Long of Brazil

Position: Long Brazil via the etf EWZ


Q. What is the native language of Brazil?

A. Brazilian? Spanish?


Or so goes the popular grade school brain teaser.  In fact, the native language of Brazil is Portugese, as Brazil is a former colony of Portugal.  There is a lot that is misunderstood about this South American powerhouse, including her growing economic power base.


Brazil’s Finance Minister announced today that the government will extend tax cuts on computer sales and purchases of capital goods, inject $45.4 billion into the state development bank, and cut taxes on the petrochemical industry.  The nature of these stimulus measures is in interesting contrast to some of its global counterparts, like the U.S., as these measures involve tax cuts and direct investment into development.  Interestingly, Brazil has also avoided cutting interest rates to an emergency level with the Selic base interest rate currently at 8.75%.


One concern is that inflationary pressures are slightly higher in Brazil versus some of its global peers with the 12-month rolling rate coming in at 4.22% in November versus 4.17% in September, but this is still below the government’s target rate of 4.50% and at a reasonable level given the high expected future GDP growth rates.


Brazil has also continued to grow its way up the GDP food chain as it gains competitiveness globally. According to the World Economic Forum:


“Brazil was the top country in upward evolution of competitiveness in 2009, gaining eight positions among other countries, overcoming Russia for the first time, and partially closing the competitiveness gap with India and China among the BRIC economies. Important steps taken since the 1990s toward fiscal sustainability, as well as measures taken to liberalize and open the economy, have significantly boosted the country’s competitiveness fundamentals, providing a better environment for private-sector development.”


We like Brazil for her growth trajectory, relatively managed inflation, and capitalist stimulus.  She also has some positive attributes versus our other emerging market favorite, China. Specifically:

  • Brazil is a Democratic nation and in fact voting for those between the ages of 18 and 65 is compulsory;
  • As is widely documented, China has an old population base that is only accelerating in terms of age due to the One Child Policy;
  • China is much more dependent on exports at ~35% of GDP versus Brazil at ~14% of GDP; and
  • Brazil is long natural resources, while China is short of them. In this instance, China is the client for Brazil’s resources.

As we look into Q4 2009 and 2010, GDP comparisons look favorable, as both Q1 2009 and Q2 2009 were negative growth quarters in Brazil, which should lead for strong reported growth out of the South American powerhouse.  Being long of the fastest growing and most competitive democracy globally is a position we like.


Daryl G. Jones
Managing Director

Long of Brazil - brazil


Sports Apparel/Footwear: Rebounding from (not so) Hot November

After an unseasonably warm November, the most notable change this week is the return of positive growth in apparel. As a result, apparel and footwear sales improved in unison on a trailing 3-week basis for the first time since the end of Q3. The chart below comparing November to historical norms is a compelling illustration of just how significant a factor temperature was last month. Meanwhile, athletic footwear is continuing to trend up and has had positive growth each of the last two weeks giving us further confidence that 2010 will mark the year that athletic footwear outperforms. Good for FL, FINL, NKE, KSWS and UA. With demand returning and temps beginning to normalize, the weak comp guidance thrown out there by some of the sporting good retailers (e.g. DKS) appears to be less likely than trends suggested just a few weeks ago – better on the margin for DKS, COLM and VFC.



Sports Apparel/Footwear: Rebounding from (not so) Hot November - FW App Industry Data 12 9 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Sporting Goods Channel 12 9 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Nov Temp 12 09



Sports Apparel/Footwear: Rebounding from (not so) Hot November - Dec Temp 12 09

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The risk associated with governments piling on debt is not a new theme for us, however yesterday’s move by Fitch to reduce the Greek sovereign rate from A- to BBB+ was front page news. The chart below shows the yield on the 10-Y Greek Bond versus the perceived credit worthiness of the 10-Y German Bund. Clearly investors will expect a significant risk premium to own Greek debt on the longer end of the curve, which should continue to push up yields even if the Greek Finance Minister George Papaconstantinou said that there is “absolutely” no risk the country will default on its debt or seek an EU bailout.


With Greece pushing a government deficit of 12.7% of GDP this year (the EU mandates under 3%) and Greek banks facing more difficulty raising funds with a deteriorated credit rating, the government must bite the bullet and administer aggressive spending cuts. 


We’ll have our eye on potential ripple effects throughout the region. Just over the last 4 weeks we’ve seen yields on 10-year bonds from such countries as Ireland, Hungary, and Portugal blow out, while Germany and France have held steady and even come in. 


The Greek god responsible for earthquakes, Poseidon, is making financial tremors that are being felt in sovereign markets around the global.


Matthew Hedrick



Poseidon - GK vs DE


Being that CKR had already preannounced its fiscal 3Q10 sales and restaurant level margins last month, the most important news that came of the company’s earnings call was its full-year sales and restaurant level margin guidance.  Management guided to -3.5% to -4% blended same-store sales and a 20-40 bp decline in full-year margins.  Based on the sequentially decelerating top-line trends year-to-date, this sales guidance is not surprising.  The full-year margin guidance, however, implies about a 110-200 bp decline in the fourth quarter and breaks the company’s year-to-date trend of maintaining YOY margins despite top-line weakness.  We knew it was only a matter of time!


As I have said before, margins could not continue to move higher with comparable sales trends getting increasingly worse.  And, period 11 comparable sales (also reported yesterday) did just that.  Carl’s Jr. same-store sales decreased 8.1%, implying a 50 bp sequential decline in 2-year average trends from period 10.  Although Hardee’s same-store sales improved slightly on a 2-year average basis, it was not enough to offset the free fall at Carl’s Jr. and blended 2-year average trends declined 30 bps on a sequential basis.  The low end of the company’s full-year blended same-store sales guidance assumes that 2-year average trends deteriorate more than 50 bps in the balance of the quarter from period 11 levels.


Favorable commodity costs have helped to support restaurant level margins despite the significant demand headwinds with food and packaging costs as a percentage of sales declining 60 bps YOY in Q1, 140 bps in Q2 and 180 bps in Q3.  The company is still expecting some commodity favorability in Q4, though to lesser magnitude than in Q3, as CKR management pointed out (as did I last month) that food prices have bottomed and are moving higher.  Even with this continued favorability, margins should decline 110-200 bps YOY in the fourth quarter.  What is going to happen to CKR’s “industry leading” margins once food inflation returns?




CKR outlined some of its new sales building initiatives on its earnings call, which are included in the slide below, and I am not convinced that any of them will be the game changer the company needs to stem the declines at Carl’s Jr.  As far as I can tell, the only new idea on the list is the company’s strategic decision to focus more attention and advertising on its healthier options, including salads at Carl’s Jr.  Although salads are not new to the concept, the company has not advertised or upgraded them in the recent past because they did not appeal to its targeted “young, hungry guys.”  Management believes that this demographic is more health conscious now and that with digital media that it can more effectively market its newly upgraded salads to women without alienating its primary audience. 


First, I don’t think salads will prove to be a real traffic driver for Carl’s Jr’s “young, hungry guys”.  Second, and more importantly, salads typically carry lower margins and decrease add-on sales such as French fries.  Management stated that the lower incidence of sales of side items and combos meals is already largely to blame for the current comparable sales trends and though this problem is not unique to Carl’s Jr., salads will not help on this front.





Big Finger Point

The Walking Co filed Chapter 11, with the primary reason given being ‘uncooperative landlords’ in its effort to renegotiate rents and shed unprofitable stores.  C’mon guys… give me a break. Where’s your accountability? Do you think that just maybe the REAL reason is that your concept doesn’t really deserve the right to exist in the first place? We’ll see more of these n 2010.

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