prev

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES?

Takeaway: Even though we like them fundamentally, Brazilian equities remain inconclusive from a quantitative perspective.

SUMMARY BULLETS:

 

  • Brazilian equities – particularly the consumer oriented names and industrials names – continue to look interesting to us on the long side with respect to the intermediate-term TREND, aswe continue to anticipate the positive effects of the cumulative stimulus efforts to continue to roll through on a lag(s), setting Brazil up to economically outperform peer economies, at the margins, over the intermediate term.
  • Additionally, we did receive some positive news on the POLICY front in the week-to-date – specifically in that investors should now anticipate some degree of FX stability and reduced capital controls, on the margin.
  • That said, however, we fully understand the lack of investor enthusiasm for this contrarian play (accelerated Big Government Intervention and Bubble #3 popping) and are not surprised to see the Bovespa continue to trade below its TREND line.
  • Is the Bovespa’s recent TRADE breakout a leading indicator of better things to come in Brazilian financial markets or is it merely a beta-driven head fake to be ultimately faded? While we don’t know the answer to that question at the current juncture, we do know what we plan to do if: A) the Bovespa follows through with a confirmed TREND breakout (buy Brazilian equities, unhedged from a FX perspective) or B) the index fails at its TREND line (more of the same = nothing).

 

Brazil has been a country we’ve been hot and cold on in the YTD from an equity market and FX perspective. When we last touched base here in our OCT 24 note titled: “IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS?”, we posited:

 

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

 

In the ~3 weeks following that note, the Bovespa traded down -3.1% to its NOV 16 closing low 55,402 and has since rebounded to +91bps higher than the original 10/24 closing price of 57,161. the S&P 500 (as a proxy for “risk assets”) dropped -3.9% to its NOV 15 closing low of 1,353 and has since recovered to the original 10/24 closing price of 1,409.

 

What to do from here depends largely on the quantitative setup, which we will continue to receive from Keith in real time. A confirmed breakout above the Bovespa’s TREND line of 58,498 would be a signal to us to increase our exposure to Brazil on the long side. We especially like consumer oriented names as Bubble #3 continues to pop amid a confluence of noteworthy domestic tax and tariff reductions.

  

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 1

 

We would also expect to see some strength in industrials names (particularly within the construction industry) as both FIFA and the IOC have recently come out and flagged Brazil as being “way behind schedule” in both World Cup (2014) and Olympic Games (2016) preparations.

 

We expect President Rousseff & Co. to address the situation with some Chinese-style command economy policies in the coming quarters as she seeks to protect the reputations of both herself and a her country from the scorn of the international community. Finance Minister Guido Mantega appears ready to follow suit at moment’s notice, suggesting his crew is working to increase investments in the country’s “inefficient infrastructure” per his own recent statement.

 

From a top-down perspective, Brazil’s GIP outlook remains robust and is supportive of further equity market and currency gains w/ respect to the intermediate-term TREND. We also like that consensus 2013 GDP estimates have come down to a more realistic +3.9% from a peak of +4.5% as recently as five months ago; +3.9% is in line with the latest projections out of the Brazilian Finance Ministry (+4%) – inclusive of last week’s demonstrable miss on the 3Q12 real GDP print (+0.9% YoY vs. Bloomberg Consensus at +1.9%).

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - BRAZIL

 

While we remain somewhat skeptical of those projections – especially given that aggressive monetary easing (525bps worth of cuts), record low interest rates (7.25% nominal; 1.8% real), subsidized credit (YTD State bank credit up +25.5% YoY vs. only +11.7% for private banks), tax breaks for consumer products and financial services and new tax incentives for various industries have all failed to demonstrably accelerate GROWTH in the YTD – we cannot deny that the Brazilian economy is finally headed in the right direction; everything that matters in the relative world of Global Macro occurs on the margin.

 

Moreover, we continue to anticipate the positive effects of the cumulative stimulus efforts to continue to roll through on a lag(s), setting Brazil up to economically outperform peer economies, at the margins, over the intermediate term.

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 3

 

As we have stressed all along in our recent work on the Brazilian economy, POLICY uncertainty – particularly the flurried nature of the announcements and notable anti-international investor and anti-private sector bias – has been the key driver of Brazil’s underperformance in the YTD, with the Bovespa ranking 83rd out of the 106 country-level and international sector-specific indices we track across the Global Macro universe.

 

Additionally, fiscal slippage may have also contributed some to weakness, as Finance Minister Guido Mantega recently confirmed that Brazil won’t hit its fiscal year budget targets and will opt to use an accounting ploy to discount public investments to make them less accretive to the deficit. Moving the goal posts mid-game remains a tried and true way to discourage the cross border capital deployment – especially for Latin American economies, which have received a black eye over the LTM as a result of President Fernandez’s (Argentina) aggressive spate of Big Government Intervention and expropriation.

 

We did, however, receive some positive news on the POLICY front in the week-to-date:

 

  • Just days after the central bank intervened in the forex market by selling 21,800 currency swap contracts worth $1.1 billion (designed to strengthen the BRL vs. the USD), the central bank reduced the maturity of international debt capital subject to the +6% IOF tax to one year from two years. This follows yesterday’s move to exempt approved exporters from the tax on qualified borrowings.
  • Both efforts reverse the tide of capital controls in Brazil and are designed to promote capital inflows and cement a base in the BRL exchange rate. We think the unofficial targeted range is ~2-2.10 per USD, w/ the top end of the range ~5% higher from here.
  • In addition, Mantega was out essentially pledging to back away from further measures designed to control/manipulate the price of the BRL, suggesting that the currency is at a level where the market can set prices (finally!).

 

We’ve said it before and we’ll keep pounding the table on this critical point: removing currency translation risk from the perspective of Brazilian companies (whose balance sheets are levered with foreign currency denominated debt) and from the perspective of international investors improves the outlook for both earnings growth and foreign currency denominated returns within the Brazilian equity market.

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 4

 

All told, Brazilian equities – particularly the consumer oriented names and industrials names – continue to look interesting to us on the long side with respect to the intermediate-term TREND. That said, however, we fully understand the lack of investor enthusiasm for this contrarian play (accelerated Big Government Intervention and Bubble #3 popping) and are not surprised to see the Bovespa continue to trade below its TREND line.

 

Is the Bovespa’s recent TRADE breakout a leading indicator of better things to come in Brazilian financial markets or is it merely a beta-driven head fake to be ultimately faded? While we don’t know the answer to that question at the current juncture, we do know what we plan to do if: A) the Bovespa follows through with a confirmed TREND breakout (buy Brazilian equities, unhedged from a FX perspective) or B) the index fails at its TREND line (more of the same = nothing).

 

Darius Dale

Senior Analyst


OZM: One Of The Best

We remain bullish on Och-Ziff Capital Management (OZM) as the stock remains undervalued and offers attractive performance. We’ve said it time and time again: management is competent and knows how to preserve capital while managing risk and generating returns in an environment where the big hedge funds are getting killed. The company returned +0.46% on its Master Fund in November, which is where roughly 70% of the company's assets under management reside. This latest print brings the year-to-date total on the Master Fund to +10.01%, which far surpasses the 2.57% YTD return on the HFRX Global Hedge Fund Index, and is only modestly below the 12.08% year-to-date return on the S&P 500. 

 

With the stock itself up +11.7% over the last three months, we expect OZM will continue to thrive but remain cautious about tax consequences related to the fiscal cliff. With no edge on the outcome of the negotiations, we prefer to sidestep the event risk and re-engage on the long side post the outcome.

 

OZM: One Of The Best - image001


NKE: Special Dividend No Brainer

Takeaway: With heavy insider ownership on top of a fat cash balance, $NKE is an obvious candidate for a special dividend.

We’re two weeks away from Nike’s quarter, and just over three weeks away from the deadline for the swarm of ‘special’ dividends that will fall into the 2012 tax year. There are factors for Nike that are worth considering.

  1. The company has about $3.2bn in cash, or $7ps, waiting to be deployed.
     
  2. There’s another $2bn in FCF over the next 12 months, or $4.40ps. Combined with current holdings, we’ve got net pro-forma cash balance of $5.2bn, or $11.40 per share. That’s 11.75% of NKE’s equity value.
     
  3. Though we still think that Nike is grossly under-levered with only $364mm in debt on a $15.1bn balance sheet, it’s unrealistic to think that it will take its cash to zero due to its sheer conservatism – especially in that it faces the same hurdles the same hurdles as other multi-nationals with repatriating cash with a tax penalty.
     
  4. But it has another characteristic that others do not…and that is the fact that management owns 21% of the stock, with Phil Knight himself owning 18% (with full control of the Board due to super voting rights in Class A/B share structure). Mr. Knight has been a very conservative seller of the stock over time, and sold hardly no shares since the first of several small 10b5-1s in 2005.
     
  5. We could comfortably leave Nike with $2.5bn in cash on the balance sheet over 12 months, leaving $2,000-$3,000 to distribute today. That accounts for around 5-6% of Nike’s current equity value. A $2bn dividend would be a $360mm paycheck for Phil Knight.

We don’t have a crystal ball as to the event or magnitude for NKE, but we see three distinct buckets of companies issuing these dividends. 1) Those that COULD, 2) Those that SHOULD, and 3) Those that THINK that they have the resources to do so, but will be regretting it in a year (like GES). Nike has ample opportunity for reinvestment in the business, but its ROE vs ROIC trend definitely suggests that it SHOULD give some back to shareholders.

 

NKE: Special Dividend No Brainer - 12 5 2012 12 45 53 PM


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Hanging In: SP500 Levels, Refreshed

Takeaway: The SP500 continues to trade in a very tight Risk Range.

POSITIONS: Long Consumer Discretionary (XLY), Short Energy (XLE), Utilities (XLU) and Industrials (XLI)

 

Government catalyst ping pong. Fun. The SP500 continues to trade in a very tight Risk Range. After taking a peek below 1404 this morning, the ball popped right back up from under that water. Risk moves fast.

 

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

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1404
  3. Long-term TAIL support = 1366

 

In other words, a close below 1404 puts 1366 in play, fast. And a close > 1419 puts the pain trade back on the upside, faster.

 

In the meantime, the best I can do is buy red and sell green.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Hanging In: SP500 Levels, Refreshed - SPX


PODCAST: Consuming The Market

On today’s morning investment call held for subscribers, Hedgeye CEO Keith McCullough discussed his reasons for buying the Consumer Discretionary ETF (XLY) yesterday and what’s happening in the current market environment. We bought the XLY on red and as you know, we don’t buy stocks on green - that’s a no-no. Another strategy is when you buy stocks when volatility is at 17 and sell stocks with volatility at 14. If you did that, you’re probably having a good quarter. Also: the top three sectors we like are consumer discretionary, consumer staples and healthcare. 

 

You can listen to our full morning call in the audio posted below.

 

 


Europe Retail Sales Slow

Retail sales in the Eurozone have been on the decline since 2005. After a bounce in 2009, sales continues to slow and have recently hit lows not seen since the end of 2009. The sharp drop in the last quarter shows that recovery in Europe is clearly far from over. With some countries experiencing 25% unemployment, it makes sense that households aren't spending their money frivolously. 

 

Europe Retail Sales Slow - image016


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next