Weekly Latin America Risk Monitor: Kneeling Before the King [Dollar]

Conclusion: USD strength and the resultant knock-on effects continue to force the hands of international policymakers.



  • Equities: Regional equity markets closed down -0.9% wk/wk on a median basis, w/ Venezuela outperforming (up +0.6%) and Argentina underperforming (down -1.3%);
  • FX: Latin American currencies are up modestly vs. the USD wk/wk (+0.1%), w/ the Brazilian real outperforming (up +0.8%) and the Chilean peso underperforming (down -0.8%);
  • Fixed Income: Regional sovereign debt yields generally backed up across the maturity curve, w/ Brazil gaining +19bps wk/wk on both its 2yr and 9yr issues;
  • CDS: 5yr sovereign CDS closed +6.6% wider wk/wk on a median percentage basis, w/ Peru widening the most (+8.4% or +13bps) and Argentina widening the least (+2.2% or +22bps);
  • Rates (swaps): 1yr O/S interest rate swaps markets were flat wk/wk on a median percentage basis, bracketed by Mexico (+9bps wider) and Chile (-4bps tighter); and
  • Rates (interbank): O/N interbank rates backed up +0.3% wk/wk on a median percentage basis, bracketed by Mexico (+10bps wider) and Argentina (-25bps tighter).

Price tables can be found at the bottom of this note.




Growth in Brazil continues to be rather un-“BRIC”-like:


Weekly Latin America Risk Monitor: Kneeling Before the King [Dollar] - 1


As such, various markets continue to price in additional monetary easing measures out of Brazil’s central bank:


Weekly Latin America Risk Monitor: Kneeling Before the King [Dollar] - 2


Jumping ship, aggressive financial repression appears to have slowed capital outflows in Argentina – for now:


Weekly Latin America Risk Monitor: Kneeling Before the King [Dollar] - 3



Growth Slowing:

  • Brazil: After publishing a sour 3Q real GDP report, Brazil’s economic activity index (a proxy for GDP) slowed incrementally in Oct to +0.7% YoY vs. +1.3% prior.
  • Colombia: Industrial production growth slowed in Oct to +5% YoY vs. +5.2% prior… retail sales growth slowed in Oct to +6.1% YoY vs. +8.1% prior.
  • Peru: Real GDP growth slowed in Oct to +5% YoY vs. +5.8% prior.

King Dollar:

  • Brazil: USD strength continues to force the hands of international policymakers; Brazil’s central bank became the latest country to [re]introduce ‘08/’09-esque measures to protect its currency and the supply of capital flowing into the country. Specifically, the program is structured as a 1-3 month repo that is intended to provide trade financing for Brazil’s exporters. A noteworthy takeaway here is that the central bank may view this as an effective maneuver in the short term to slow the pace of the real’s decline, thus opening the door for further rate cuts. Of course, the derivate of the latter action is indeed a weaker outlook for the currency.
  • Brazil: Regarding the slope of Brazilian interest rates, widespread political pressure continues to be applied to the country’s central bank operatives. President Dilma Rousseff had this to say over the weekend: “[Brazil] is ready to use monetary policy to stimulate growth amid a violent global crisis… Developed nations have interest rates close to zero. We have a room for maneuvers that they don’t.” Markets are taking her continued outlook for Brazilian interest rates seriously: 2yr sovereign debt yields, 1yr interest rate swaps, and O/N interbank rates are all trading below the official Selic rate at -54bps, -112bps, and -10bps, respectively.
  • Argentina: Financial repression, while successful at slowing the pace of capital flight, continues unabated in Argentina as the gov’t seeks to stave off a crash in the currency. To the former point, the central bank has now become a net buyer of FX reserves as insurers, energy and mining companies repatriate an estimated $2-4 billion into year-end per the government’s directive. Slowing capital flight, which fell to about $1 billion in Nov from $3 billion in Oct, and pressure from central bank president Mercedes Marco Del Pont are combining to drive down the cost of capital in the country (from a mid-Nov peak of 26.1% to 18.8% on the 30-day badlar). As mentioned, these near-term “successes” are not without consequence. Over the long term, we expect the country to experience incremental economic volatility and even higher [unofficial] rates of structural inflation as investors lose confidence in the country altogether and abandon peso-denominated assets. To that point, 1yr USD/ARS NDF contracts are currently pricing in a -20.2% crash from the spot rate over the NTM.
  • Chile: Less than a week after holding its benchmark policy rate at 5.25%, Chile’s central bank lowered its 2012 growth and inflation outlook by -50bps and -20bps, respectively, to 4.25%-4.7% and 2.7%, respectively. Their reduced expectations for both metrics paves the way, on the margin, for them to cut rates – an outcome currently being priced into Chile’s 1yr O/S interest rate swaps (trading -90bps below the policy rate).


  • Mexico: Who says you need a strong currency to empower domestic consumption? Mexico’s ANTAD same store sales growth ripped to the upside in Nov to +14.6 YoY vs. +5.8% prior, despite the peso falling -9.4% vs. the USD in the YTD through Nov. We don’t expect this divergence to sustain itself and remain the bears on the peso (vs. King Dollar) over the intermediate-term TREND. Mexico’s central bank remains divided on the next step(s) in monetary policy. This indecision is subtly bearish for the peso as heightened volatility forces investors to demand greater premiums to hold risky assets – a premium that is not being adequately provided by the central bank due to their Indefinitely Dovish interest rate policy.


  • Peru: Less than six months after winning the Peruvian presidency on the strength of strong populist support, it appears President Ollanta Humala is losing some of his left-most supporters in politics after he recently declared a state of emergency and authorized a military response to quash protests against a $4.8 billion gold mine being developed by Newmont Mining Corp. Two senior officials in his cabinet resigned after voicing support for the demonstrations; he then replaced his cabinet chief with a former military instructor. Former president Alejandro Toledo withdrew his party’s support for Humala in Congress, where Humala’s Gana Peru party only has 47 of 130 seats. Congressional gridlock and lower-highs in presidential approval appear to be in the cards for Peru and its now pro-business president over the intermediate and, potentially, long term. Ironically, it was Humala that led a violent uprising as a rebel solider just over ten years ago.
  • Venezuela: Another socialist leopard changing its spots? In an attempt to limit consumer goods supply shortages ahead of next year’s elections, Venezuelan president/dictator Hugo Chavez is forging strategic alliances with private international companies to entice them back to the country’s retail markets. This is a major reversal of his political M.O.; as recently as a few weeks ago, he authorized a dramatic piece of new legislation which would allow the government to impose draconian price caps on thousands of consumer goods. Moreover, since taking office in 1999, Chavez has seized the assets of 1,045 companies and is on the hook for roughly $30 billion in paid and unpaid international legal settlements. While we don’t expect Chavez to soon adopt Adam Smith-style capitalism, we do think this latest round of political short-termism might actually be marginally supportive for the economy struggling with structurally high rates of inflation – if he is to follow though, of course.

Darius Dale

Senior Analyst


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Weekly Latin America Risk Monitor: Kneeling Before the King [Dollar] - 10

Gentleman Prefer Bonds: TLT Trade Update

On a day like today where Bernanke’s mandate of “price stability” is violated to the upside on the order of ~3-4% (S&P 500, Russell 2000, crude oil), it helps to have a repeatable multi-factor, multi-duration risk management process to contextualize such moves beyond merely attributing performance to a fictional character tasked with spurring consumerism via holiday cheer.


To that tune, the long end of the Treasury bond market continues to suggest to us quantitatively that the global growth/inflation/interconnected risk outlook for the short-to-intermediate term has not changed. All that’s changed are market prices (to inconsequential levels) and the latest batch of consensus storytelling. As such, we’ve taken this wonderful opportunity to continue Fading Beta by purchasing long-term Treasury bonds via the TLT ETF in our Virtual Portfolio.


Until a) long-term Treasuries sustainably break down through any of our three risk management levels and b) the Treasury market stops being a leading indicator for U.S. equities (it has led domestic equities lower in every economic slowdown since 2007), the gentleman (and ladies) of Hedgeye will continue to prefer bonds.  


Buy low. Sell high. Fade Beta – for now, at least.


Darius Dale

Senior Analyst


Gentleman Prefer Bonds: TLT Trade Update - 4

Early Look

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Pricing commentary spooking investors today.



"On the whole, 2011 was an encouraging year for our global portfolio of cruise brands. Our North American brands performed well, achieving an almost four percent revenue yield increase, while our European, Australian and Asian brand yields were in line with the prior year (constant dollars) despite having been significantly impacted by the geo-political unrest in the Middle East and North Africa.  Higher revenue yields partially offset a 32 percent increase in fuel prices, which reduced earnings by $535 million or $0.68 per share for the year. Cash from operations of $3.8 billion provided more than ample funding for our $2.7 billion capital investment program and enabled the company to return excess cash to shareholders.  Earlier this year, our quarterly dividend was increased from $0.10 to $0.25 per share resulting in $670 million of dividend distributions. In addition, we purchased 14.8 million of the company's shares in the open market at a cost of $455 million."


- CCL CEO Micky Arison




  • 4Q 2011
    • EAA brand yield grew 10% while NA brand yield grew 3%
    • Net ticket yields: NA +8%, higher yields in Caribbean, Alaska, Canada/New England, and transatlantic itineraries; EAA: -6%, from impact on MENA
    • Net onboard yield & other: +1.4%
      • Driven by our North American brands as our EAA brands were impacted from MENA itinerary changes that resulted in lower occupancies, lower short duration revenues and slightly lower spending in other areas
    • Net cruise costs ex fuel influenced by ship repair costs
    • Fuel usage savings of 15% since 2005
  • 2011
    • 4% improvement in NA brand yield; EAA brand yield in-line YoY
    • Fuel/currency shaved EPS by 41 cents
    • Ex Japan and ME, CCL would have been at the high end of their original guidance range from a year ago
    • Dividends paid and share repurchases of $1.1BN which consisted all of its FCF
    • Going forward, CCL will not include in our earnings guidance any year-to-date impact or any future estimates of the unrealized gains and losses on the fuel derivatives. Will be on non-GAAP basis going forward.
  • 2012
    • Current spot price for fuel used in our guidance is essentially in line with 2011's average price.  However, based on the current FX rates, currency is expected to have a negative impact of 17 cents
    • 10% change in the price of fuel represents a 225 million or $0.29 per share impact for the full year
    • 10% change in all relevant currencies -- relative to the U.S. dollar, would impact EPS by 25%
    • 3 ships for delivery: Costa Fascinosa scheduled for April, while AIDAmar and Carnival Breeze are scheduled for May
    • Capex: $2.6BN
    • FCF: $1.4BN
    • The $0.30 per share range for 2012 compares to the $0.20 share range we have used in recent years due to European uncertainty
    • Lower consumer confidence caused some delay in vacation decisions and resulted in a lower end booking window.
    • Fleet-wide bookings volumes have been higher year-over-year, we have achieved this volume by reducing prices for our Cruises. 
    • North America brand booking volumes over the last 13 weeks have been "rubbing higher" than a year ago at lower prices
    • EAA brand bookings are slightly higher at lower prices.  
    • Recent bookings over the last six weeks have seen stronger pickup in booking volumes for both North America and Europe brands which is encouraging 
    • In terms of our current booking status at the present time based on bookings taken to date, constant dollar ticket prices for North America and EAA brands are slightly higher than a year ago on slightly lower occupancies.
    • Capacity: +4.8%
  • 1Q 2012
    • Capacity: +4.9%
      • 4.5% for NA brands
      • 5.6% for EAA brands
    • Occupancies on the fleet-wide basis are slightly higher year-over-year, with constant dollar pricing also higher.
    • Very little inventory left
    • NA brand
      • 65% Caribbean (same as last year)--pricing is higher than a year ago at slightly higher occupancy 
      • Pricing for all other itineraries is also shootingly higher than a year ago at slightly lower occupancies
    • EAA brand
      •  22% Caribbean (vs 20% last year); 19% in Europe (vs 22% last year); 18% South America (vs 16% last year)
      • EAA constant dollar pricing in the Caribbean is higher than a year ago on lower occupancies.  EAA prices in Europe is lower year-over-year but with higher occupancies.  And EAA South America pricing is nicely higher than a year ago on higher occupancies.
    • Incremental costs for the increased number of dry dock days vs 1Q2011 is ~$0.06 per share.  This is a timing difference.  These dry dock days that will reverse during the remainder of the year as the dry dock days for the full year 2012 is approximately the same as 2011.
  • 2Q 2012
    • NA: Caribbean 56% (same YoY); pricing nicely higher on same occ; other itins are higher with lower occ
    • EAA: 53% Europe (vs 55% last year); EAA European constant currency Cruise pricing is slightly higher than a year ago on slightly lower occupancies. EAA brand pricing all taken together is slightly lower than last year also at lower occupancies.  
    • Overall basis estimate is that constant dollar revenue yields will be flattish for the second quarter by the time we close
  • 3Q 2012
    • Capacity: 4.7% (3.3% in NA, 7% in EAA)
    • Pricing higher on lower occu
    • NA
      • 39% in Caribbean (36% last ago); 24% in Alaska; (slightly higher than year ago); 25% in Europe (same YoY)
      • Pricing for Caribbean Alaska and Europe itineraries are higher than a year ago.  Occupancies for Caribbean and Alaska Cruises are running at about the same level as last year with occupancy for Europe Cruises lower than last year.
    • EAA
      • 88% in Europe (in-line YoY); pricing nicely higher on lower occu
      • But considerable amount of inventory left to be sold



  • There has been "ebb and flow" in bookings
    • For last 13 weeks: less impact on 1Q, more impact on 2Q and 3Q
    • Last 6 weeks, bookings have been stronger
  • Some markets fine, some markets lower demand--more broadly so in Europe than NA
  • Southern Europe: a big challenge but still holding pricing
  • Comps for European crisis won't happen until mid-February
  • "Pleasantly surprised" by UK and Germany
  • Southern Europe--Spain, Italy and France-- wintertime is a slow time for those countries
  • Don't expect crack spread between WTI and brent to come down 
  • Costa was hit the hardest from MENA disruption--expect better occupancy to drive yields in 2012
  • MENA negatively impacted yields by 1.7%.  EAA brands was probably over double that.
  • Ships that go to dry docks depends on the ships every three years, twice every five years.
    • Relative to 2011, 2012 total # of dry dock days were in-line. Capacity went up slightly.
    • Dry dock costs will not affect cruise costs for the full year
  • FCF: 30-40% payout in dividends
  • Don't source a lot of Scandinavia passengers; Netherlands business is going well
  • Pricing will continue to be a challenge in Southern Europe; not much capacity increase in Europe
  • Booking window has come in a little bit
  • If you didn't lower price, would you see better volumes? 
    • Don't know
  • Market share vs Tour operators/Thomas Cook: Package holiday business in Europe in general is shrinking while the Cruise business is growing.  So obviously we're effectively taking share but our share is so small in number.  Compared to the overall package holiday business in Europe, it's not meaningful.
  • 2012 capacity increase is after the Pacific Sun take out
  • Wave guidance
    • In some markets, sustained pricing and good volumes
    • In other markets, lower pricing
  • But once you get post that line in the comparisons get much easier, we'll be running well ahead in terms of prices
  • More than of 50% of yield will be driven by occupancies
  • Not much change in patterns between Premium and Contemporary brands; US Premium is holding up well
  • Q2 "flattish pricing"--could still be slightly up or down but in a tight range
  • No need to worry about cost of new itineraries; they are booking well
    • Major change in deployment is shorter duration which is helping bring pricing down and delaying the booking which would benefit onboard spend



  • 4Q2011 results: 
    • EPS: $0.28 (consensus $0.28)
    • Current $ net revenue yields: +2.1% (vs consensus of +2.2% and guidance of +1.5-2.5%)
    • Constant $ net revenue yields: +1.5% (guidance of +1% to 2%)
    • Gross revenue yields (in constant $): +0.3%
    • Constant dollar net cruise costs: -1.8% (guidance of -3-4%)
    • Fuel: +39% YoY to $680/metric ton (lower than guidance of $686/mt)
  • 1Q2012 guidance
    • Current dollar net revenue yields: +0.5% to 1.5% (consensus: +2%)
    • Constant dollar net revenue yields: +1.5% to 2.5% (consensus: 2.3%)
    • Current dollar net cruise costs (ex. fuel): +2.5% to 3.5%
    • Constant dollar net cruise costs (ex. fuel): +3.5% to 4.5%
    • Fuel: $652/metric ton; 860K metric tons
      • Fuel costs for Q1: $93MM or $0.12 EPS drag
    • EPS: $0.06-0.10 (consensus: $0.14)
  • FY2012 guidance:
    • Diluted EPS:$2.55-$2.85 (consensus: $2.77)
    • Constant dollar net revenue yields: +1.0% to 2.0% (consensus: +2.8%)
    • Constant dollar net cruise costs (ex. fuel): -0.5% to 0.5%
    • Fuel: $650/metric ton
    • Fuel consumption: 3,470K
  • Fuel derivatives program
    • "During the fourth quarter of 2011, the company entered into zero cost collars for approximately 10 percent of its estimated fuel consumption for the second half of fiscal 2012 through fiscal 2015.  The company will not realize any economic gain or loss upon the maturity of these zero cost collars unless the price of Brent is above the ceiling price or below the floor price." 






Comments from CEO Keith McCullough


Plenty going on out there in the world – we just need to keep refining a repeatable risk mgt process to absorb it:

  1. KOREA – I learn a lot more about a bear market on the bounces than you do on the down moves – the KOSPI’s -3.4% drop on the “news” was met w/ a +0.91% bounce overnight (you’d need a +3.7% move to get back to breakeven); much like the rest of Asia which was weak again (India down another -1.3%, crashing to -26% YTD), South Korean Industrial and Tech demand continues to slow
  2. FTSE – Steiner highlighted this in our morning meeting yesterday and it appears that the market continues to care about it this morning – capital charges on British banks – gives the FTSE and Swiss Market Index negative divergences vs the region this morn despite the Swedes cutting rates by 25bps to 1.75% (Sweden gets the + divergence for the morning, up +0.8%)
  3. OIL – Bearish is as bearish does; provided that the USD holds my most immediate-term TRADE line of $79.68 support, I see Brent Oil making lower-highs on bounces within a newly established Bearish Formation (TAIL resistance = $110.12/barrel). This read through is wrecking Russia; down another -1% this morning, sending the RTSI to -36.2% since the Bernanke USD debauchery low (April 2011)


1207 holding in the SP500 is critical. We’ll see what the bulls have left to keep it treading water – inflows are dead.







THE HBM: CMG, GMCR, SBUX, WEN, DRI - subsector fbr





CMG: Chipotle Mexican Grill was initiated Outperform at Bernstein with a RT of $141.


GMCR: FY13 estimates for Green Mountain were cut by Piper Jaffray, reducing y/y K-Cup sales growth estimate to 30% from 45%.  FY13 EPS now $3.64 from $3.87.  Consensus is $3.62.  PT cut to $52 from $117 versus consensus $89. Rating remains Overweight.


SBUX: Starbucks FY12 estimates raised “after recent checks” on SBUX single-serve during holiday season.  FY12 EPS estimate raised to $1.82 from $1.75 versus consensus $1.82.  Starbucks rating remains Overweight, PT $55 versus consensus $49.


WEN:  The newest Wendy’s prototype features in an article on today.





DRI: Darden was reiterated “Overweight” at Barclays.


THE HBM: CMG, GMCR, SBUX, WEN, DRI - stocks 1220



Howard Penney

Managing Director


Rory Green



Looking For Improvement

This note was originally published at 8am on December 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Socialism told us that we had been looking for improvement in the wrong direction.”

-Friederich Hayek


I’ve been writing about this from my gut since I started the firm in 2008, but I think it’s worth stating plainly again this morning because it’s the one solution to this mess of economic common sense that we have not yet tried – stop what we are doing.


That’s it. Instead of do more, spend more, centrally plan more. Just stop.


As we have learned since 2007, central plans can only suspend economic gravity for short periods of time. In the long-run, we all have to find a way to let free market capitalism live. The best way to ensure that is to let market prices clear.


Hayek’s views are often ignored and/or misrepresented primarily because the entire Western system of economics education is founded on the idea that Big Government Intervention can “smooth” the business and price cycle.


How’s that smoothing mechanism treating everyone?


I don’t wake up every morning looking to whine. I want to win. Like many immigrants, that’s what I came to America to do. I’m Looking For Improvement in markets every day.


I’m looking to invest in a Strong Dollar. I’m looking for someone in this country’s political leadership to embrace the long-standing economic fact that a Strong Currency empowers not only a nation’s purchasing power, but the confidence of its People.


Taking a step back – and I mean going all the way back to the arenas of meritocracy that hosted the great debates of the Roman Empire (pre 49BC) – this is all we want. We want to be able to have an idea in this country and compete with the broken ideas of the status quo.


If we lose, we can deal with that. If we win, we can change the world. As the great American hockey Coach, Herb Brooks, said, “Again!” – stop what we are doing so that we can all start over.


Back to the Global Macro Grind


US Consumer Confidence is rising as the US stock market is falling.




Yes, while this may shock people who are in the business of seeing stocks go up, the other 80-90% of us get paid when the price at the pump goes down. At Hedgeye, since our Q211 Global Macro Themes call, we’ve coined this commoner’s phenomenon “Deflating the Inflation.”


Metaphorically, maybe this is why Hayek’s economic perspective resonates with so many people. When “Hayek disembarked at the passenger liner quay on Manhattan’s West Side in March 1923 with just twenty-five dollars in his pocket… he decided to take a job until Jenks returned, and was offered one washing dishes in a Sixth Avenue restaurant…” (Keynes Hayek, page 27)


While he didn’t make his name in dishwashing, this does remind readers what it takes to make it in this world.  On Saturday mornings in the 1980s, after my Dad got off the nightshift at the fire-hall, we’d literally scrub the local GM Auto Body shop’s floor with de-greaser, clean the toilets, and sweep the floors.


And liked it…


I mean that with all sincerity. There was an innocence maybe, but also a recognition of reality. That job put more money in our pockets than we’d have had if we didn’t do it. That job, when completed, also gave me a personal sense of accomplishment and responsibility.


This is the real-world folks. And it’s time we start liking that American idea again too.


In May 1924... Hayek set sail back across the Atlantic … and would not return to America for another twenty-five years.” (Keynes Hayek, pg 28)


That’s an American academic tragedy. Since Hayek’s English was awful, he had a very hard time communicating with the British academic elite (which instructed the American academic elite on economics).


However, by 1932, after Keynes had blown up most of his capital being long corn, rubber, etc. (you know, the Debauch the Currency, Buy Commodities trade), Hayek was gaining traction.


His argument – all of your central plans since 1928 have not worked. They have perpetuated the inflation and slowed Consumption growth.


His solution – stop what you are doing.


Was 2007 this Canadian-American’s 1928? I hope not. But hope is not a risk management process. And if I really take a step back and see how much money I made being long inflation (2003-2007), I can’t say it made me any more proud than the glimmer of that GM shop floor.


My immediate-term support and resistance ranges for Gold (bought it yesterday), Brent Oil, German DAX, and the SP500 are now $1568-1624, $104.94-108.61, 5593-5831, and 1205-1230, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking For Improvement - Chart of the Day


Looking For Improvement - Virtual Portfolio

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