Takeaway: Brazil is setting up as a short in 2H. Lots of capital has flowed into the country this year on a catalyst that is unlikely to materialize.

On JUN 3 we closed out a long recommendation in Brazilian equities and the BRL, citing a marked deterioration in Brazil’s high-frequency growth data that was likely to perpetuate incremental Policies To Inflate out of the Rousseff administration. While the initial recommendation did generate a substantial degree of alpha, our decision to “book” the gain was clearly the wrong one given that the iShares MSCI Brazil Index Fund (EWZ) and the BRL/USD cross have appreciated +7.2% and +2.9%, respectively, since then.


Nothing worse than leaving money on the table…


Since JUN 3, we’ve seen signs of economic stabilization, with PMI, Industrial Production, Consumer Confidence and Credit Quality data more-or-less flattening out relative to their recent trends, while Retail Sales and Consumer Credit growth have shown material improvement.


SELL BRAZIL? - Brazil High Frequency GIP Monitor


This economic stabilization comes in the wake of a slew of fiscal easing measures out of the Rousseff camp that is likely perpetuating what we’re identifying as renewed confidence in her failed economic policies. In fact, in her initial volley to start the campaign season, she proclaimed that Brazil had very little space to adjust fiscal policy. Moreover, her platform of increased spending on social welfare, health care and education represents little change to the inflationary fiscal and monetary policy she has promoted throughout her administration.


Looking at Brazil from a top-down perspective, we see that headline consumer price inflation has run above the mid-point of BCB’s target band of +4.5% YoY +/- 200bps for the entirety of her presidency. Again, this is largely due to an ever-expansionary fiscal policy mix that has weighed on Brazil’s fiscal and current account balances.








It’s worth noting that our predictive tracking algorithm has Brazilian inflation readings accelerating throughout 2H14. In the context of a OK-at-best outlook for growth, we think that will likely continue to erode expectations for real interest rates in Brazil over the intermediate term (e.g. Brazil's 1Y OIS spread has compressed -48bps over the past 3M). That should reduce (but not completely quash) the country’s allure in the context of our 3Q macro theme “#DollarDevaluation”.








No surprise here, but various readings of confidence – be it Consumer or Business – in the Brazilian government and/or Brazil’s economic situation are at/near cycle-lows – which is one of the factors that got us to believe back in FEB that the OCT presidential election will be tighter than what was priced into the markets at the time.






Fast-forward to today, however, it’s very clear that investors are well aware of this setup given the outperformance of Brazilian capital and currency markets since then. As we initially outlined, international investors took a page out of the Japan (2012-13) and India (2013-14) playbooks speculate on political change in Brazil.


What if the political change never comes? What if, after all is said and done in OCT, we have another four years of pro-inflation, pro-BoP deterioration policies in Brazil? What if the “Brazil discount” is reapplied to the prices of Brazilian financial assets?


That’s a key risk(s) for investors to consider going forward from today’s prices.


We’ve already seen Rousseff’s support in the polls stabilize in recent weeks amid positive developments on the political front (e.g. the PMDB – Brazil’s 2nd largest political party – backed her election bid while officially nominating PMDB lawmaker Michel Temer as her running mate).


Per the JUL 1 Datafolha survey, Rousseff rebounded to 38% from a trough of 34% last month. While the poll was conducted ~1W prior to Germany handing Brazil its worst-ever World Cup defeat (on home soil nonetheless), history would seem to suggest that the World Cup has little-to-nothing to do with the outcomes of Brazilian presidential elections (e.g. Henrique Cardoso won re-election in 1998 in spite of Brazil losing to France in the final and Lula da Silva defeated the incumbent to claim victory in 2002 despite Brazil beating Germany for the title that year).


We’ll get more polling data this week (i.e. Sensus JUL 15, Datafolha JUL 16 and Ibope JUL 18), which will help us begin to cement our views on the upcoming election and the prospect for meaningful political and economic reform in Brazil.


To the extent Rousseff starts to gain momentum, we’ll likely begin to recommend investors trade Brazil with a short bias going forward.


Best of luck out there!




Darius Dale

Associate: Macro Team

WWW: Thoughts Into the Print

Takeaway: The Q looks fine. But we’re looking for one thing only. No, not Sperry, but the number and productivity of Int’l dist deals signed.

This WWW quarter to be reported tomorrow is an important event for our confidence in our Long thesis.  To be clear, we’re not too worried about the EPS number. We think that looks fine. We’re at $0.28, about a penny above the Street, which would represent a 22% growth rate in EPS compared to a 6% decline in 1Q.  The consensus view is that the revenue is weak, and that the company will make up for it with lower pension expense. That’s mostly correct, but well-telegraphed. We shouldn’t see any downward revision to guidance for the year. If anything we think WWW will beat and keep FY guidance steady, implying that 2H will be lower (that’s what it always does). Keep in mind that the company was at the FFANNY trade show in early June where it held 1-on-1s, and then presented at a broker’s Consumer Conference. Both of those happened just 1-2 weeks before the quarter closed June 14th. In other words, WWW knew its numbers, and likely would have preannounced at that time if it thought the quarter or year was at risk.   


The key thing we’re looking for, however, is a) the number of international distribution arrangements signed for Sperry, Keds, Saucony and Stride Rite, and b) the revenue generated by the deals that have already been signed. Why is this so important? The crux of the investment opportunity here is WWW scaling up the International distribution for the four PLG brands. It already has the most efficient international distribution network of any footwear company in the world, with better than 60% of its shoes sold outside the US across a network of 210 distributors over 11,000 points of distribution. All of them are on SAP, and all are exclusive to WWW. Conversely, the PLG brands generated only 5% of its sales outside of the US due to the inefficiencies of being under the umbrella of its former owner, Collective Brands (Payless). When we look at the timeline associated with this deal, organic international growth should be ramping up right now. Here’s the timeline…


PLG Acquisition Timeline

  • 2012 was the year of the PLG deal (4Q12). It was big, and painful initially – no EBIT, just interest from $1.2bn in debt.
  • 2013 was the year of integration. In 1H people moved around, brands were repositioned, and management realigned. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
  • Then comes 2014 – which should be all about revenue growth. The global salesforce, which is the most efficient footwear distribution operation on the planet, has four new major tools (brands) in its toolbox. WWW has been lining up international distribution arrangements over the past 18 months and is now sitting on about 55. Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.



Here’s what the company has said in its last seven public appearances about its cadence in signing new deals.


  • Q2'13 CC (Jul ‘13):  almost 20 distribution agreements in key growth markets and anticipate another 15 to 20 programs will come online in the back half of 2013


  • Q3'13  CC (Oct ‘13):  We continued to make progress on this front during the quarter by signing and executing distribution agreements covering 14 key growth markets, bringing the total number of new agreements since closing to nearly 35 covering 67 countries.


  • Investor Day (Oct '13) : Since acquisition, we've signed 35 new agreements covering 67 countries, and we're very excited about certainly the most recently inked agreements with the Elan Corporation for the Sperry Top-Sider and Keds brand for the China market.


  • ICR (Jan '14):

 WWW: Thoughts Into the Print - WWW Chart1


  • Q4 '13 CC (Feb '14) : significant investments to build out the full Sperry Top-Sider lifestyle assortment. We have seven license agreements in place today for everything from swimsuits to sun glasses and our most exciting initiative, the introduction of a full range of Sperry apparel via license agreement with Li & Fung is scheduled to launch this coming fall... We've signed 15 to 20 new contracts for Sperry. We still only have Sperry in about 67 countries around the world, for example.


  • Q1'14 CC (Apr '14): During the quarter, we signed agreements covering over 25 key growth markets, bringing the total number of new agreements since closing to nearly 55, covering nearly 85 countries.


  • Baird Conference (May '12): And as we noted in our earnings call last week, since the acquisition closed, we've signed 55 new distribution agreements for the newly acquired brands covering 85 markets. And so those distribution agreements are in place.


So there are 55 agreements in place as of May, and probably close to 70 today. We’re ahead of the consensus this quarter due to revenue growth associated with these arrangements.  If we’re wrong, then we’ve got to step back and question our logic, math and thesis. But based on what we know today, we’re comfortable owning this one.

Retail Callouts (7/14): Hegeye Retail Ideas List, FL, FINL, DKS

Takeaway: Hedgeye Retail Ideas List. Specialty running looking towards apparel.



Retail Callouts (7/14): Hegeye Retail Ideas List, FL, FINL, DKS - chart1 7 14




Tuesday (7/15)

  • WWW - Earnings Call: 8:30am


Wednesday (7/16)

  • EBAY - Earnings Call: 5:00pm


Friday (7/18)

  • VFC - Earnings Call: 8:30am




FL, FINL, DKS - What Strategic Changes Are Running Stores Making?



  • Ed Griffin-Co-owner, Fleet Feet Sports, Syracuse, N.Y.
    • “'We are putting a ton of focus on apparel sales — and women’s in particular. We have hired apparel specialists...spread the footwear try-on areas throughout the store to better integrate apparel and accessories to create a more even flow of traffic.'"
  • Lee Silverman-President, JackRabbit Sports, New York
    • “'We’re putting a lot of effort into apparel. If we’re going to grow, it needs to be through apparel. We’re adjusting our store merchandising, replenishing, buying and sales techniques — there’s a lot to learn.'"


Retail Callouts (7/14): Hegeye Retail Ideas List, FL, FINL, DKS - chart2 7 14


Takeaway: No surprise that that running specialty stores are looking to apparel to help fuel the next leg of growth. The running category hasn't exactly been knocking the cover off the ball over the past 12 quarters. On the other hand, athletic apparel has shown no signs of cooling off and would help some of these smaller concepts diversify at higher margins. But, it won't be easy with DKS and FL pushing in the same direction.




AdiBok - Adidas outperforms competition at FIFA



  • "On the field of play, adidas outperformed all competitors: adidas outfitted yesterday's two finalists, World Champion Germany and runner-up Argentina, and is also the partner of adidas Golden Ball winner Leo Messi, adidas Golden Boot winner James Rodriguez, adidas Golden Glove winner Manuel Neuer. For the final, adidas supplied the Official Match Ball, brazuca Rio Final, outfitted the referees and ball kids and used the stadium boards to bring home its brand message 'all in or nothing'."


TGT - Target security officer fired after reporting shoplifting



  • "Northington said Target officials told him that he had violated procedure by not filling out the proper paperwork before contacting the police, though he said his office had operated the same way for years. He said he also was told that he had been insubordinate for not seeking approval before calling police, though he said the standard practice was for him to act as needed."


HD - MakerBot and The Home Depot Bring MakerBot 3D Printers to and Select Stores



  • "MakerBot and The Home Depot® announce a collaboration to bring MakerBot® Replicator® Desktop 3D Printers to customers on and in 12 Home Depot stores in California, Illinois and New York beginning July 14, 2014. This is the first time The Home Depot has offered 3D printers for sale in its stores and will be a pilot program for MakerBot and The Home Depot."





  • "Abercrombie & Fitch Co. today announced that it has initiated a process to refinance its existing credit facilities.  The existing credit facilities consist of a $350 million unsecured Revolving Credit Facility maturing July 27, 2016 and a $150 million Term Loan A maturing February 23, 2017."
  • "The new credit facilities are expected to consist of a $400 million Asset-Based Revolving Credit Facility and a $325 million Term Loan B maturing five and seven years after the closing date, respectively."


EBAY, BID - A Warhol With Your Moose Head? Sotheby’s Teams With Ebay



  • "Starting this fall, most of Sotheby’s New York auctions will be broadcast live on a new section of eBay’s website. Eventually the auction house expects to extend the partnership, adding online-only sales and streamed auctions taking place anywhere from Hong Kong to Paris to London."

Early Look

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Week #2 in July was a better one for the Macau operators with table revenues averaging HK$929 million per day, up 9% over last year.  Our model anticipated a recovery from the weak results from the prior week.  Thus, our full month GGR projection remains at flat to slightly negative YoY growth. 


Reports from the ground suggest strong mass traffic all weekend long and recovering VIP volumes as the World Cup wound down.  We think VIP hold percentage is tracking close to normal for the market.


In terms of market share, Galaxy, Wynn, and MGM are all tracking above recent trend.  We’re generally cautious on the Macau names with our decelerating mass growth theme but Galaxy looks uniquely well positioned over the intermediate term.





LEISURE LETTER (07/14/2014)



  • July 14: AC June revenues
  • July 15-17: Pre-RCL earnings Hedgeye Cruise pricing survey
  • July 16:  LVS 2Q call (430pm)
  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
    • AWAY 2Q call (430pm)
  • July 25:
    • PEB 2Q call (9am)


CZR(Bloomberg) Caesars Entertainment Operating Company has hired New York law firm Kirkland and Ellis to help in the reorganization of $17.4 billion in debt. 

Takeaway: Good luck. Bad balance sheets are endemic in gaming.


IGT – announced an agreement to install its Advantage 9.1 System Suite along with sbX Media Manager at Northern Quest Resort & Casino. The comprehensive systems solution includes IGT's Point Play and Xtra Credit bonus applications, sbX Media Manager, and IGT's Service Window

Takeaway: Another systems win for IGT.


LVS – A former Macau business partner of Las Vegas Sands Corp has accused the casino operator of misappropriating trade secrets during the latter’s successful bid in 2002 for a casino licence in the city.  Asian American Entertainment Corp (AAEC), a company led by Taiwan entrepreneur Marshall Hao Shi-sheng, is suing the company for at least US$5 billion in profits that it says are owed via their joint ownership of copyright related to a casino licence bid. AAEC filed the complaint in U.S. District Court in Nevada on July 9. The case is in addition to two separate, ongoing legal actions in Macau over alleged breach of contract

Takeaway: A repeat of the same, previous lawsuit.


WYNN & 1128:HK (Macau Business Daily) In a CNN interview, Linda Chen, Wynn Macau COO said that Wynn is now focusing on expanding the activities offered by Wynn Resort especially as the company gets ready to open it's new Wynn Palace in Cotai. She also said that Steve Wynn will remain in his position for many years.

Takeaway: Touting the Macau DICJ focus for more non-gaming and entertainment amenities.


HOT – In an interview with Bloomberg, Matthew Fry, SVP of acquisitions and development for Asia, said: “China is our single-biggest and fastest-growing market in Asia.” Factors like rising urbanization, a buoying middle class, and a mushrooming travel industry make China an attractive travel and tourism market. The company, which already has a network of 133 hotels in the region, is planning to double its footprint in the region by 2015.  It already has 120 properties in the pipeline, with four expected open this year. In second and third-tier cities, Starwood will focus on four-star hotels to cater to the changing demand of the country after the new government’s crackdown on extravagant spending.  Fry also said Starwood plans to add 30 properties to its portfolio of 40 hotels in India, which according to Fry is the company’s second-biggest market in Asia.

Takeaway: Let's hope the ASIA/PAC economies remain strong.


RHP – The Metro Historic Zoning Commission recommended approval of RHP's expansion plans for the Ryman Auditorium on the condition the digital billboard be downsized from 236 square feet to 154 square feet. Ryman Hospitality will have its expansion plan for the auditorium considered at the Historic Zoning Commission meeting on Wednesday. The company wants to add a restaurant, new lobby and multimedia history tour, plus renovated box office, restrooms and concessions area. The project, which will extend the non-historic portion of the building all the way to Fourth Avenue, will cost about $14 million.

Takeaway: As expected, RHP is refocusing the Ryman Auditorium programming for the younger country music listener.


Illegal Chinese World Cup Betting – (Xinhua) More than RMB18 billion (US$2.9 billion) changed hands in cases of illegal football gambling detected by the authorities in mainland China during the 2014 FIFA World Cup.

Takeaway: A big number and now with the World Cup over, no more excuses for poor GGR


Trump Plaza Casino Atlantic City to close – Trump Entertainment Resorts announced the company “expects that it will terminate the operations of Trump Plaza Hotel and Casino on or shortly after September 16, 2014.”

Takeaway:  With the 3rd AC casino to close this year, incremental positive for Borgata and CZR.


Macau Airlift – AirAsia asked Macau's Civil Aeronautics Board for an additional 720 weekly seat entitlements between Macau and the Philippines.  AirAsia's request follows the July 1st service expansion from 4,500 weekly seats to 7,020 current weekly seats.

Takeaway: Strong demand = request for additional capacity.


California Online Poker – Online poker may come to California sooner than expected - the Iipay Nation of Santa Ysabel Indians could launch real money online poker in the state as soon as today through its website, The site will only spread real money online poker to California residents 18 years of age and older. Players will be able to make deposits through the Financial Payment Network, or FinPay for short. Deposit options include credit cards, electronic checks, Bitcoin and in person at the tribe’s smoke shop.

Takeaway: With a large potential pool of players, CA remains the prize for on line poker companies.


Netherlands Gaming – The Dutch government decided to sell 14 casinos operated by Casino Holland, 10 in an immediate portfolio sale and the remaining four individually during 2015, as well as authorize two new licenses will be granted 2017, and legalize and regulate Internet gaming. The government announced casinos will pay a 20% gaming revenue tax plus 2% for problem gambling programs and to regulators.

Takeaway: An interesting announcement that was under the radar... we are anxious to hear which companies are interested in buying the casinos.  


Singapore Economy Unexpectedly Contracts – Gross Domestic Product for the three months to June 30 fell 0.8% on a seasonally adjusted and annualized basis compared with the previous quarter, according to advance estimates by the Ministry of Trade and Industry. This compared with a revised 1.6% increase in the first quarter. The median forecast by seven economists polled by The Wall Street Journal was for 2.2% growth.

Takeaway: Could be another tough quarter for Singapore mass 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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