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Brazilian Equities Down -50% From 2011 Peak, Time to Buy?: Conference Call Invite

We will be hosting a brief conference call on Thursday, February 27th at 11:00am EST to discuss why we think market participants may finally be appropriately bearish on Brazil.

 

With the Bovespa Index down -54% in USD terms since peaking in APR ’11, we now think it’s appropriate to explore whether or not the currently distressed prices of Brazilian assets represent real value or if they remain a value trap. We will conclude the call with a live Q&A session.

  

 

KEY TOPICS WILL INCLUDE

  • A review of our bearish thesis and key risks over the next few quarters
  • Scenario analysis on whether or not this is a good time buy
  • Valuation work on Petrobras and Vale

 

RELATED TICKERS

EWZ, PBR, VALE, USD/BRL, BRL/MXN 

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 896782#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the start of the call)

 

Contact for more information.

 

We look forward to your participation on the call. Please email with any questions you'd like us to address.

 

-The Hedgeye Macro Team


European Banking Monitor: Steady As She Goes

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - It was a fairly uneventful week for EU bank swaps as the median change was zero basis points. #Steady as she goes.

 

European Banking Monitor: Steady As She Goes - ww. banks

 

Sovereign CDS – Sovereign swaps were flat to tighter around the world last week. Italian and Portuguese sovereign swaps tightened by -3.6% (-6 bps to 153) and -2.0% (5 bps to 254 bps). Spanish and German swaps were unchanged at 135 and 25 bps, respectively.

 

European Banking Monitor: Steady As She Goes - ww. sov1

 

European Banking Monitor: Steady As She Goes - ww. sov2

 

European Banking Monitor: Steady As She Goes - ww. sov. 3

 

Euribor-OIS Spread –  The Euribor-OIS spread widened by half a basis point to 15.4 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

European Banking Monitor: Steady As She Goes - ww.euribor

 

Matthew Hedrick

Associate


[video] Keith's Macro Notebook 2/24: CHINA #INFLATIONACCELERATING GOLD


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MONDAY MORNING RISK MONITOR: SPLIT SIGNALS

Takeaway: Rising commodity prices, meandering yield spreads and still-rising Euribor-OIS continue to keep us cautious, but the TED Spread is thawing.

Split Signals:

We've been arguing in favor of a defensive posture in Financials for a few weeks now. Our main qualms with the bull case have been rising interbank systemic risk measures, rising commodity prices, which precipitate a slowing of economic growth, and a compressing yield curve. Here's the latest score on those fronts: Euribor-OIS continues to widen, albeit very modestly in the latest print. TED Spread, however, tightened a few basis points in the latest week. Commodity prices continue to rise as reflected in the CRB Index's 3.4% week-over-week increase and the now +7.2% increase on a month-over-month basis. Finally, the 2-10 yield spread was uneventful, tightening 1 bp last week to 242 bps. The notable reversal here vs recent weeks is the now tightening TED Spread, putting it at odds, from a signaling standpoint, with the widening Euribor-OIS. For now, we'll continue to err on the side of caution.

 

Key Points:

* CRB Commodity Price Index – The CRB index rose 3.4%, ending the week at 302 versus 292 the prior week. As compared with the prior month, commodity prices have increased 7.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* Euribor-OIS Spread –  The Euribor-OIS spread widened by half a basis point to 15.4 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

* High Yield (YTM) Monitor – High Yield rates fell 9.8 bps last week, ending the week at 5.77% versus 5.86% the prior week.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 3 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 15

 

1. U.S. Financial CDS -  Overall, swaps tightened for 23 out of 27 domestic financial institutions. Interestingly, while the US Financials saw their median CDS tighten by 2 bps, the median stock price change was lower by 20 bps. 

 

Tightened the most WoW: SLM, UNM, MET

Widened the most WoW: CB, ACE, AXP

Tightened the most WoW: MBI, PRU, AGO

Widened the most MoM: CB, C, ACE

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 1

 

2. European Financial CDS - It was a fairly uneventful week for EU bank swaps as the median change was zero basis points. #Steady as she goes.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 2 2

 

3. Asian Financial CDS - Asian bank swaps were a mixed bag last week. The biggest improvement came from two of India's banks, ICICI and IDB, though State Bank of India widened. Results were mixed in China and generally, though modestly, tighter in Japan.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 17

 

4. Sovereign CDS – Sovereign swaps were flat to tighter around the world last week. Italian and Portuguese sovereign swaps tightened by -3.6% (-6 bps to 153 ) and -2.0% (5 bps to 254 bps). Spanish and German swaps were unchanged at 135 and 25 bps, respectively.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 18

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 3

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 9.8 bps last week, ending the week at 5.77% versus 5.86% the prior week.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1,849.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 6

 

7. TED Spread Monitor – The TED spread fell 2.4 basis points last week, ending the week at 19.7 bps this week versus last week’s print of 22.1 bps.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 7

 

8. CRB Commodity Price Index – The CRB index rose 3.4%, ending the week at 302 versus 292 the prior week. As compared with the prior month, commodity prices have increased 7.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 8

 

9. Euribor-OIS Spread –  The Euribor-OIS spread widened by half a basis point to 15.4 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 130 basis points last week, ending the week at 1.98% versus last week’s print of 3.28%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 76 bps versus 77 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 11

 

12. Chinese Steel – Steel prices in China fell 0.4% last week, or 14 yuan/ton, to 3,334 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 242 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.1% upside to TRADE resistance of $21.51 and 1.3% downside to TREND support of $21.21.

 

 

MONDAY MORNING RISK MONITOR: SPLIT SIGNALS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Just Charts: Staples Dog Do

Despite great anticipation around the release of “news” at the annual Consumer Analyst Group of New York (CAGNY) Conference last week, the sector (XLP) was flat on the week versus the S&P500 at +0.4%.   

 

In fact, XLP is the worst performing sector year-to-date (down -3.6% vs the broader market +1.7%), despite the slow growth and yield chasing sector of Utilizes (XLU) the top performing sector. This underperformance has also been reflected in earnings season results. As the chart below shows, the Q4 2013 Earnings Scorecard shows Consumer Staples as the worst performing sector across sales, EPS, and operating margin growth versus the prior quarter!

 

 

Just Charts: Staples Dog Do - ES OP Table 022114

 

The Hedgeye U.S. Consumption Model is flashing predominantly red, as only 4 of the 12 metrics are flashing green.

 

Just Charts: Staples Dog Do - 1

 

From a quantitative set-up the sector remains broken across the immediate term TRADE and intermediate term TREND durations, our language for a bearish medium term sector outlook. 

 

Just Charts: Staples Dog Do - 2

 

We continue to believe that the sector is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 18.9x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and expanded only 10bps higher week-over-week (-30.6 vs -30.7) 

Just Charts: Staples Dog Do - 3

 

Just Charts: Staples Dog Do - 4

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

(o)

 

 

Quantitative Setup

 

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

 

Alcohol

 

BUD – low-volume beta bounce still hasn’t changed BUD’s developing bearish TREND – it would need to close back above $102.91 to go bullish on our model

 

Just Charts: Staples Dog Do - 5

 

DEO – uglier than BUD, but same setup – it had its low-volume beta bounce and failed to recapture TREND support up at $128.27

 

Just Charts: Staples Dog Do - 6

 

 

Beverage

 

KO – our risk management model saw this breakdown coming (see prior weeks’ notes); big time bearish TREND @Hedgeye with resistance firmly intact up at $39.56

 

Just Charts: Staples Dog Do - 7

 

 

PEP – just a nasty breakdown after our risk model signaled it was in motion; TREND resistance remains overhead up at $82.11

 

Just Charts: Staples Dog Do - 8

 

 

Food


GIS – one of the few names that deserves consideration for a bearish to bullish reversal; needs to hold $48.82 TREND support (which was resistance until the past few weeks), so let the market decide

 

Just Charts: Staples Dog Do - GIS

 

 

MDLZ – Peltz’s love matters – a nice Valentine’s day v-bottom sees follow through here back above the TREND line of $32.89; if that holds, we’ll call this bullish

 

Just Charts: Staples Dog Do - mdlz

 

 

Household Products


KMB – nothing but love for this name remains – Bullish Formation @Hedgeye with TREND support of $104.21 intact

 

Just Charts: Staples Dog Do - 11

 

 

PG – next to KO and PEP, Procter gets the nod for the next worse looking setup in this risk management note; bearish TREND remains resistance up at $79.87

 

Just Charts: Staples Dog Do - 12

 

 

Tobacco


MO – these smokes stocks still have dog breath; bearish TREND resistance intact ($36.16 resistance)

 

Just Charts: Staples Dog Do - 13

 

 

PM – still one of the better looking shorts in all of big cap consumer; bearish TREND @Hedgeye = $83.19 resistance

 

Just Charts: Staples Dog Do - 14

 


Get the Macro Right

Client Talking Points

CHINA

The Shanghai Composite tried to go positive last week for the year-to-date. What happened? It got slammed -1.8% overnight (down -1.9% YTD). Ex-ramping credit (which isn’t the answer to their problems), the Chinese data is just terrible. Guess what? That matters to global growth consensus remaining too high.

#InflationAccelerating

Last year, we were the bulls on US #GrowthAccelerating. This year? We’re sticking with inflation’s ramp. Check out commodities with the CRB Index up another +2.8% to +7.8% YTD last week (compared to S&P 500 -0.1% to -0.7% YTD). That's a big deal that consensus is still missing. With Mario Draghi saying there is no “deflation” risk, that’s good for the Euro (bad for USD), and good for commodities. Got correlation?

GOLD

Gold is up another +0.7% to +10.9% year-to-date this morning as A) 10-year yields remain bearish TREND @Hedgeye and B) US Dollar remains under pressure ahead of both Janet Yellen’s regime and Obama’s 2015 budget (#Spending). Gold loves inflation slowing growth (and Team Canada Hockey). Couldn't resist.

Asset Allocation

CASH 44% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 18%
FIXED INCOME 14% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

COMMODITIES: at +7.8% YTD for the CRB Index, #inflationAccelerating is now obvious @KeithMcCullough

QUOTE OF THE DAY

"What a man can be, he must be." - Abraham Maslow

STAT OF THE DAY

The G20 has pledged to install policies that will add $2 trillion to the world economy over the next five years. The world's 19 richest nations and the European Union -- said the reforms aim to lift collective GDP by more than 2%. (CNN)


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