contribute to support banks when such measures have never been clearly outline, and more importantly, the facility is undercapitalized to support banks and sovereigns across the region?  The web of cross-country exposures and derivative impact makes answering these questions all the more difficult.


On Greek Haircuts:  Sarkozy said that “on the question of Greece, things are moving along. We’re not there yet”. There’s still no specific guidance on the haircut international lenders should assume, at 21% (as proposal 3 months ago) or closer to the 50-60% range supported by the German camp. 


Remember, any haircut on Greek debt will be a technical default, so Eurocrats will continue to tip-toe around the subject/define it in all terms other than what it is, as to shield issues around the constitutionality of a default within the Eurozone, as there’s no specific language that provides guidance for debt default/”forgiveness” in any of the major treaties.   



Given the above we expect to be underwhelmed by Wednesday’s meeting to produce any form of a “Bazooka” to cure Europe’s entire sovereign and banking ills. For more see our note on 10/20 titled “Italy’s 10YR at 6.02% Ahead of EU Summit”. We’re short the EUR-USD (FXE) in the Hedgeye Virtual Portfolio for this very reason.  



Risk Metrics

As is typical for Mondays, below are our risk metrics across the sovereigns and banks. You’ll note that yields and CDS spreads on the sovereigns are continue to trend up and to the right, with critical focus now on Italy and Spain’s 10YR bond yield, the former which rose to 6.02% last Thursday. As a reminder, we flag the 6% level on 10YR government bonds as a historically significant level. When Greece, Portugal and Ireland broke through this level, yields shot up expediently and the individual countries required a bailout in short order. And this time around there’s no facility large enough to bailout Italy, which is sitting on €1.9Trillion of debt, or a Spain, or a large nation requiring assistance to prop up its banking sector. 


European Risk Monitor: At the Halfway Point? No Chance. - mh 1


European Sovereign CDS – European sovereign swaps widened slightly last week. Only German and American spreads tightened. American spreads tightened by 12%.  French swaps widened 6.4% to 192 from 180. 


European Risk Monitor: At the Halfway Point? No Chance. - mh 2


European Risk Monitor: At the Halfway Point? No Chance. - mh 3


European Financials CDS Monitor – Bank swaps were mixed in Europe last week, with swaps tightened for 21 of the 40 reference entities. Greek banks were the worst performers, as Alpha Bank A.E. and EFG Eurobank Ergasias S.A widened 30% and 15.2% respectively. German banks also saw deteriorations, with swaps widening an average of 7.5% WoW.


European Risk Monitor: At the Halfway Point? No Chance. - mh 4


Matthew Hedrick

Senior Analyst

UA: Unfavorable Risk/Reward Near-term


Conclusion: 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.


TRADE (3-Weeks or Less):

We expect Q3 results to be in-line with expectations ($0.83E) when the company reports before the open tomorrow, but as we’ve made clear in recent weeks, we’re growing increasingly concerned that the Q4 outlook and initial 2012 commentary could be more cautious than expected. If it’s not, then we’ll be even more concerned, because based on all of our work, it should be.


Since 2Q when  inventories were up 74% and UA initially discussed ‘fulfillment issues,’ we’ve seen a material management shake-up on the Operations side of the house and ASP growth in the channel that has tracked below peers based on POS data and our research. In fact, based on Sportscan data, UA ASPs have recently declining while the rest of the industry is strongly positive. Coupled with our growing concern that Charged Cotton sales are tracking below expectations, earnings could be headed lower near-term. Footwear has pierced the 1% market share mark recently, which is positive. But we need to see that double before it really starts to matter. UA is a long ways off.


TREND (3-Months or More):

Relative to the +24% revenue growth UA comped last quarter, Q3 is up against a +22% compare after which comps get progressively tougher over the next three quarters. Core apparel growth appears to remain  healthy and even footwear is starting to pick up on the margin, but we have been getting increasingly concerned with sales of charged cotton relative to expectations.


Based on an incremental $60mm in sales expected from this new line it should account for roughly 7-8% growth in apparel – industry data suggests its running closer to 3-4%. Before we start citing any trends relative to industry data, we first have to highlight the fact that UA’s DTC, DKS, and TSA account for over 50% of UA’s distribution, which should also be its most productive. That said, we’d have to assume that sales of charged cotton has to be running at ~3x in those channels to be keeping pace with expectations – possible, but greater disparity between the channels then we’d like to see. In addition, ASPs for charged cotton have declined by ~10% over the past month perhaps indicating softer than anticipated sales. For perspective, if the category is tracking at adding an incremental ~6% growth to apparel it is likely to come in closer to $50mm in revs for the year vs. $60-$70mm suggested. That could equate to as much as a 2-4pt deceleration in top-line sales growth expectations in Q4 (consensus at +33%).


If the top-line is indeed starting to slow as we suspect, inventories could take longer to clear and margin pressures will prove to be greater than the company’s original margin adjustment in Q2. Now UA could feasibly pull back on SG&A – like it has in each of the past two quarters – to help hit earnings, but that would increasingly jeopardize the company’s ability to drive top-line growth in 2012. That’s not a trade off we’d like to see. In fact, given the money UA has spent on endorsements over the last year (Michael Phelps, Tom Brady, Lindsay Vonn, Kemba Walker, Derrick Williams (#2 NBA draft – ahead of Kemba at #9) along with retail store growth – it’s not a trade off we’re likely to see.


The punchline is that we’re willing to front UA the benefit of sales growth, OR margin. But certainly not both. Our sense is that the consensus will prove too bullish on one or the other. The Street might give the stock a pass so long as revenue comes in – even though it’s more expensive. For what it’s worth, the biggest pushback we get on a UA short is “I believe that they’ll ultimately grow, and if margins get hurt now, I can live with that. There’s just not much else out there I can own.”


TAIL (3-Years or Less):

We continue to like UA a lot using our TAIL duration – even though we would not buy at current prices. The reality is that this is a great brand, and the company behind it is going through puberty – and is handling the change quite well. But that does not mean that there won’t be operational snafus while the company finds it way in exploring new consumers (women), channels of distribution (DTC), products (footwear), and regions (anything non-US).  It’s currently in the midst of a big snafu that will take several quarters to resolve at a minimum.


In addition,  a new subtle long-term concern has crept into the equation for us. The reality is that Plank supercharged the footwear organization about 28 months ago, and we’ve really seen nada since then. This is simply taking too long. There are other power brands we’ve seen perennially fail over time in key categories (Columbia, Reebok, Adidas, Timberland). From where we sit, a perennial opportunity either means that a company is mis-executing, or is simply not spending enough money to get it done.


The reality with UA is that Kevin Plank will make the footwear business a real player. We’re pretty convinced there. But the question is whether he’ll have to invest more money in order to do that.


In people’s models, they have sales of 25%+ and margins of 10% that are creeping higher over time. I won’t debate the top line opportunity. But perhaps we should consider if the appropriate margin target here is closer to 8%. That’d definitely put a name trading at 40x+ earnings into a new perspective.



Key Issues re Earnings:

  • Top-line trajectory – especially in charged cotton, women’s and footwear
  • How much margin UA is giving up to clear inventories
  • Is current level of SG&A/Capex spend enough to build a real Footwear business
  • Initial 2012 Outlook

Earnings: While we’re in-line with estimates in Q3 ($0.83E), we are coming in below revenue expectations for Q4 at +28.6% vs. +33%E and earnings of $0.56 vs. $0.62E.


UA: Unfavorable Risk/Reward Near-term - UA apparel industry ASP 10 11


UA: Unfavorable Risk/Reward Near-term - UA charged cotton sales ASP 10 11


UA: Unfavorable Risk/Reward Near-term - UA storm cotton 10 11


UA: Unfavorable Risk/Reward Near-term - UA total charged cotton sales 10 11


UA: Unfavorable Risk/Reward Near-term - UA chrg ctn apparel contribution 10 24 11


UA: Unfavorable Risk/Reward Near-term - UA new shoe contribution 10 11


UA: Unfavorable Risk/Reward Near-term - UA 10 24 11


UA: Unfavorable Risk/Reward Near-term - UA Scorecard 10 11


Brian McGough & Casey Flavin 


Shorting: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP), Short SP500 (SPY)


Short high. On our way up to 1266, that is…


I was leaning long for the better part of last week (12 LONGS, 7 SHORTS on Thursday), and now I’m taking that net exposure right back to neutral (10 LONGS, 10 SHORTS). While it’s never easy to pick your spot from a beta perspective, I do not think this spot is very difficult to choose. 

  1. The TAIL (1266) remains broken
  2. The TRADE (1) is now immediate-term overbought
  3. The Catalyst (EU Summit decisions Wednesday) looks like it could very well be bearish relative to expectations 

Every market has a time and price that bakes in some level of expectations. The heartache usually occurs for the largest amount of people at the most unfortunate time. While the Pain Trade has been higher since the SP500 moved to bullish TRADE 2 weeks ago, now I think it could move to lower – in a hurry.


Immediate-term TRADE support at 1218 is what I’m looking for. If that breaks on event risk, there will be a sharp 40-50 points of SP500 downside risk that appears very quickly. If 1218 holds, just cover shorts there and trade the range.



Keith R. McCullough
Chief Executive Officer


Shorting: SP500 Levels, Refreshed - SPX

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%