Weekly Latin America Risk Monitor: All Eyes On Brazil

Conclusion: Alongside China, Brazil is one of the key global economies that led 2011’s global growth slowdown. Supported by aggressive policy, we expect the country to lead on the way up if/when the global economic cycle turns.



Through yesterday’s close, Latin American equity markets have had a phenomenal week, closing up +5.8% in the week-to-date on a median basis. Gains were led by the higher-beta Argentina, which closed yesterday up +7.5% in the week-to-date. We remain negative here, and do not see their capital flight headwinds/currency devaluation pressure easing in a meaningful way over the intermediate term. Brazil, a market we are getting increasingly constructive on from a fundamental perspective after having the negative view for over a year, closed up +5.9% in the week-to-date.


There are a couple of monster moves to report across Latin American FX markets. Brazil’s real finally stopped going down on the back of monetary easing, closing up +5% vs. the USD in the week-to-date. Mexico’s peso also had a great week vs. the USD, closing up +4.5% in the week-to-date on the heels of central bank holding rates and announcing measures to strengthen the currency. We think the latter will eventually lead to easing in the former and remain fundamentally negative here. The -15bps week-to-date drop in Mexico’s 1yr O/S interest rate swap rates lend credence to our view.


Slowing growth continues to get imputed into Latin American sovereign debt markets, though at varying levels of duration risk due where each country is in the context of its own economic cycle. Brazil, which has led regional and global growth lower in the YTD, saw its 2yr yields fall -24bps in the week-to-date. Even after this week’s rate cut, Brazil’s 1yr O/S interest rate swaps market remains 90bps below the benchmark Selic rate – an indicator of expectations for further easing. Mexico, which has held up alongside a “resilient” U.S. economy saw its 10yr yields fall -46bps in the week-to-date as international capital continues to view Mexican sovereign debt as a “levered play on the U.S. economy” (per one bond fund manager). We expect this short-term move to reverse; Mexico’s 10yr yield has an -0.95% inverse correlation to the MXN/USD sport price.


No surprise here, given the week-to-date rally in global beta, but Latin American 5yr CDS markets closed down -13.1% on a median percentage basis. Argentina, a country with a deteriorating credit profile, underperformed, narrowing only -91bps or only -8.4% in the week-to-date.




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Growth Slowing:

  • Brazilian industrial production growth slowed in Oct to -2.2% YoY vs. -1.6% prior.
  • Credit growth continued to slow in Brazil, falling in Oct to +18.4% YoY vs. +19.7% prior. In an effort to ward off a more material deceleration in domestic liquidity, the monetary policy council will delay the implementation of accounting rules that would have been rather punitive to Brazilian financials in the near term, including having to fully book loan portfolios as a profit at the time of sale. This accounting change would have forced them to record a string of losses stemming from prepaid loans. Additionally, the central bank is considering increasing the limit larger banks can uses to buy loan books in an effort to increase liquidity for smaller lenders (currently at 36% of reserves on time deposits).
  • Brazil’s domestic growth situation must be rather dire; either that or Brazilian policymakers are far too aggressive with recent measures – which may show up in 2012 inflation readings. We think it’s a little bit of both… Their latest stimulus efforts include reducing a variety of taxes throughout the real and financial economies. The IOF taxes on foreign equity purchases and corporate infrastructure debt have both been reduced to 0%; the IOF tax on consumer credit has been reduced by -50bps to 2.5%; and sales taxes on consumer appliances and food staples have been cut by an estimated R$1 billion. If Rouseff’s government finds a way to enact meaningful austerity (vs. the usual accounting gimmicks) in the coming months, Brazil’s 2012 economic outlook should appear rather bright.
  • Chile’s Oct economic data was quite bad, on the margin: industrial production growth slowed (-0.8% YoY vs. +5.2% prior); industrial sales growth slowed (-0.6% YoY vs. +1.1% prior); and retail sales growth slowed a full -100bps to +8.6% YoY. One bright spot was the unemployment rate, which saw a -20bps MoM decline to 7.2%.

Deflating the Inflation:

  • Brazilian CPI, as measured by the unofficial IGP-M series, slowed in Nov to +6% YoY from +7% YoY prior. This deceleration is supportive of our dovish intermediate-term outlook for Brazilian inflation, as the IGP-M series has led the benchmark IPCA series by an average of 5.2 months over the last ten years.

Sticky Stagflation:

  • Peruvian CPI accelerated in Nov to +4.6% YoY vs. +4.2% prior.

King Dollar:

  • Brazil’s central bank lowered its benchmark Selic rate by another -50bps, in-line with the recent pace of cuts (now at -150bps in the current easing cycle). Their commentary was unchanged meeting-to-meeting, suggesting to us that they intend to keep cutting at a “moderate” rate.
  • As the U.S. dollar continues to make a series of higher intermediate-term highs and lows, we’ve seen it materially erode EM corporate earnings and the market for issuing international debt, as well as increasing dollar funding costs for such borrowers. The latest data out of Brazil, whose international junk bond issuance calendar has been dark since July 7, saw HY/HG credit spreads widen to 565bps – the largest premium since April ’09 and up from a much-tighter 216bps in early July. Our models have Brazilian GDP growth bottoming in the 4Q/1Q range, so we expect to see additional deterioration in Brazil’s HY credit market over the near term.
  • Mexico, whose currency (the peso) has declined the most in LatAm vs. the USD over the past six months (-13.9%), saw its central bank announce measures to support the peso through U.S. dollar auctions. In the short term, this announcement is bullish for the currency at face value, but looking through to forward implications, this sets the MXN up to extend declines as it gives the central bank room to eventually cut its benchmark interest rate from the current all-time low of 4.5%, after holding at that level today. Recall that last week both JPMorgan and Credit Suisse recanted forecasts for Banxico to cut rates as a function of the dramatic decline in the peso, which has the potential to negatively impact Mexico’s domestic intermediate-term inflation outlook.
  • The recent spate of aggressive intervention out of Argentine policymakers (designed to stem capital flight) has had some negative consequences to-date: consumer confidence ticked down in Nov to 56.7 vs. 57.7 prior; yields on Argentine bank bonds are rising 4-10x their LatAm peers after restrictions on FX purchases forced depositors to withdraw dollar depots from the country’s banking system; and insurers and other investors are fast selling the country’s dollar bonds after being forced boost local investments. Argentina’s 2012 securities declined -7.3% last week vs. +5.8% for JPMorgan’s broad EM dollar bond index. The latest data (through 3Q) shows the pace of capital flight has accelerated to a single-quarter record of $8.4 billion, upping the YTD total to $18 billion (+100% YoY!).

Eurocrat Bazooka:

  • Santander is planning to sell a ~10% stake in its Brazilian unit, Banco Santander Brasil SA, and another 7.8% stake in Banco Santander Chile SA as the struggling Spanish bank looks to artificially strengthen its capital ratios by selling what it can vs. liquidating what it should (i.e. Spanish sovereign debt).


  • Brazil’s FGV consumer confidence index ticked up in Nov to 119 vs. 115.2 – a four-month high. Brazil’s unemployment rate ticked down to 5.8% – an all-time low for the month of Oct.
  • Still slowing, but at a slower rate: Brazil’s manufacturing PMI ticked up in Nov to 48.7 vs. 46.5 prior.
  • Mexican real GDP growth accelerated in 3Q to +4.5% YoY vs. +3.2% prior, aided by a resilient consumer (retail sales growth accelerated in Sept to +4.7% YoY vs. +2.7% prior). The strength was followed by a dramatic improvement in the unemployment rate in Oct to 5% vs. 5.7% prior.
  • In an effort to combat a recent uptick in inflation, Colombia’s central bank hiked its benchmark interest rate to 4.75% - the first LatAm country to do so since July.


  • Brazil’s domestic fund flow situation anchors well with our intermediate-term outlook for the country (continued slowing growth and inflation), as fixed-income funds received another R$2.8 billion in Oct, which drove the YTD inflows up to a 4yr-high of R$67 billion. The central bank wound up cutting the benchmark Selic rate -500bps from the following year’s peak of 13.75%, making the pre-2008 fund-flow move a profitable bet for a great many of Brazil’s domestic money managers. If their trip back to the ol’ well is successful this time around, it may be the result of a dramatic deterioration in global economic conditions.
  • In what may be his last year as President of Venezuela, Hugo Chavez just recently signed into law regulation that will allow his government to set price caps on as many as 15,000 products. The cost of 18 basic goods including soap, toothpaste, and diapers will be immediately frozen. This new measure is on top of existing legislation that regulates the price of 100 foodstuffs – a law that has been viewed by many as a culprit behind persistent shortages of key items. Vice President Elias Jaua had this to say upon the announcement: “This idea of an invisible hand of the market that generates an equilibrium between supply and demand is a lie... [This is] a system in which the capitalists won’t have any way of fooling and defrauding us. The only ones who should fear the law are the speculators who have become accustomed to robbing the Venezuelan people.” On that cheery note, have a great weekend.

Darius Dale



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Bearish TAIL: SP500 Levels, Refreshed



Last week was the best Thanksgiving week to be short stocks since 1932. This week has been one of the best weeks to be long stocks in 3 years. It’s what La Bernank calls the “price stability”, baby!


No matter where you go into the close, here we are – setting up for next week.


Across durations in my model, here are the lines that matter most: 

  1.        Long-term TAIL resistance = 1270
  2.        Immediate-term TRADE resistance = 1259
  3.        Intermediate-term TREND support = 1204 

In the attached chart, I also show a very immediate-term TRADE support line at 1234. Breaking that line on a sharp down move puts 1204 in play – and in a hurry. Holding 1234 will provide the 2011 bulls an opportunity to suspend disbelief until Santa arrives at lower-highs on the 25th.


What could go wrong next week? I think the Euro’s intraday move today is already previewing that. We think the European Summit could very well disappoint whatever market expectations remain for an immediate-term solution to a long-term leverage problem.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Bearish TAIL: SP500 Levels, Refreshed - SPX


Today’s employment data were positive for the restaurant industry. 


With the exception of the 55-64 YOA cohort, which is seeing healthy employment growth despite the sequential deceleration in trends, all age cohorts we monitor saw a sequential improvement in employment trends.  The chart below illustrates the national employment trends by age.  For QSR, in particular, the pickup in the numbers from the summer through the fall has been encouraging for sales trends in the fourth quarter.  Food and beverage spending trends, relative to overall PCE, have been strong throughout this housing downturn as spending on housing-related sectors has lagged.  We anticipate that any continuation of employment growth will be beneficial for the restaurant industry going forward.





The restaurant industry is still hiring.  Despite the upward trend having stalled over the last few months, the data indicates that – at least through October – restaurant operators have been hiring more versus a year ago and that is a positive sign.  We were concerned about the downtick in Full Service employment growth in September, thinking that the trend could have been rolling over, but October’s growth in full service employment was sequentially higher than the month prior.  In the event of a serious downturn or recession taking place we would be more positive on QSR names than Casual Dining.


At this juncture, we like YUM, MCD and EAT on the long side. DNKN and BWLD remain our top two picks on the short side.





Howard Penney

Managing Director


Rory Green




Early Look

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The unemployment rate fell to 8.6% in November versus 9.0% consensus.  The Labor Force Participation Rate fell to 64% from 64.2% in October.  The unemployment rate for teenagers aged 16-19 years dropped to 23.7% from 24.1%. Nonfarm payrolls came in at 120k versus 125k consensus and average hourly earnings declined -0.1% MoM versus +0.2% consensus.



Beef Costs


According to an article on, now is one of the best times to be in the cattle business.  According to Randy Black of Cattle-Fax, “this is the first year in history the U.S. has been a net beef exporter.” For restaurant companies with exposure to spot market beef, this is not good news for margins.



Notes from CEO Keith McCullough


Fed sponsored Dollar Debauchery this week has its reflation perks – don’t mistake it for growth:

  1. CHINA – unfortunately, the Chinese economy doesn’t like the commodity inflation – this only compounds the already accelerating deceleration in sequential (Q4 vs Q3) Asian and European growth. China closed down another -1.1% overnight, right back to where it was pre the rate cut.
  2. BRAZIL – fortunately, the Bovespa is linked to inflation (Petrobras, etc) and is one of the ways to get long of Bernanke getting pushed around by the Germans and the French on bank blow up fear. We’re not long the EWZ yet, but likely will be on a pullback – the Bovespa is down -16% YTD but trading above its TREND line of 55,378 as Brazil cuts rates and taxes.
  3. COPPER – the Doctor looks exactly like European Stoxx because they have the same correlation to the USD. Copper climbs back above its immediate-term TRADE line of resistance this week of 3.47/lb and remains under TREND line resistance of 3.72/lb. Pick your European stock market and the TRADE/TREND setup is the same. Trade the new ranges.

US Futures spikey as short sellers are now in Pain Trade mode while the long-onlys chase beta. Always a powerful combo in the immediate-term – also the biggest downside risk after the immediate-term squeeze makes a lower-high. My refreshed SP500 range = 1.







THE HBM: DPZ, WEN, GMCR, SBUX, KKD, DIN, CBRL, EAT - subsector fbr





DPZ: Domino’s Pizza was initiated “Hold” at KeyBanc.


WEN: Wendy’s announced plans to consolidate its World HQ in Dublin, Ohio.  Wendy’s said that it has 200-210 employees in the Atlanta office right now and that most Atlanta-based employees will be offered relocation.  30-40 jobs, according to the company, are redundant and may be eliminated.


GMCR: Green Mountain Coffee Roasters was raised to “Outperform” at William Blair.


SBUX: Starbucks is set to create 5,000 jobs in the UK as it opens 200 more drive-through stores across the country.


KKD: Krispy Kreme same-store sales gained 4% in the third quarter.  EPS came in at $0.35 versus $0.41.





DIN: Dine Equity was initiated “Neutral” at Janney Montgomery.  The twelve-month price target is $45.


CBRL: Cracker Barrel reported November sales metrics yesterday.  Comparable restaurant traffic was down -1.0% while average check gained 2.2% to leave the overall comp at +1.2% for the month. Comparable retail sales were up +2.7%.


EAT: Chili’s features in an article on today describing the “kitchen of the future”.  We have been bullish on this name for some time and remain so following store visits this week. 





Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, December 2, 2011




November GGR Share: SJM (27%), GALAXY (20%), LVS (16%), MPEL & WYNN (13%, with WYNN slightly ahead), MGM (11%).



Secretary Tam said the Macau government has still not received any application from MPEL to include gaming elements in the Macau Studio City project.  Tam said that if an application is filed, the DICJ would consider it according to the relevant legislation.  He also stressed again that the 5,500 table limit on live gaming tables will not be lifted before 2013.  He added the remaining number of table licenses should be enough for Sands Cotai Central to operate successfully.


The first phase of Sands Cotai Central is set to open in March and will include a 9,850 square-metre casino and VIP gaming areas.  The company expects to open a second casino there by 3Q 2012.



Singapore visitation hit 1,033,013 in September 2011, up 9.1% YoY, the lowest growth rate since November 2009.  Mainland China visitors accounted for 10% of total visitation.




Just when the sell side warms up to the idea of a recovery, Q4 replacement sales are likely to disappoint.



The sell side finally seems to be on the replacement recovery bandwagon, even though the bandwagon has been moving forward for a number of consecutive quarters and years.  BYI and IGT put up solid September quarters and the stocks took off.  The sell side followed up with enthusiasm about replacement demand returning and all is well.  Or not. 


We hate to rain on the parade but calendar Q4 replacements are likely to fall sequentially and, yikes, YoY.  IGT could see the biggest drop since they appeared to pull sales forward into the September quarter.  A significant market share decline in CYQ4 may be disappointing, considering IGT's long thesis of “continued share gains”. 


BYI should still gain share in CYQ4 and we continue to believe they are the best positioned supplier over the intermediate and long-term (trend and tail).  However, this stock has been a rocket ship since our positive call during G2E.  A disappointing industry wide replacement quarter will likely not be a positive for the stock with maybe the most bullish sentiment. 


At this juncture, we think both IGT and BYI can make consensus estimates but the quality would be low and transparent.  IGT does a better job of managing earnings – lower than expected revenues, higher margins and vice versa – so it may be a little safer from an earnings perspective but the market share drop would hurt.  WMS is likely to miss in our opinion but we can’t believe there are still people out there who think WMS is going to have a decent quarter any time soon. 


So why do we think replacements will fall in CYQ4?

  • IGT which had a 40% share of replacements last quarter at 5,100 is likely to see about a 1,500 sequential drop in replacements – partly due to seasonality and partly due to what we believe was pulling forward of demand.  September is IGT’s fiscal year end, so that quarter tends to be their best.
  • WMS should be up sequentially but definitely still down YoY so they won’t be making up the difference.  WMS also appeared to pull forward some units into the September quarter.
  • We believe that with all the uncertainty in 2010, there was some flushing of capital budgets in the December quarter
  • Bottom line, we think that there will be a modest YoY decline between 1-5% in replacement demand – the first YoY decline since 3Q of calendar 2010.

We still think 2012 will be a good year for the slot suppliers: resumption of replacement demand growth, huge growth in slot sales to new and expanded casinos, and a more visible and growing systems business (mostly BYI).  But we may have to take a step back this quarter to move forward.  However, we’re not sure the Street is ready for the step back just yet.

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