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IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS?

Takeaway: The Bovespa’s TREND-line breakdown diminishes our formerly positive bias and affirms our negative cyclical concerns regarding “risk assets”.

SUMMARY BULLETS:

 

  • Since late 2008, the Bovespa Index has generally led global equities on nearly every major intra-cycle rally and correction, with the exception of the most recent intra-cycle bottom and the current topping process.
  • Supported by an improving GIP outlook (chart below) and an anticipated deceleration of Big Government Intervention (there’s growing speculation that the government will allow PBR to raise prices, which would be a noteworthy step in the right direction), we have held a positive fundamental bias on the Brazilian equity market since SEP 25; that’s obviously been the wrong call (the Bovespa is down roughly -5.5% since then). Importantly, the index is flirting with a TREND line breakdown. If that holds, we would expect to see the index re-test its JUN ’12 lows – roughly -8% to -9% lower.
  • We are not smarter than the market here and are inclined to suspend our bullish bias until we receive confirmation of a TREND-line breakout. The risk of that catalyst not materializing is rising rapidly, however, given the ominous Global Macro fundamental picture staring investors right in the face at the current juncture.
  • And given Brazil’s unique qualities as a weathervane of global economic activity and reflation expectations, a failure for Brazil to recapture its TREND line would imply further weakness ahead for risk assets broadly over the immediate-to-intermediate term.

 

Since late 2008, the Bovespa Index has generally led global equities on nearly every major intra-cycle rally and correction, with the exception of the most recent intra-cycle bottom and the current topping process:

 

  • 10/27/08 the Bovespa bottoms; the MSCI World Equity Index bottomed ~4.5 months later on 3/9/09;
  • 4/9/10 the Bovespa peaks; the MSCI World Equity Index peaked 5 days later on 4/15/10;
  • 5/20/10 the Bovespa bottoms; the MSCI World Equity Index bottomed ~1.5 months later on 7/5/10;
  • 11/4/10 the Bovespa peaks; the MSCI World Equity Index peaked 6 months later on 5/2/11;
  • 8/8/11 the Bovespa bottoms; the MSCI World Equity Index bottomed ~2 months later on 10/4/11;
  • 3/13/12 the Bovespa peaks; the MSCI World Equity Index peaked 6 days later on 3/19/12;
  • 6/5/12 the Bovespa bottoms; the MSCI World Equity Index bottomed 1 day prior on 6/4/12; and
  • 9/14/12 the Bovespa peaks; the MSCI World Equity Index peaked on the same day amid mass QE-ternity hysteria.

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 1

 

A couple of questions arise here:

 

  1. Why has Brazil been generally led on nearly every meaningful world equity market delta since 2008?
  2. Why has Brazil’s leadership dissipated, as evidenced by the latest cycle?

 

To address question #1, we think Brazil’s unique setup from a capital markets and economic perspective exposes it to getting pulled aggressively in both directions of global inflation expectations (reflation and de/dis-inflation). From an index perspective, the Bovespa is heavily weighted to reflation with 67.6% of its market cap having direct exposure to top line and margin leverage that stems from rising prices of commodities and risk assets (Energy, Basic Materials and Financials sectors).

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 2

 

On the way down, the Brazilian economy is heavily weighted towards domestic consumption, so the tailwind of disinflation/falling inflation expectations tends to become a positive for both Brazil’s GROWTH outlook and speculation around easier monetary and fiscal POLICY in Brazil. Eighty-one percent of Brazilian GDP is consumption (household = 60.3%; government = 20.7%) and, on a comparable basis, Brazil’s Unemployment Rate (NSA) continues to make all-time lows.

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 3

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 4

 

Regarding question #2, which, admittedly, is much tougher to answer, we think the reason investors have appeared far less willing to stick their respective “necks” out there on Brazil early in the selloff like they were in previous Global Macro swoons is largely due to the demonstrable acceleration in perceived political risk (more on this later).

 

As it relates to the current topping process across “risky assets”  we think investors were far less willing to sell Brazil early because it would’ve been a tacit admission that the only catalyst that supported leaning long in the face of terrible fundamental data in the first place (i.e. rising inflation expectations born out of Fed POLICY) was, in fact, culminating. Again these are just our opinions, but, in talking to clients, we can confirm that many of them continue to agree with our negative fundamental conclusions but have chosen to stay long largely due to the Bernank’s explicit dare to chase yield.

 

Delving back into the aforementioned political risk, Brazilian policymakers led by President Dilma Rousseff and Finance Minister Guido Mantega have certainly been busy making Brazil a less attractive destination for international capital in the YTD. Dilma has been at the forefront of an aggressive year-long drive to lower consumer and corporate lending rates, essentially using her influence over the central bank to accomplish her goals. Mantega, on the other hand, continues to use aggressive rhetoric and IOF tax hikes/expansion (i.e. capital gains taxes for foreign investors) to boost manufacturing and export competitiveness by promoting weakness in the BRL, which has declined -13.6% vs. the USD over the past year (inclusive of a -18.9% drop from late-FEB to mid-MAY). As recently as today, Mantega was quoted in the news (Valor Economico) as saying, “the government’s ‘dirty float’ currency policy will last as long as necessary to defend the country’s competitiveness”.

 

All of this has come at a time where Brazil’s southerly neighbor Argentina is demonstrably eroding investor confidence as a result of President Cristina Fernandez’s aggressive series of capital controls. We would argue that the “Fernandez Effect” has painted a dark cloud over the economic reforms Rousseff and Mantega have sought to implement, likely making Brazil’s bout of Big Government Intervention appear worse to investors than it otherwise would have. As such, it’s no surprise that outflows of international capital have accelerated in 2012: since JAN, the Bovespa Stock Exchange has seen an average monthly net outflow of -R$7.9 billion; this compares to an average monthly net outflow of -R$1.4 billion in 2011 and an average monthly net inflow of +R$6 billion in 2010.  

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 5

 

WHERE TO FROM HERE?

Supported by an improving GIP outlook (chart below) and an anticipated deceleration of Big Government Intervention (there’s growing speculation that the government will allow PBR to raise prices, which would be a noteworthy step in the right direction), we have held a positive fundamental bias on the Brazilian equity market since SEP 25; that’s obviously been the wrong call (the Bovespa is down roughly -5% since then). Importantly, the index is flirting with a TREND line breakdown. If that holds, we would expect to see the index re-test its JUN ’12 lows – roughly -8% to -9% lower.

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - BRAZIL

 

IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS? - 7

 

We are not smarter than the market here and are inclined to suspend our bullish bias until we receive confirmation of a TREND-line breakout. The risk of that catalyst not materializing is rising rapidly, however, given the ominous Global Macro fundamental picture staring investors right in the face at the current juncture. And given Brazil’s unique qualities as a weathervane of global economic activity and reflation expectations, a failure for Brazil to recapture its TREND line would imply further weakness ahead for risk assets broadly over the immediate-to-intermediate term.

 

Not good.

 

Darius Dale

Senior Analyst


View From the Battleground States

Today we held our expert call with Kenneth Bickers titled "View From the Battleground States." On the call, Bickers discussed the current state of the election, economic indicators and the role they play with voters and shared his view on what his model forecasts as the final electoral college in November. See below for the forecast and draw your own conclusion on whether Romney or Obama will take the White House.

 

View From the Battleground States - Screen Shot 2012 10 24 at 2.32.12 PM


STNR YOUTUBE

In preparation for STNR's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary

 

 

YOUTUBE FROM 2Q CONFERENCE CALL

  • "We expect revenue to be in a range of $192 million to $197 million, with Q3 earnings per share estimated at $0.85 to $0.90. Our full year guidance remains unchanged with 2012 revenue at $800 million to $820 million with resulting earnings per share guidance at $3.70 to $3.90."
  • "We have opened an additional seven new laser centers this quarter, bringing it up to nine for year and we continue to track well on our target of 15 new centers for 2012. Cash sales generated in the quarter exceeded expectations and increased our deferred revenue liability again on the balance sheet, which is a healthy barometer of the future earnings potential of our laser hair removal division....We expect and hope to open up more than 15 next year, which will propel growth for the future."
  • "Our estimate for the third quarter is for depreciation and amortization at $4.8 million...Above the line depreciation is expected to be $3.5 million." 
  • "Capital spending is expected to be $5 million in the third quarter."
  • "The scheduled capital repayment on the term loan commenced at the end of the first quarter of 2012 – at the end of each quarter of 2012 is an amount of $4.125 million and the interest rates on this loan for 2012 is anticipated to be LIBOR plus 2.5%."
  • [Schools segment]"Hopefully, not as soft in the third quarter, but we just haven't seen a full enrollment quarter yet. We've got enrollment starting here beginning of August and September, so it's a high enrollment quarter. So we're just tempted by the fact that the second quarter was softer than we expected and that's really the primary reason for us guiding a little lower here on the third quarter number."
  • [Product margin guidance of 31-32%]  "It's possible. Certainly, we saw a much better mix on board the ships, certainly with the North American passengers and that certainly supported stronger margins here in the quarter. We also saw less discounting channel taking that we have to get product into this quarter in both Europe and the North American channels that we're distributing to, so the whole of that helped us to create those margins."
  • [Ideal Image] "Thus far, there's positive growth in the same-store at this point in time. I think as we start to take a look at metrics maybe for next year, right now, we're giving you per center average revenue growth, which moved up again this quarter, so all of it points to very positive productivity thus far."
  • "Our schools have behaved in line with both a bad economic environment and unemployment. And certainly through 2009, 2010 and some of 2011, the schools performed right in line with that. So the counter-cyclicality nature of the business was proven in those times, and certainly as unemployment gets better, and more stability and direction comes into our economy later this year hopefully, we don't expect the schools to be the highest performer in our portfolio, but that's the beauty of the schools is they perform well when things are bad elsewhere and it balances our performance in our portfolio."
  • "The Q3 and Q4 numbers on spa vessels is a 114 for Q3 and a 113 for Q4. Non-spa for Q3 is 42 and 40 for Q4."
  •  [Land-based spas decrease in average weekly revs] "Some of the bigger properties both in the Caribbean and in Vegas underperformed expectations.  They didn't obviously yield manage sufficiently to get the spend there and I think it's following along the lines of some of the other consumer spend trends."
  • "There's definitely a lot of continuing pressure in Europe, we all know that. Consumer here is also a little under pressure, and I think our guidance is in line with that."

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HOT YOUTUBE

In preparation for HOT's 3Q earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.

 

 HOT YOUTUBE - HOT

 

 

YOUTUBE FROM 2Q CONFERENCE CALL

  • China:  “We have seen a deceleration, but nothing precipitous. It appears to us that the slower growth has to do with upcoming government transition and excess supply in a few cities.”
  • “You should also note that none of our 100 hotel projects has been put on hold”
  • “On track to hit net rooms growth in excess of 4%”
  • “Asia accounts for 65% of our pipeline, with China representing three-fourths of that.”
  • “We've seen an increase in active members outside the U.S. of over 50%. As of today, non- U.S. members account for 44% of the SPG active base and around the world SPG drives over 50% of our occupancy. SPG provides benefits to our guests, but also to our business. SPG Members spend more, give us business in tough times and they're our best brand advocates.”
  • “Bal Harbour …. sales momentum and pricing remain good. We now expect the complete sales of all Bal Harbour condos by the first quarter of 2014, if not earlier."
  • “Our hotels in North China continue to grow in the double digits. Eastern and Central China are growing in the mid-single digits. The South has been hurt by the slowdown in exports. Selected cities like Tianjin, Guangzhou, Hunan, which have seen a lot of new capacity, have short-term supply/demand imbalances. Tier two and tier three cities, where we have the largest footprint among the major high-end hotel companies, are experiencing double digit growth with very strong F&B momentum... through the first half of the year, our total revenue in China is up over 25% in local currency.”
  • “Our opening pace for new hotels is not slowing down. By the end of July, we expect to have opened 15 hotels and the rest of our openings this year remain on track. Year-to-date, we have signed 30 hotels versus 27 at the same time last year.”
  • “As we look ahead to Q3, momentum remains good in Asian and Middle Eastern markets, as well as Sub-Saharan Africa. North Africa has tougher comparisons. We anticipate a slowdown in Latin America, driven by the worsening situation in Argentina, where we also benefited from a big soccer event last year.”
  • “High occupancies are helping us remix our transient business, raise group rates and we anticipate an even better outcome from 2013 corporate rate negotiations than the rate increases realized this year.”
  • “At this point, we have no indications global companies are either restricting or cutting travel and meeting plans. As such, our best estimate is that recent trend lines will continue through the rest of the year." 
  • "Given the issues in Canada and Argentina, we're lowering our owned-hotel REVPAR growth range at the high-end from 4% to 6% to 4% to 5% in local currencies and only 1% to 2% in dollars. Europe, Canada and Argentina account for over 33% of owned rooms and almost 40% of owned EBITDA.”
  • “We remain committed to our asset sale program… We have several conversations underway, some at advanced stages. It is our practice to announce sales only when we close and when we have received the cash. We expect to close on several transactions before the end of the year. Our goal is to sell most of our owned assets over time and we have quite a few transactions in discussion at this point.”
  • “What did help us in the second quarter, which won't help us as much in the third quarter, is the comparison in Japan. Japan was up quite a bit because it was lapping the earthquake/tsunami last year at this time that added, probably 100 basis points to REVPAR in Q2. It won't help as much in Q3. We're assuming the situation in China remains roughly where it is. You saw that some other parts of Asia were doing pretty well. So we would say that Asia still is a region that will be at the high-end, if not somewhat higher than our overall 6% to 8% range and that's our best view, at this point.”
  • “On group pace, we've continued... our run of strong mid-single digit numbers for the pace in the rest of the year. It's been something that's actually allowed us to remix the corporate transient, or the transient side of the business, where we've seen revenue increases of sort of nearing 10% and, at the same time, we've reduced our opaque and lower-rated discounted business”
  • “At this point, we have not put any hedges in for next year."

WYN 2Q12 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 WYN 2Q12 REPORT CARD - WYNNNN

 

 

OVERALL

  • LITTLE WORSE:  Numbers were in line, but there was some weakness in the lodging and vacation exchange and rental drivers.  2013 guidance looks solid

REVPAR GUIDANCE

  • WORSE:  RevPAR growth was up 2% or 3% on a constant currency basis.  WYN said that RevPAR growth appears to be slowing partly due more construction and that things have already recovered.  The company expects to be at the lower end of their guidance range for RevPAR.
  • PREVIOUSLY:  Systemwide growth of 5-8%

LODGING SYSTEM GROWTH

  • LITTLE WORSE:  Even with the addition of the 3,000 HPT rooms, room growth was only up 1% YoY.  It looks like WYN is going to end the year at the low end of their guidance range.
  • PREVIOUSLY:  Growth of 1-3%

VACATION EXCHANGE AND RENTAL DRIVERS

  • LITTLE WORSE:  # of exchange members is tracking just below the low end of guidance.  In the release, # of rentals was +3% (our math says +5%) so they either missed the guidance range or came in at the low end.  Pricing on rentals was down 9% YoY or -2% on a constant currency basis, the lower end of company guidance. 
  • PREVIOUSLY:  # exchange members: -2% to flat; # of rentals: +4-7%; rental price per transaction: -3% to flat

VACATION OWNERSHIP

  • BETTER:  Tours came in at +5% above the guidance range as did VPG which also came in at +5% - at the very high end of guidance
  • PREVIOUSLY:  Tours: +1-4%; VPG:+2-5%

BRAND.COM PROGRESS

  • SAME:  Room nights resulting from Brand.com initiative are up 17% YoY (both YTD and quarterly basis).  WYN has completely revamped 13 brand websites, significantly enhancing features, functionality, and content for over 7,000 properties. 
  • PREVIOUSLY:  “We've made significant progress over the past two years with one of our key Apollo initiatives, brand.com. Revenue in room nights across the brand portfolio are up approximately 20% from this channel year-to date in part due to improved content and Web functionality.”

RCI.COM ONLINE TRANSITION

  • SAME:  Because of improvements to RCI.com, WYN is on track to reduce call volume by over 30% from the inception of the project through year-end 2012, and expect a total reduction of almost 40% by 2015.  Their online web share increased from 13% to currently over 40% and it's still rising.  
  • PREVIOUSLY:  “We completed another successful release of rci.com, which included an upgrade to an innovative click-to-chat functionality with multiple language support. From when we started the project in the first quarter of 2008, through the end of 2012, we expect our migration to online transactions to improve our exchange in rentals margin by over 225 basis points.”

TARGET EBITDA GROWTH GUIDANCE BY SEGMENT

  • SAME:  Continue to target annual EBITDA growth of 6% to 8%, high single to low double-digit growth in their Hotel Group and mid single-digit growth in the Exchange and Rentals Group and Wyndham Vacation Ownership. 
  • PREVIOUSLY:  “We are committed to EBITDA growth of 6% to 8% with high single to low double-digit growth in the Hotel Group and mid single-digit growth in the Exchange & Rentals Group and Wyndham Vacation Ownership."

ACTUAL EBITDA PERFORMANCE BY SEGMENT

  • BETTER:  Lodging EBITDA growth exceeded expectations by 28% and 20%, excluding inter-segment fees 
  • WORSE:  Vacation rental and exchange EBITDA fell 9% and was flat ex FX impact
  • PREVIOUSLY:  “We expect Vacation Ownership and Lodging revenues and adjusted EBITDA to be at the high end of their respective ranges. We expect exchange in rentals revenues to be at the low end of its range and adjusted EBITDA to be at the midpoint of its range.

EPS GUIDANCE FOR 3Q12

  • BETTER:  Adjusted 3Q EPS came in at $1.13. Using the 2Q period share count EPS would have come in at the high end of company guidance of $1.10
  • PREVIOUSLY:  “For the third quarter, we expect earnings per share to be $1.07 to $1.10. This is below the consensus, reflecting differences in both share repurchase assumptions and seasonality between the third and fourth quarters, however our guidance for the second half of the year is consistent with street expectations”

AVAILABLE CASH FOR DEPLOYMENT

  • SAME:  same commentary as previous guidance
  • PREVIOUSLY:  “We expect sustainable annual free cash flow of $600 million to $700 million. We remain committed to an investment grade profile, which will enable us to increase debt by $300 million for every $100 million that we add in EBITDA. The result is $1 billion of available cash to deploy each year to increase shareholder value.”

DEAL ENVIRONMENT

  • SAME:  may do a couple of deals in the future
  • PREVIOUSLY:  “We've probably seen a little more activity recently, more deals seem to be coming to market, but it's not a dramatic change in the volume of our activity, and really kind of what has to change is the expectation of the other side because we're very disciplined. We're not going chase anything, so if deals don't make sense, they're not going to fit into our plan… I would probably characterize it as the pipeline is a little bit stronger than it was last year at this time.”

PNK REPORT CARD

Takeaway: Across the board beat

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

 

 

OVERALL

  •  BETTER:  PNK provides very little forward commentary so we're not able to determine whether the company exceeded management's expections.  However, margins were so strong and the EBITDA beat was sizeable so we will chalk this one up to a Better.   

VIETNAM 

  • SAME:  The gaming decree is currently undergoing a review process with different ministries in Vietnam. PNK continues to expect phase 1 to open by 1Q 2013.
  • PREVIOUSLY: “"Vietnam is expected to follow a gaming tax model that is similar to that of Singapore. The gaming tax rate is 30% in Vietnam on a mass market play; however, it is our expectation that junket commissions will be deductible for gaming tax purposes. Therefore, the VIP effective tax rate will be materially lower."

RIVER CITY

  • SAME:  The 1,600 space parking structure is expected to open by the Thanksgiving holiday weekend.  Construction of the second phase of this expansion, a 200-room hotel and multi-purpose event center, has commenced with an expected completion date in the second half of 2013. 
  • PREVIOUSLY: “[River City] "We expect to have the first phase of development open and to the public in 2013. We're looking forward to having access to the garage later on this year, the multipurpose room will come online next before the end of next summer, and the hotel will be opened in the second half of 2013.

RETAMA PARK

  • WORSE:  We expect the transaction to close in the first quarter of 2013. 
  • PREVIOUSLY: "We expect that transaction to close by the end of this year." 

CORPORATE EXPENSE

  • SAME:  Excluding severance costs, corporate expenses came in at $4.9MM, in-line with guidance
  • PREVIOUSLY:  [Corp expense of ~$5MM sustainable?] "Yes, we can maintain that level."

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