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Takeaway: Another currency devaluation may be on the horizon in Venezuela, which joins Argentina on our LatAm FX devaluation watch list.



  • Hugo Chavez may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela.
  • “Doing more” likely implies an acceleration of social spending and a potential FX reserve-financing currency devaluation.
  • If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!


Hugo Chavez, fresh off a 10 percentage point victory in recent Venezuela’s presidential election and a potential victorious battle with cancer (three surgeries in the past 15 months), may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela – Latin America’s most oil-rich nation (211.2 billion barrels; 15.3% of world proved reserves). The “slim” victory – Chavez’ narrowest of his four total: 1998 = 16 ppts.; 2000 = 22 ppts.; 2006 = 26 ppts. – may actually put pressure on him to “do more” to maintain what he believes to be social and economic stability in Venezuela.


From a practical standpoint, “doing more” may look like the following:


  • Since taking office in 1999, he’s expropriated  more than 1,000 companies or their assets in the name of his socialist agenda.
  • He’s perpetuated a near -40% decline in the country’s international FX reserves as the central bank has been repeatedly forced to transfer the funds to an off-budget fund known as Fonden that Chavez uses to finance public expenditures on social programs.
  • A -50% currency devaluation back in early 2010 helped briefly stem the decline in FX reserves, but they’ve since resumed their downward trend.






Given his history of unstable monetary policy, it’s no surprise to see Venezuelan inflation flirt with rates north of +35% YoY in recent years; it’s since come down to +18.6% YoY in AUG ’12.




If “doing more” does, in fact, imply an acceleration of social spending and a potential FX reserve-financing currency devaluation, we’d be remiss to not signal risk to clients who hold assets denominated in VEB or those that invest in USD debt issued by Venezuelan entities whose revenue streams are denominated in VEB. A declining price of crude oil across international markets over the intermediate term (a view consistent with our 4Q12 Macro Theme titled: Bubble #3) would also perpetuate devaluation fears. It’s worth noting that Venezuelan dollar debt had been Latin America’s best-performing YTD (+32%) largely on hopes of a regime change, though Chavez’ reelection has likely contributed to cracks resurfacing in Venezuelan financial markets:


  • Post the election, the VEB has fallen -2.3% week-to-date to a record 12.58 per USD in the unregulated market, where it is trading down -31% YTD (LeChuga Verde);
  • Yields on state oil company Petroleo de Venezuela SA’s USD bonds due 2017 rose +55bps to 11.73% (Stuttgart Stock Exchange); and
  • The benchmark IBC Stock Index is down -16% week-to-date, after closing up +31% wk/wk last week (now up “only” +189.8% YTD).


If you were fortunate to have been on the near +200% hyperinflationary ride up in Venezuelan stock market YTD, we suggest now might be a good time to book some gains. Most likely, however, you probably weren’t; still, to the extent any of the companies in your portfolio have outsized exposure to Venezuela we think it’s worth paying attention to these key risks and developments.


If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!


Darius Dale

Senior Analyst

AXP: Growth Slowing

American Express (AXP) is experiencing the pandemic sweeping the financial world known as #GrowthSlowing. Using data from First Data, we’ve seen Amex credit volumes decline on a year-over-year basis. The company also faces headwinds in the form of a slowdown in consumer spending and tough comps for the month of September.


As for the Bluebird partnership with Walmart (WMT) that was announced yesterday, this is a positive for AXP. It’ll give the company access to the high-growth debit card market and revenue from fees associated with the card.


AXP: Growth Slowing  - Amex vs. First Data quarterly


AXP: Growth Slowing  - spendtrend Qrtly YoY

WWW: Deal Done, See Upside

Takeaway: Accretion projections re PLG raised - update on core biz next week. We continue to like this name.

With the PLG acquisition now complete, management is taking up accretion expectations ahead of next week’s earnings call. We’ve been writing since the announcement back in July that accretion projections look conservative – and think they still are. The question remains how WWW’s core business is faring, which we hit on in our note “WWW: Opportunity Knocking” re last month’s preannouncement (included below). We’ll get the update there Tuesday (10/16).

The bottom-line here is that we think European weakness is likely to stabilize and start reaccelerating as the company realizes incremental earnings from the PLG business over the next 2-3 quarters and investors start looking at ~$3.50 and $4.25+ in EPS in FY13 and FY14 respectively as the Street takes estimates higher (the deal is not yet in consensus numbers). WWW has a solid management team and a global platform to leverage its growing portfolio of brands. We continue to like this name. One of our concerns is the timing of the deal at what might be a peak in the boat shoe cycle. This is about the only factor keeping us from putting this name on the ‘love’ side of our ledger.

Here are a few callouts re this morning’s call:

  • Accretion projections were increased by $0.10 to  $0.35-0.50 (from 0.25-0.40) in F13 and $0.60-0.80 (from 0.50-0.70) in F14.
  • Dilution of $0.25-$0.30 during the stub period in the remainder of F12 reflects the timing of the deal closure post higher volume PLG selling periods in August and September.
  • The composition of accretion factors have shifted to reflect higher non-cash amortization and interest charges that will be more than offset by net synergy and higher revenue and profit growth expectations.
  • In a positive update on PLG, the business had very strong BTS results with full year expectations now for the portfolio to post revenue and profit growth in the double-digits after reporting +8% revenue growth through 1H.


Our comments from 9/6 note “WWW: Opportunity Knocking”:

We've been working more and more on WWW since the PSS acquisition, and while today's pre announcement by no means is positive, it does not change the underlying reason why we've been warming up to it. It draws attention to risks in Europe, which we probably under appreciated. But we're seeing downward revisions in next year's EPS below a level we think the company will earn.

Consider the following:

  • WWW’s European business has been a drag on performance for several quarters now and continues to be. Underestimating this headwind has been a big miss by management and has lead to earnings disappointments in each of the last two quarters for the first time in over 4-years. WWW is not alone as the rest of retail has suffered a similar plight. While this underperformance is not new news, continued weakness is coming in below exectations and that’s not good for near-term results – we get that.
  • It’s worth noting,however, that EMEA was already running down double-digit in Q2 so it’s not clear yet if there’s incremental weakness, or simply a delay in sales reaccelerating. We expect the company to elaborate on this later today.
  • EMEA accounts for ~25% of revenues and a similar if not slightly greater portion of WWW’s earnings. Relative to our expectation for Q3 EMEA sales to reflect improvement coming in down –HSD, this update impacts revenues by an incremental $6-$10mm in the quarter and $0.15 in EPS for the year. At historical multiples (~14x EPS), we’d expect this to impact the value of the stock by ~$2/share near-term.
  • Furthermore, once the PLG deal closes (early Oct), EMEA will account for closer to 15% of revenues. With less than 10% of the PLG business coming out of Europe, we expect distribution expansion alone to reaccelerate sales in Europe.
  • Outside of Europe, the base business is positive and improving with U.S. wholesale and retail both posting positive quarter-to-date performance. In addition, revenue compares getting increasingly more favorable over the next three quarters as the company laps slower European demand and the timing of military orders in 1H.
  • The margin setup also gets more favorable ahead. WWW took it’s medicine last quarter clearing excess fall/winter product. While this accounted for a -200bps gross margin hit, it also resulted in WWW’s sales/inventory spread turning positive for the first time in 10 quarters – very positive for gross margins headed into 2H.

Continued weakness overseas begs the question regarding the timing of the PLG deal to be completed in early October. While it will likely tarnish the timing suggesting an offset to what might be an eroding base business, we expect WWW’s base business to stabilize near-term and continue to post top and bottom-line growth in the single-digits and double-digits respectively.

More importantly, the positive impact of the PLG acquisition on NewCo is still largely underappreciated and outweighs this latest delta. While the company continues to guide to $0.25-$0.40 and $0.50-$0.70 in EPS accretion, we expect closer to $0.50 and $1.00 in F13 and F14.

To be clear, this incremental weakness out of Europe is unfavorable on the margin, but is not material enough for us to alter the positive outlook we have on the intermediate-to-longer term upside in earnings. We’re shaking out at $3.45 and $4.30 in EPS for FY13 and FY14 well above consensus, which still does not fully reflect the pending acquisition. All things considered, we’d be buyers on weakness this morning.

WWW: Deal Done, See Upside - WWW S



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NYSE Volume Continues To Fall

Anyone actively participating in US equities will tell you that market volumes have been abysmal lately. Broker-dealers have been getting crushed, including the bulge bracket banks as market volumes continue to drop. When volume isn't there, brokers aren't making money and that puts a strain on any company with a capital markets business.


The year over year chart shows that volume in 3Q12 was down 41% YoY, partly attributable to a tough +12% comp in 3Q11. Nevertheless, this is the largest YoY decline in volume in the last three years. On a sequential basis, volume was down 17% in 3Q12.  


NYSE Volume Continues To Fall - volume QoQ



NYSE Volume Continues To Fall - Volume YoY

Buyem: SP500 Levels, Refreshed

Takeaway: Keep moving – markets are.



Fortunately, I can’t call today’s note by any politician’s name – it’s just another signal that we are tagging the low end of our risk range.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1464
  2. Immediate-term TRADE support = 1444
  3. Intermediate-term TREND support = 1419


In other words, keep moving – markets are.



Keith R. McCullough
Chief Executive Officer


Buyem: SP500 Levels, Refreshed - SPX

Golden Week In Macau

Macau’s Golden Week took place last week and put up decent average daily table revenues (ADTR). ADTR fell in September compared to August, but overall, the story is that gaming volumes are solid but comps are tough. For those of you who are unfamiliar with Golden Week, it is a seven day Chinese holiday which attracts lots of tourists; Macau welcomed 390,683 visitors on the first four days alone. Visitation through Golden Week was up 9% year-over-year (that is an apples-to-apples comparison) and we have reports of strong floor traffic. This bodes well for high margin Mass gaming revenues.


Golden Week In Macau  - macau4

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