The Economic Data calendar for the week of the 5th of December through the 9th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
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.
CHARTS OF THE WEEK
THE LEAST YOU NEED TO KNOW
Deflating the Inflation:
POSITION: Short SPY
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:
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
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.
THE HEDGEYE BREAKFAST MONITOR
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.
According to an article on cattlenetwork.com, 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:
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.
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 NRN.com 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.
The Macau Metro Monitor, December 2, 2011
SANDS' PERFORMANCE IMPROVES IN NOVEMBER Macau Business
November GGR Share: SJM (27%), GALAXY (20%), LVS (16%), MPEL & WYNN (13%, with WYNN slightly ahead), MGM (11%).
GOVT HAS RECEIVED NO GAMING APPLICATION FOR STUDIO CITY Macau Business
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.
INTERNATIONAL VISITOR ARRIVALS BY REGION/COUNTRY OF RESIDENCE STB
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.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.