Weekly Latin America Risk Monitor: The Bernank Tax

Conclusion: We await for more quantitative clarity on the price front as the outsized potential for another implementation of The Bernank Tax clouds Latin America’s GROWTH/INFLATION/POLICY outlook.



All % moves week-over-week unless otherwise specified.

    • Median: +1.1%
    • High: Peru +3.2%
    • Low: Argentina -3.8%
    • Callout: Latin American equity market are up +10.3% for the YTD on a median basis
  • FX (vs. USD):
    • Median: +0.2%
    • High: Brazilian real +0.7%
    • Low: Argentine peso flat
    • Callout: Latin American currencies are up +6.2% vs. the USD for the YTD on a median basis
    • High: Colombia flat
    • Low: Brazil -44bps
    • Callout: Brazil down -52bps YTD vs. Colombia only down -7bps
    • High: Colombia -3bps
    • Low: Brazil -19bps
    • Callout: Brazil down +8bps YTD vs. Mexico down -56bps
    • High: Brazil +25bps
    • Low: Mexico -10bps
    • Callout: Brazil +60bps wider YTD vs. Colombia -25bps tighter
  • 5YR CDS:
    • Median: -3.1%
    • High: Argentina -1.6%
    • Low: Peru -3.6%
    • Callout: Venezuela -17.7% tighter over the LTM vs. a regional widening of +18.2% on a median basis
    • Median: -0.5%
    • High: Colombia +3.9%/+20bps
    • Low: Brazil -3.3%/-32bps
    • Callout: Chile +4.2% wider YTD vs. Brazil -4.8% tighter
    • Median: -0.2%
    • High: Colombia +5.2%/+24bps
    • Low: Chile -0.8%/-4bps
    • Callout: Colombia +3.7% wider YTD vs. Brazil -5.2% tighter
  • CORRELATION RISK: The risk of heightening inflationary pressures is being incrementally priced into LatAm bond markets, with the MSCI EM Latin America Equity Index trading with a 23% inverse correlation to the price of Brent Crude Oil on a three-week basis. Extending the analysis across six additional [longer] durations, the correlations are all positive, which adds ethos to this data point as quantitative signal of a fundamental inflection point on Latin America’s growth/inflation outlook.

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



We’ve been vocal in calling out the risks to growth that are associated with the Fed’s renewed policy to inflate. We’ve rhetorically shifted our research focus alongside a demonstrable shift in our Asset Allocation and Virtual Portfolio to capture this immediate-term consternation. The key quantitative breakout/breakdown levels that will help us decide our next directional shift en masse are outlined in the charts below:


Weekly Latin America Risk Monitor: The Bernank Tax - 1


Weekly Latin America Risk Monitor: The Bernank Tax - 2



Growth Slowing’s Bottom:

  • Brazil: FGV Consumer Confidence ticked down in JAN to 116 vs. 119.6 prior. The country’s Unemployment Rate did make a new all-time low in DEC, at 4.7%. While seasonality exists in this metric on a month-to-month basis, the YoY decline in the rate actually accelerated: -60bps vs. -50bps prior.
  • Brazil: Industrial Production growth accelerated in DEC to -1.2% YoY vs. -2.7% prior. On a MoM basis, growth accelerated to +0.9% vs. +0.2% prior.
  • Argentina: Consumer Confidence ticked up in JAN to 57.4 vs. 52.6.
  • Chile: Industrial Production and Industrial Sales growth both slowed in DEC to +0.5% YoY (vs. +2% prior) and +0.4% YoY (vs. +4.5% prior), respectively. Retail Sales growth accelerated, however, to +10.1% YoY vs. +8.5% prior.

The Bernank Tax:

  • Brazil: The unofficial IGP-M CPI series slowed in JAN to +4.5% YoY vs. +5.1% prior; this positive data point should continue to drag the benchmark IPCA series down with it on a 2-4 month lag. As alluded to above, however, should the USD continue to break down quantitatively and Brent prices continue to break out, we think inflation on a global basis will start to reaccelerate heading into 2Q.
  • Colombia: In the wake of Bernanke priming the pump for QE3, Colombia’s central bank raised its benchmark interest rate +25bps to 5%, citing “increased inflation expectations”. This move is in-line with our outlook for Colombian 1H12 growth and inflation.


  • Brazil: Finance Minister Guido Mantega reiterated President Rouseff’s previous commentary in saying that Brazil will use fiscal policy to make room for more flexible monetary policy. Per the central bank’s latest minutes, “flexible” in this case is currently being defined as the Selic Rate being lowered into the high single digits, which is the level we saw in the thralls of 2009. The country is seeking a reacceleration to +4% Real GDP growth in 2012 via a combination of credit expansion of +15-17%, an increase in public investment, and consumer tax cuts/incentives. 
  • Brazil: To the point above, credit continues to come in hot amid gov’t incentives and lower interest rates (consumer lending rates: 43.8% on average in DEC down from 2011 peak of 47.1% in OCT): +19% YoY in DEC vs. +18.2% prior; +2.3% MoM vs. +1.9% prior. Looking ahead, we expect the Brazilian gov't to unveil policies designed to support Brazilian homeownership, with mortgages representing just shy of 10% of all domestic loans (vs. 31.2% for all other consumer credit).
  • Mexico: Incumbent president Filipe Calderon continues to audition for a role at the IMF following the culmination of his presidency by stating: “The G-20 should act together to help build a firewall that will prevent the spread of the financial crisis throughout Europe.” His view is in-line with Lagarde’s fear-mongering and is yet another sign of the Keynesian slant Mexican policymakers have adopted in recent years (haven’t hiked rates at all since the ‘08/’09 crisis).
  • Argentina: As inflation continues to trend well above official metrics, Argentines are responding in kind via “parking” their money in cars in search of dwindling opportunities for inflation protection. Automobile loans grew in 2011 at 10yr-high rate of +61% to a 10yr-high level of $3.8B. Car sales increased +30% YoY in 2011 following this expansion of capital. Not coincidentally, Standard & Poor’s, an agency that is not liable to the Argentine gov’t which fines private economists for publishing CPI rates north of official statistics, estimates Argentine CPI to come in at +29% YoY in 2012.
  • Argentina: President Cristina Fernandez de Kirchner’s regime continues to aggressively intervene in Argentine capital markets in pursuit of financial repression; the latest measures include the central bank’s decision to force dividend-paying banks to hold 75% more capital than the minimum requirement starting in FEB (up from 30%). The central bank pitched the change as a step towards compliance with Basel III, but the timing and punitive nature of the changes suggests otherwise to us – which is in line with the growing number of financial services professionals becoming increasingly disenchanted with the country due to the government’s [growing] heavy hand in markets. The latest measure should limit the amount of pesos being converted into dollars in order to be sent overseas to international investors and may serve to incrementally lower Argentine interest rates if banks do away w/ dividend payments altogether, as that would increase the aggregate supply of capital in the domestic economy. This is yet another measure that reduces Argentina’s need to devalue the peso and the country’s dollar debt is responding in kind: +10% YTD vs. -14% in 2011.
  • Argentina: YPF Sociedad Anonima shares have plunged this week and are now down -15% since the ADR put in an intermediate-term lower-high on JAN 23 on speculation that the government is discussing nationalization of the Argentinean oil giant. Fernandez’s administration has not been shy about pushing the country’s oil companies to increase domestic investment; nor have they been shy about blaming these corporations for a doubling of Argentina’s fuel imports to $9.4B in 2011. Our Energy team believes that such speculation is not warranted due to Argentina’s inability to finance YPF’s capital expenditures on their own; additionally the country stands to incrementally lose foreign investment amid a bevy of other interventionist measures.


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. The Minha Casa, Minha Vida (“My House, My Life”) cash transfer program, whose focus is to build new housing for poor families, targets building 2 million additional dwelling units by 2014.  Finance minister Guido Mantega said aid to the construction sector is essential if the government’s target of 4% GDP growth is to be met this year.  Planning Minister Miriam Belchior said half of the 2 million units have already been completed and noted that the government is working on other aspects of the projects in an effort to speed completion and reduce costs.  This covers such areas as delays in installation of electricity, water, sewer lines, and documentation of families supposed to be covered by the program. 
  2. The central bank reports Brazilian tourists spent a record US$ 21.2 billion abroad in 2011, up 30% from 2010.  At the same time, foreign tourists in Brazil spent US$ 6.8 billion, an increase of 16.7%. Record spending levels notwithstanding, spending declined in the four months through November.  November showed a 5% decline month over month before spending picked up again in December, rising 2.2% MoM. 
  3. Brazilian mining and metals giant Vale won the “Oscar of Shame” award, an on-line poll conducted by Public Eye and sponsored by Greenpeace.  88,000 people voted worldwide to choose the world’s worst company.  The winner, with over 25,000 votes, was Vale, followed by Tepco, the operator of the Fukushima nuclear plant, Samsung and Barclays.  Vale was cited for its long history “characterized by inhuman working conditions, human rights violations, and destruction of the environment,” and was criticized for participating in the highly controversial Belo Monte hydroelectric dam.


Key economic data releases and policy announcements:

  • WED:
    • Brazil: JAN Manufacturing PMI, JAN Trade Data
    • Peru: JAN CPI
  • THURS:
    • Brazil: JAN FIPE CPI
  • FRI:
    • Brazil: DEC Capacity Utilization
    • Mexico: JAN Consumer Confidence; Central Bank Monetary Policy Minutes
    • Colombia: JAN PPI
    • Colombia: JAN CPI
  • MON:
    • Chile: DEC Economic Activity Index
  • TUES:
    • Mexico: JAN Manufacturing PMI; JAN Services PMI
    • Chile: JAN Trade Data

Darius Dale

Senior Analyst


Weekly Latin America Risk Monitor: The Bernank Tax - 3


Weekly Latin America Risk Monitor: The Bernank Tax - 4


Weekly Latin America Risk Monitor: The Bernank Tax - 5


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Weekly Latin America Risk Monitor: The Bernank Tax - 7


Weekly Latin America Risk Monitor: The Bernank Tax - 8


Weekly Latin America Risk Monitor: The Bernank Tax - 9


In preparation for LVS's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Interim dividend of HK$0.58 per share payable to shareholders who own shares as of Feb 20.  The interim dividend will be paid on Feb 28.



  • Sands received confirmation from the Securities and Futures Commission of Hong Kong (SFC) that the investigation has been concluded and that no further action will be taken against the Company at this time.





  • As I mentioned in the opening, we have an aggressive plan for the Plaza moving forward, beginning with the addition of two new leading VIP operators opening there in the next couple of weeks.”
  • “It's about another seven months before it's fully implemented. It goes throughout the first quarter and second quarter. But the answer is, it's happening. We're very comfortable with our relationships. We're very comfortable with our deals. We're fully sold out on all or our five, six opportunities.”
  • “I've heard the word cannibalization over the last several years. But I have not seen a single instance of one property cannibalizing the other. Period. We were hoping to cannibalize, and I think we've cannibalized a lot of the properties on the Peninsula, with my idea about the Cotai Strip and Asia's Las Vegas.”
  • “We will be opening the first 1,800 rooms, which is a 1,200 room Holiday Inn and a 600 room Conrad by Hilton, at the end of the first quarter.  At the end of the third quarter, the first Sheraton tower of 2,000 rooms will also open in the end of the third quarter '12. And then at the first quarter of '13, as we've said before in previous calls, we'll open the last tower, the last 2,000 rooms at the Sheraton.”
  • “If you take out Cotai Central, our existing capital (maintenance) spend annually is going to be in the vicinity of about $400 million.”And then from a project standpoint, we're probably close to about $1.2 billion.”
  • “The bulk of that obviously is Sands Cotai Central, and then we've got some retainage payments obviously to make on Marina Bay Sands.”
  • “I think it's [margin] sustainable on our current business model in the casino, but hopefully it will go down significantly as we grow a lot more junket business, which as you know is much slimmer margins. But I think when you look at some of the numbers that Galaxy and Wynn, our competitors, have thrown off in that segment, I'd rather have more EBITDA and less margin because we've left behind some dollars there.”
  • “When you look at kind of what we recorded at reserves for the quarter, it's actually very consistent, both on a quarter-over-quarter basis, year-over-year, if you will, and also on a sequential basis. So, really not much change in that regard. And our percentages with regard to the reserves against the outstanding balances have stayed relatively flat, doing a great job collecting. And there's really been no need to kind of change what we have been doing.”


  • [Increase in VIP volumes] “It's a number of customers coming out of mainland China. It continues to be more important to Singapore, so does Hong Kong. There is some play out of Singapore itself, mostly PR play. Indonesia, Malaysia, Korea, Japan, all important. But clearly the strength of that rim business resides in mainland China, whether it be mainland Chinese themselves living in mainland, or having a second home in Singapore."
  • “Year-to-date our hold percentage is 2.82%.”
  • [Mass] “We are holding in the 22, 23 range, which speaks to the customers' willingness to gamble and sit at the table, and the drop's increasing considerably. The good news from our perspective is that's mostly a tourist customer. I would say the majority of our business comes out of a non-rated side, which is a wonderful customer, both into the margin and consistency. We're fortunate in having tens of thousands of hotel rooms in the neighborhood that feed that market. It's tourist driven.”
  • “Visitation is relatively flat, Shaun, between the second quarter and the third quarter into the casino. But visitation to the property continues to increase and will continue to increase, as you bring more folks into the area with the trains coming first quarter next year.”
  • “The [Marina Bay] MRT stop, which is Q1 '12; and the cruise terminal Q2 '12; the gardens, the base 2012; eventually be a Singapore sports hub – are unique opportunities to continue to grow this mass slot and table business.”
  • “On the slot machines, obviously we're capped by government regulation. We run at very high utilization, probably the highest I've ever seen. On weekends and holidays, we get into the 80s. In my mind that's pretty much, you can't get a whole lot higher. So, these machines the next year we do, let's say, $700 million. This is the highest numbers in the industry, so clearly we have high capacity and high usage.”


  • The property's new outlet stores will begin previews early next week ahead of a February grand opening. We expect traffic from the retail stores, the 300 room hotel which opened in May, and the forthcoming Event Center to provide a continued increase in our gaming revenue there.”

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Japan’s Jugular 2.0: Will 2012 Be the Beginning of the End?

Conclusion: The perception of the Japanese sovereign debt market is at risk of a fundamental inflection point in 2012, as heavy issuance is likely to be accompanied by very public failures in passing much-needed fiscal reform. As such, we will seek to manage immediate-term risk within this long-term bearish thesis by trading Japanese equities and the Japanese yen with a bearish bias.


Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).




“I skate to where the puck is going to be, not where it has been.”
-Wayne Gretzky


For long-time Hedgeye clients, our long-term bearish outlook for Japanese economic growth is not new news; neither is our aggressive stance against their ultra-Keynesian monetary policy and fiscal positioning. That said, however, 2012 shapes up to be a rather interesting year for Japan’s sovereign debt market, as both a heavy auction calendar coincides with debates on key fiscal reforms – both of which possess the potential of dramatically surprising consensus expectations to the downside.


Given our own deep understanding of the tailwinds supporting the Japanese yen and the Japanese government bond market, it would be reckless to assign a timeline to a potential Japanese sovereign debt and/or banking crisis. We have, however, done the work and are comfortable in saying that, more so than any year prior, 2012 shapes up to be the year where confidence in the JGB market is lost – putting Japan at risk of being next in line to face the music of our Sovereign Debt Dichotomy theme.


As the aforementioned quote by hockey great Wayne Gretzky suggests, we think it’s appropriate for investors to begin hedging their portfolios against Japanese sovereign credit risk. As always, feel free to email us at if you have any follow-up questions and would like to dialogue further.


Darius Dale

Senior Analyst


In preparation for BYI's FQ2 2012 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • As part of the agreement, Bally will obtain a license to the WMS and Aruze Transmissive Reels® gaming technology portfolio under confidential terms.


  • [Michael Jackson & Grease] “Those are both going to be wide-area progressive games. We actually have seen our wide-area progressive footprint decline over the past couple of years seem to stabilize at about 1000 units. We do have an expectation that both Michael and Grease could see similar-size install base once they get to maturity.  In terms of earnings the reality is since they are coming out later in the summer our fiscal year ending June 30, we probably won't see a lot of immediate revenue impact towards the tail end but that's just in time for the season for gaming, as you know, really starts ramping up around July 4 and goes through Labor Day. So we're hoping that at the height of the gaming season we'll have those titles out there.”
  • “In term of impact for us, we earn 6.25% of the net win per day, so at Yonkers that equates to about $18 a day and at Aqueduct, double that right now.”
  • “It looks like we're going to cap off this year in terms of replacement sales, somewhere in the 50,000 units; actually with IGT reporting earlier this week, WMS reporting and us reporting, it actually looks like as an industry we saw a tick up in the September quarter with replacements. So maybe the December quarter caps off a pretty decent year with about a 10% increase in replacement sales. If you apply the same metric to next year, maybe replacements are 50,000 units to 55,000 units.”
  • “I don't really see much of a technology driver for a replacement cycle right now. I think just natural replacements due to wear and tear are happening. What's more exciting for us in the upcoming calendar year is the fact that you do have more new properties coming on; Ohio has four properties, you have Revel opening, you have a couple of properties in Louisiana, Kansas. So there's been a lot of opportunity that will probably double the total sales into new openings and expansions from – call it roughly 7,500 to 10,000 this past calendar year that we're in, to call it roughly 20,000 next year.”
  • “We have seen operators spending more capital. Some of it actually going to rooms and the instance of Caesars finishing their tower in Las Vegas, some of it going to other entertainment venues. Caesars adding a Ferris wheel here in Las Vegas. So the good news is number one, they seem better capitalized. Our customers are not so much focused on debt covenants and making those. So we think naturally some additional capital will be available. And the finally, competition is lot of these newer jurisdictions like, I mentioned Ohio and Kansas come on line as well as some properties in Louisiana, we think that that will drive some regional refresh just because of some of those floors are fairly aged.”
  • “We've really ramped up our international infrastructure over the past five years going from about 5% of our revenue to 20% today. That was initially focused on South America, Latin America, Mexico as well, and then Europe. In the last year or two, we've put additional focus into Australia, so we do see a lot of growth opportunity in Australia just from our entrance into the market. We think there is a natural replacement cycle there that runs between 6,000 and 10,000 units. So if we were to be a 10% ship share that would increase our international sales by 25% a year to an additional 1,000 units."


  • “Due to the size, nature and complexity of several of the larger contracts, we expect revenues during the initial months to be more weighted towards services than hardware sales and software licensee.”
  • “We signed major contracts with British Columbia and Sun International, both of which will contribute meaningfully to fiscal year '13 and beyond [some of it included in FY2012 guidance]. And the acquisition of market leading mobile applications company MacroView and the establishment of Bally Interactive ensures that we have a great foundation for the long-term.”
  • “Our systems' margin does vary based on the mix whether its software or hardware, we did mention that we had a record quarter for signing up high dues, but, which is a hardware with slightly lower margin than our software, but those will be rolled out over the next six or 12 months. So, we did have a high mix of software. We still believe a good range of margins for systems in sort of that 70% to 75% or 76%. We continue to develop more software products, but we are seeing a nice sort of breaking of the pipeline in the iVIEW DM arena, which can also mitigate that.”
  • “iVIEW DM has a slightly higher margin than iVIEW, but still slightly lower than our software margins, so look for iVIEW DM margins in the 50% to 65% range, whereas our software margins are sort of 80% to 95% range.”
  • “The Grease should be out in the customers in the April timeframe and Michael Jackson in the June timeframe and these are subject to sort of a month variability or so either way.”
  • “Our core products that we've had whether it's Cash Spin or Betty Boop and Money Vault are also doing well, and we've been expanding the WAP with them. So, we are expecting gaming operations to continue to grow year-over-year.”
  • “One of the early renditions of the Pro Series we've been able to shave about 12% off the cost over the next couple of quarters. We don't see at this point a huge change in gross margins, maybe 100 to 200 basis points, longer term over the next three to five quarters I think we do get back up to that higher 48, 49 tier.”
  • [Systems margin] “Our goal is to get back into the 50%, low 50% range, especially as we get more of the new cabinets out and can sell the conversion kits. Neil, I think was talking about over the next five quarters. Clearly, the Pro Series cabinet is more expensive. The iDeCK is expensive. But it does allow us to still maintain good dollar margins, and we do see in the near term getting to the 48%, 49%, but if we're out here 18 to 24 months, Steve, we would expect to be back at 50%-plus.”
  • “We would expect it to trend down over the next two or three quarters, but we had slightly less, maybe 200 basis points less royalty themes this quarter than last quarter.”
  • “There's a very modest, very small contribution from Italy expected in fiscal '12.”
  • “In terms of ship share, we've seen the past couple of quarters, we've had an incremental increases in our ship share. So, with our content as it stands now we would expect to see some upward ticking ship share over the rest of the year. With respect to replacements, we continue to remain fairly cautious on replacements. There really hasn't been any catalysts out in the market that we've seen that have driven up an increase in replacements. The one thing I would point out is new openings and expansions, we think they were somewhere in the neighborhood of 10,000, we closed out this calendar year with about 10,000, next calendar year that doubles, and so some of that will fall in our second half of the fiscal year.”
  • [Any additional stock buyback activity?] “We may assume about $30 million, or $40 million right now as long as we're above 2 turns levered, we're capped at $64 million for the rest of this year once we get below 2 turns, we can get back to an unlimited state.”
  • “Our new openings share has pretty much tracked our replacement ship shares. So, it's been trending upward over the last year or so.”
  • “It will be several years before we generate revenue from Massachusetts, whereas Ohio should start generating some revenue in fiscal '12 for us, Illinois probably not in fiscal '12, but fiscal '13.”


Keith bought BYD in the Hedgeye Virtual Portfolio at $8.71. According to his model, the TRADE range for BYD is between $8.62 and $9.37. There is TREND support at $6.71.



Boyd Gaming has been a laggard in the regional gaming space past few year.  The sentiment surrounding the name is negative - JP Morgan and Lazard recently downgraded the stock and short interest is very high. We’ll make this contrarian call due to better than expected performance in Locals Las Vegas and Atlantic City.  A near-term earnings beat is likely and management should provide positive commentary on 2012, particularly as the LV Locals market starts to show consistent, albeit slow, growth going forward.  Any catalyst should impact the stock meaningfully given the attractive FCF valuation and negative sentiment.



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