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Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update

Conclusion: The Brazilian economy remains in the sweet spot for equity investments and we continue to hold a bullish bias towards Brazilian equities for the intermediate term. Elsewhere, the fundamentals continue to suggest that King Dollar will appreciate versus LatAm currencies over the intermediate term TREND.

 

No Virtual Portfolio positions in Latin America currently.

 

PRICE SIGNALS

All % moves week-over-week unless otherwise specified. As of Friday’s closing prices.

  • EQUITIES Median: +2.8%; High: Brazil +5.4%; Low: Chile +1.7%; Callout: Brazil closed last week up +9.8% for the YTD vs. a regional median of +6.9%
  • FX (vs. USD) Median: +1.2%; High: Mexican peso +3.2%; Low: Argentine peso -0.3%; Callout: Peru’s Nuevo sol is the only LatAm currency that has appreciated vs. the USD over the last six months (+1.7%)
  • S/T SOVEREIGN DEBT (2YR) High: Colombia -3bps; Low: Brazil -16bps; Callout: Colombian 2yr yields up +116bps in the LTM vs. down -235bps for Brazil
  • L/T SOVEREIGN DEBT (10YR) High: Colombia +1bps; Low: Mexico -25bps; Callout: Mexican 10yr yields down -46bps over the last month vs. up +24bps for Brazil
  • SOVEREIGN YIELD SPREADS (10s-2s) High: Brazil +10bps; Low: Mexico -15bps; Callout: Brazil up +37bps over the past three months vs. down -48bps for Mexico
  • 5YR CDS Median: -2%; High: Peru -0.9%; Low: Argentina -9.7%; Callout: Peru up +9.8% over the last three months vs. a regional median of -3.2%
  • 1YR O/S INTEREST RATE SWAPS Median: -0.9%; High: Chile +0.7%; Low: Brazil -1.9%; Callout: Brazil down -6.3% over the last three months vs. a regional median of +2.5%
  • O/N INTERBANK RATES Median: -0.3%; High: Chile +1.2%; Low: Brazil -4.6%; Callout: Brazil down -15.1% over the last six month vs. a regional median of -2.2%
  • CORRELATION RISK Brazil’s Bovespa Index is becoming increasingly correlated with the S&P 500: +97% over the last three weeks vs. +72% over the last three months.

Full price and performance tables can be found at the conclusion of this note.

 

CHARTS OF THE WEEK

Brazil’s central bank lowered the country’s benchmark interest rate -50bps for the fourth consecutive meeting.  The rate, now at a 18-month low, is now much closer to market expectations for Brazilian monetary policy:

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 1

 

Based on our propriety G.I.D.P. analysis, the Brazilian economy remains in the sweet spot for equity investments:

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 2

 

Moreover, the outlook for Brazil’s growth, inflation, policy, and equity market beta that we published at the top of our 9/1/11 note titled: “Eye On Brazilian Policy: Oh No You Didn’t” continues to play out in spades: “We view the central bank’s aggressive and proactive rate cut as supportive of Brazilian equities because it will likely coincide with a peaking of CPI and a deceleration in Brazil’s current economic slowdown. Our quant models aren’t in full confirmation of this, however, which suggests the turn is likely further out in duration.” Aside from TIME, the only difference between then and now is that the Bovespa’s quantitative setup is in full support of our bullish bias on Brazilian equities:

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 3

 

KEY CALLOUTS

Growth Slowing’s Bottom:

  • Mexico: Unemployment Rate ticked down in DEC to 4.5% vs. 5%; ANTAD Same-Store Sales growth slowed in DEC to +3.8% YoY vs. +14.6%.
  • Peru: Unemployment Rate held flat in DEC at 7%.

King Dollar:

  • Brazil: For the fourth time since AUG, Tombini & Co. lowered the country’s Benchmark Interest Rate by -50bps, taking the Selic to 10.5%, which is the lowest since 3Q10. The latter point suggests to us that the QE2-inspired rate hike cycle has been completely reversed in Brazil, which is bullish, on the margin, for perception of Brazil’s intermediate-term growth prospects. Looking forward, Brazil should remain in quadrant #4 of our GIDA chart (see above) through Q1, suggesting further easing is likely. We received confirmation of this over the weekend, as O Globo reported that Rousseff is prepared to make fiscal adjustments to help the central bank cut the [Selic] by at least a another percentage point in 2012.
  • Brazil: In addition to the currency headwind that is monetary easing, Brazil’s government is reported to be studying ways to stem the recent rally in the real. The inflection in USD-denominated loan rates (+14bps since Wed) suggests that the central bank may be hinting at additional dollar purchases.
  • Mexico: Despite three consecutive months of acceleration in CPI to a mere 20bps shy of their upside inflation target, the central bank kept the country’s Benchmark Interest Rate at a record-low of 4.5% for the 24th-consecutive meeting. In fact, the monetary policy board led by Governor Agustin Carstens tilted their commentary to the dovish side, signaling that: a) their policy is consistent with their outlook for inflation; and b) that they stand ready to lower rates should growth come in to the downside.
  • Argentina: Argentina’s Benchmark ARS Deposit Rate continues to make new intermediate-term lows, touching 15.6% today (down from a peak of 22.9% in mid-NOV). The trend is proof that President Fernandez was successful (over the short term) in her bid to slow capital outflows by increasing the supply of pesos in the economy by imposing USD scarcity via a series of repressive regulations. This does not include the latest scheme, which will force importers to require gov’t approval for all overseas purchases after FEB 1. The change is likely to limit imports on the margin in order to support the trade balance; that may ultimately serve to push up Argentine CPI as certain products become more scarce and/or more expensive to produce.
  • Argentina: The peso’s -6.5% YTD slide vs. the Brazilian real has been supportive of Argentina’s USD-denominated sovereign debt, with yields falling -61bps to 10.7% (through JAN 18). This is because increased competiveness w/ Brazil, Argentina’s largest trade partner, is supportive for growth in the country’s FX reserves, which Argentina uses to service its USD debt burden.

Other:

  • Argentina: The latest news surrounding Argentina’s sovereign default/bankruptcy proceedings takes us to D.C., where the Supreme Court asked the Obama administration for advice on whether it should hear an appeal from the hedge funds EM Ltd. and NML Capital (both units of Elliot Management Corp.). Having turned down both of Argentina’s restructuring attempts (2005 and 2010), the creditors claim they are owed at least $2B in principal and interest payments. The Supreme Court is specifically debating whether or not to rule on the funds’ failed attempt at seizing $100M in Argentine assets being held in custody of the Federal Reserve. A ruling in favor of the funds may set precedent for increased legal recourse for investors in the event of sovereign defaults – a very apropos subject given the current issues in Europe.

MOSHE’S BRAZIL NUGGETS

Moshe Silver, our Chief Compliance Officer, is fluent in Portuguese and mines the local Brazilian press for hard-to-get data points for us each day. Below, we flag his top three callouts from the previous week:

  1. Brazil’s national labeling program is urging consumers to trade in their low-efficiency appliances and lighting fixtures for those labeled “A”, which represents the highest level of quality and energy efficiency. A concerted marketing effort plus any new rebate program are likely to be a tailwind for Brazilian retail sales over the intermediate term.
  2. According to Valor, the $3.5B of foreign investor inflows into the Bovespa in the YTD (through first 12 trading days of 2012) is the highest in at least seven years.
  3. Brazilian leadership continues to demand more say in how IMF funds are allocated in exchange for its continued financial support.

THE WEEK AHEAD

Key economic data releases and policy announcements:

  • TUES: Brazil: mid-month CPI (IPCA-15); Mexico: Global Economic Indicator; Argentina: Industrial Production, Consumer Confidence, and Shop Center Sales
  • WED: Brazil: FGV Consumer Confidence; Argentina: Supermarket Sales
  • THURS: Brazil: Central Bank Monetary Policy Meeting Minutes and Unemployment Rate; Mexico: Retail Sales and Presidential Election Poll (Consulta Mitofsky)
  • FRI: Brazil: Aggregate Credit; Chile: Central Bank Monetary Policy Meeting Minutes
  • WEEKEND:
  • MON: Brazil: FGV CPI (IGP-M); Chile: Industrial Production and Retail Sales

Darius Dale

Analyst

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 4

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 5

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 6

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 7

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 8

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 9

 

Weekly Latin America Risk Monitor: All Eyes on Brazil Part II + A King Dollar Update - 10


MCD SALES PREVIEW

McDonald’s will release sales tomorrow before market open.

 

McDonald’s remains one of our favorite stocks in the restaurant space as the company continues to outmatch the competition in the United States (where the company derives almost 45% of its operating income) as it executes on its remodel program. 

 

Within the earnings, we will be focusing on management’s forward looking statements around 2012 guidance; in particular, commodity basket inflation and any update on capex related to the reimaging program for the next 12-24 months.  While additional pricing may need to be added to help the company absorb inflation, we expect December comps to impress once again and the top-line remains the primary focus for investors.

 

Below we go through our take on what numbers will be received by investors as good, bad, and neutral MCD comps numbers by region.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to December 2010, December 2011 had one less Wednesday and one additional Saturday.  We expect a slight positive calendar shift as a result.

 

 

U.S.: facing an easy compare of +2.6%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world and a negative impact of -2% related to weather:

 

GOOD:  A print of 8% or higher would be received as a good result.  Despite implying sequentially lower same-store sales on a two-year average basis, an 8% print would be a positive headline number and would beat consensus of 6.5% by a significant margin.  We believe that the company continues to capture share in the domestic business and macro trends in the U.S. from December point to a continuation of the positive momentum in MCD U.S. sales.   Our estimate is +8%.

 

NEUTRAL: A print of 7-8% would be received as a neutral result given that, on a calendar-adjusted basis, it would imply a significant sequential decline in two-year average trends while still coming in slightly above consensus.  With the stock having traded up 15% during 4Q11, investors are pricing in a strong top line and we believe that consensus is conservative for December U.S. comps.

 

BAD:  A result of less than 7% would disappoint investors as it would imply the lowest calendar-adjusted two-year average trends since May.  And the steepest sequential decline in calendar-adjusted two-year average trends since December 2010 (which was largely caused by weather).

 

MCD SALES PREVIEW - mcd sales chart

 

 

Europe: facing an easy compare of -0.50%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world and a negative impact of -2% related to weather:

 

GOOD: A print of 11% or higher would be received as a good result for MCD Europe.  We are setting the bar a little higher than the Street, which is at +8.4%.  Our estimate for December is +11%.

 

NEUTRAL: A result of between 9% and 11% would be received as a neutral result for Europe as it would imply a print just above consensus but also a sequential decline in calendar-adjusted two-year average trends. 

 

BAD: A print of less than 9% would imply a steep decline in calendar-adjusted two-year average trends.

 

 

APMEA: facing a difficult compare of +8.90%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world:

 

GOOD:  A result above +4.5% would be received as a good number as it would imply a sequential acceleration in calendar-adjusted two-year average trends. Our estimate is 4%.

 

NEUTRAL: A print of between 3.5% and 4.5% would be received as a neutral result as it would imply calendar-adjusted two-year average trends.

 

BAD: A print of less than 3.5% would imply a deceleration in calendar-adjusted two-year average trends.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Keith McCullough: The Larry Kudlow Show

Keith McCullough, CEO at Hedgeye Risk Management, discusses the dollar and the global economy.

 

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Keith McCullough: the Larry Kudlow Show

Keith McCullough, CEO at Hedgeye Risk Management, discusses the dollar and the global economy.

 


BBBY: TRADE Update

Keith is managing the immediate-term TRADE risk around one of our favorite shorts across all three durations covering BBBY in the Hedgeye Virtual Portfolio.


There is no change to our fundamental outlook.


BBBY: TRADE Update - BBBY TTT


Bullish TAIL: SP500 Levels, Refreshed

POSITIONS: Long Consumer Discretionary (XLY), Long Utilities (XLU), Short Russell2000 (IWM)

 

This melt-up scores very differently versus the ones we’d short on strength in 2011. This one is backed by our Fundamental Macro Modeling process (Growth, Inflation, Policy), with all 3 factors working in bullish favor of stocks (bearish for bonds).

 

As Growth Expectations rise, so will multiples people pay for US Equities. Growth Expectations should also pressure Ben Bernanke to be less dovish. Imagine the man ends up talking rate hike by Q3?

 

Don’t choke on your water bottle – no one else thinks he’d do that either – which is why we are thinking about it.

 

Across all 3 of my risk management durations, here are the lines that matter most to me right now: 

  1. Immediate-term TRADE resistance = 1325
  2. Immediate-term TRADE support = 1302
  3. Long-term TAIL support = 1267 

I’ve been saying this since the beginning of the year and I’ll say it again – the US stock market now has a Bullish TAIL.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TAIL: 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 80.28%
  • SHORT SIGNALS 78.51%
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