Brazil Update - Moonshot GDP Release & Presidential Election Commentary

Economy Grew 9% in First Quarter


Brazil’s official statistical agency, IBGE, reports today that Brazil’s economy grew 9% in the first quarter over the year-ago period, and that GDP was up 2.7% over the last quarter of 2009.  They say this puts Brazil’s economy in a similar position to the other “BRIC” economies.  Already reporting for this year were China – with an 11.9% annualized growth rate – and India, at 8.6%.


Brazil’s central bank said the number was in line with their growth estimates.  We have not reviewed Brazil’s central bank previous estimates, but the projected range for this quarter was between 7.5%-10%.  This looks like a gimme, and we wonder why a central bank would give such generous leeway, unless it was trying to make sure the government couldn’t possibly disappoint.


Press commentary says Brazil is running counter to the economic trends in Europe, observing that Britain’s new government is talking austerity measures, and Germany just announced significant the layoffs of public service employees and personnel cuts in the armed services.  Brazilian government spending, meanwhile, continues to grow, raising fears of inflation.  The strong growth number just reported for the first quarter was strong, but growth is noticeably slower in the current quarter. 


Brazil Update - Moonshot GDP Release & Presidential Election Commentary - Brazil GDP




Brazil’s election authorities fined President Lula – for the fifth time – for campaign violations.  A sitting president is not allowed to campaign during the preliminary stages of an election, only once the official campaign season has started and the official candidates have been named.  Lula appeared before a federation of labor unions in a May Day celebration and said the country “needs continuity” – a clear reference to his hand-picked successor, Dilma Rousseff.  The mistake will cost him about US$4,500.


Polling shows recent gains in Rousseff'’s popularity, despite the scandal that surfaced in the past week, where it was revealed that a journalist, together with a former senior police official and a former military intelligence officer were planning an espionage campaign aimed at presumptive opposition candidate Jose Serra.


Under Brazil’s constitution, Lula, who has held the presidency for two terms, cannot run for a third consecutive term.  In a newspaper interview this week, Lula said he would not rule out the possibility of his returning to run for president in 2014.  He emphasized, however, that he is looking forward to attending the World Cup games that year – when Brazil will be the host – as a private citizen. 


Brazilians will vote for a new president on 3 October.



Moshe Silver

Chief Compliance Officer & Managing Director


MCD reported May sales today and as I stated yesterday although trends remain positive on an absolute basis, expectations, particularly in the U.S., are ahead of current trends.  U.S. same-store sales came in +3.4%, below the street’s +4.3% estimate.  Relative to the ranges I outlined in my sales preview note, which look at reported trends versus recent two-year trends, the U.S. segment posted a BAD result and both Europe and APMEA came in NEUTRAL. 


Adjusting for calendar shifts, two-year average trends in the U.S. slowed again in May to February levels of below 4% after accelerating in the prior two months to closer to +5% while Europe and APMEA were in line to slightly better.  For reference, MCD lapped the initial national launch of its McCafe advertising campaign in mid-May so it will be important to watch how McCafe fares in its second year.  MCD reported that the recent addition of Frappes to the McCafe line-up helped drive same-store sales growth in May, but I continue to believe that the beverage initiative will complicate operations longer-term. 


FX Headwind…MCD also reported today that for the full year foreign currency translation is expected to have a negative impact on EPS, which reflects a change from the company’s prior expectation of a slight benefit.








Howard Penney

Managing Director


R3: DG: Looking at the Drivers


June 8, 2010


Under the hood of DG’s strong Q2 results are several notable highlights including the willingness of the lower-end consumer to purchase incremental non-consumables.


DG reported another strong quarter, with earnings of $0.42 vs. the Street at $0.34.  Recall that the company was on the road for a secondary in the early part of the quarter, which in some way was probably a big vote of confidence in favor of the company’s underlying trends.  Timing aside, there’s no denying that this was another solid quarter, on top of difficult comparisons with the prior year.  Yes, same store sales were better than forecast (up 6.7% vs. a 4.1% expectation) but gross margins and leverage on SG&A were better too.  In looking below the surface there were a couple of notable changes that stand out:


- DG’s merchandise mix showed one of the more dramatic sequential changes we’ve seen in several quarters, with consumables growth slowing and seasonal and apparel categories picking up.  Notably, apparel posted a 6.7% increase on top a 7.6% increase LY.  This is clearly a win for gross margins over time, if sustainable.  Either way, the conference call will be telling as we wait to see if management takes credit for the changes in mix or if this is simply a byproduct of comparisons with last year.


- Dovetailing on the mix comment, was a very strong performance from the company’s seasonal category.  For the quarter, seasonal increased by 20.6%.   Favorable weather was likely a key contributor, as we have seen across the entire retail space in early Spring.  Nonetheless, the willingness of the lower-end consumer to purchase incremental non-consumables is noteworthy.


- Inventory remains well controlled, but not as stellar in quarters past.  On an 11.9% increase in sales, DG’s inventories increased by 10%.  While this is still a favorable spread, see the SIGMA chart below to see the progression over the past few quarters in the company’s inventory management.


Eric Levine



R3: DG: Looking at the Drivers - DG SIGMA




- GIII’s push to transform outerwear specialist Andrew Marc into a lifestyle brand continues. Management believes category extensions for the brand are “endless”. As such, the company recently announced the license of the brand for Men’s denim and sportswear with Jones New York. The men’s business will be built under three sub-brands, which are expected to be sold through specialty and department store channels. Other recent licenses include men’s small leather goods, luggage, footwear, and women’s accessories.


- Keep an eye on the Boomerangers. Who are these people? Defined as young adults who have moved home with their parents after living away and being independent, this newly defined demographic is growing. Approximately 13% of parents report Boomerang children according to a Luminosity poll. Marketers are becoming more excited about this niche category of consumers due to their ability to influence self-purchases as well as those made by their families living under the same roof.


- Add Crocs to the list of footwear companies looking to capitalize on “barefoot” technology. While toning has certainly received a disproportionate share of attention, let’s not forget the growing belief that we’re all better off walking around barefoot (for health and anatomical reasons). Building on this concept is Crocs ABF, short for “as close to barefoot as it gets”. The new sandals come in a variety of colors and designs, priced from $19.99 to $29.99.





Puma to Consider More Acquisitions - Puma will consider further acquisitions if any potential target complements its offerings. CEO Jochen Zeitz said: "I can well imagine making acquisitions so long as these are complementary to Puma and move it forward." Puma acquired the golf equipment brand Cobra, which it bought in March from US diversified consumer products company Fortune Brands Inc. In terms of Puma's prospective growth, Zeitz said the company still believed it had the long-term potential of generating sales of more than 4 bn euros ($4.88 billion) despite the recession. <>

Hedgeye Retail’s Take: With sales stalled at ~€2.5Bn over each of the last 3-years, acquisitions are critical to Puma’s goal of achieving of €4Bn in sales. The company can also be very liberal with its definition of “complementary” acquisitions given its brand exposure in running, football, baseball, cricket, and motorsports in addition to soccer.


Indian Garment Exports Down 2.64% in '09 to '10 - After new data showed the value of the country's garment exports fell by 2.6% in the year to March, Indian apparel exporters are calling for a tax on cotton yarn exports again.  <>

Hedgeye Retail’s Take:   Either way you slice it this is yet another contributing factor to rising costs. 


Vietnam Leather Export Target May be Unattainable - Vietnamese leather and footwear industry is concerned that the sector might not be able to reach the 2010 export target of US$5.3 billion. <>

Hedgeye Retail’s Take:   With more and more chatter that China costs are on the rise (driven by wage increases, labor shortages, and raw materials) is now the time for Vietnam to cut price and take back share?


Nike Introduces a Heart Rate Monitor Training Device - Nike, Inc and Polar have introduced the Polar WearLink+ that works with Nike+, enabling users to run and train with heart rate monitoring. This new product works with the Nike+ SportBand and the Nike+ iPod Sport Kit, enabling users to run and train with heart rate monitoring for the first time. It is worn comfortably around the chest and transmits the user's heart rate wirelessly to their Nike+ iPod Sport Kit or SportBand. It will improve the training experience of Nike+ users helping them to understand how hard they are working in any given run. <>

Hedgeye Retail’s Take: The latest innovation in self-monitoring workout accessories for Nike athletes serves as a reminder that many stay fit the old-fashioned way – they earn it.


BEBE and 90210 Partner for Contemporary Line - Bebe Stores Inc. and CBS Consumer Products are partnering on a Bebe for 90210 contemporary clothing collection based on CBS Television Studios’ “90210” series for The CW. It’s a collaboration between producers and wardrobe stylists from the show and Bebe’s creative design team. The line will be introduced simultaneously on-air and in stores. The label will launch in conjunction with new episodes of the series’ third season this fall and include styles worn by characters in the show along with products inspired by the series. <>

Hedgeye Retail’s Take: Capitalizing on its Californian heritage, you have to tip your hat to Bebe and its recent moves partnering recently with the Kardashians and now 90210 in an effort to stay relevant.


Hermès International Cautions Growth to Slow in Back Half - Sales at Hermès International rose even faster in April and May than the 18.5% increase registered in the first quarter, but these growth levels should drop off in the second half, CEO Patrick Thomas said Monday. Sales continue to progress at an extremely good rate for the time being, in fact at a rhythm superior even to the first quarter, especially in watches. The CEO added, “This very strong growth in the first half of the year must not prompt us to overestimate our forecasts for the end of the year.” <>

Hedgeye Retail’s Take: Not exactly a surprise here as comps get increasingly less favorable and pent up demand wanes over the balance of the year.


Paris Stores Denied Bid for Sunday Trading - City Hall rejected some Paris department stores that bid to lift a ban on Sunday trading. In a joint statement Monday, the retailers said Mayor Bertrand Delanoë had turned down an application to classify the shopping district around Boulevard Haussmann as a tourist zone, which would have given them the green light to open every Sunday like stores on the Champs-Elysées. Such a move would have boosted tourism and the local economy by generating additional revenue and creating at least 600 jobs, they argued. <>

Hedgeye Retail’s Take:  Gotta love the archaic old-school laws.  Anyone try to shop in Bergen County, NJ on a Sunday?


Li&Fung To Produce More for TapouT - TapouT, a mixed martial arts apparel and gear brand, has extended its licensing deal with LF USA, a subsidiary of Li & Fung Limited, to include men's and juniors' sportswear. LF USA's Wear Me Apparel division will produce and distribute the sportswear under the TapouT and MPS brands. The division has produced product for TapouT since 2008. The new TapouT sportswear will hit retailers next month. <>

Hedgeye Retail’s Take:   Keep an eye on this growing apparel and footwear category, which appears to be gaining momentum.  While MMA has been around for a while, we’re just beginning to see sizable company’s taking advantage of the growing market.  Just last week, Payless CEO Matt Rubell highlighted a similar opportunity with its MMA brand, Strikeforce.



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Ugly Chart of the Day: Greece

In our Ugly Chart of the Day we refresh both Greece’s Consumer Price Index and 5YR sovereign CDS.  Both charts are heading in the wrong direction and both help confirm that neither the European led Greek bailout fund (€110 Billion) nor the €750 Billion loan facility will be a near or long-term solution to all of Europe’s economic ails.


Today, Spanish workers are on strike against the government’s decision to cut wages 5%. While the strikers may make a fine case that they were not responsible for the government’s mismanagement of the budget, someone has to bite the bullet—cutting the bloated wage inflation of many government positions in Spain (and largely across much of Europe) is a sensible move in our opinion.


Germany also picked up the austerity ball, announcing yesterday a €81.6 Billion package of tax increases and spending cuts, including levies on banks, air travel and nuclear-power plants from 2011 to 2014. For Germany, which has much lower levels of total debt and deficit spending as a percentage of GDP, the move underlines the country’s fiscal discipline and aversion to debt.


Matthew Hedrick



Ugly Chart of the Day: Greece - Greece Ugly


The Macau Metro Monitor, June 8th, 2010



"The government has agreed to impose a smoking ban in casinos in three years' time," quoted the Macau Post Daily.  Although the general outline of the anti-tobacco bill was unanimously passed by the legislature in January, a new version of the bill proclaims that the entire casino, including sauna parlours, massage parlours, and ballrooms should be non-smoking.  The Second Standing Committee of the Legislative Assembly is expected to receive the revised bill as soon as next week.  The three-year transition period would start after the anti-tobacco law's promulgation in the Official Gazette.


MBS CEO Thomas Arasi said at GGE Asia that the MBS project will be completed by the 1st Quarter of 2011.  Arasi mentioned the good balance of mass market gamblers and high-rollers so far. He also said the average length of stay for visitors at MBS' hotel was 4.5 nights, compared with the average 3.8 nights in the Singapore market.



Macau International Airport (MIA) handled a total of 330,407 passengers in May, a YoY decrease of 1.65%.  This was the third month in a row in which the airport lost passengers on a YoY comparison basis.

CHUI WIDENS MACAU'S NET Intelligence Macau

CEO Chui recently announced he was working on setting up flights from cities in Eastern Guangdong such as the coastal city, Shantou. If flight connections are established, IM believes this would be a positive for VIP rooms and premium-mass tables.



Speymill Macau Property Company plc announced it has almost sold out all its units at the Riviera complex. Of the 259 units it owns, Speymill Macau still has 27 unsold apartments in its two Riviera towers.  As of June 5, 2010, the actual total net proceeds received, after deduction for discounts and commissions, from the sale of the units including deposits and final payments amounted to HK$687.0 million—equating to ~$380,000 USD per unit.

Courage That Counts

“Success is never final, failure is never fatal. It's courage that counts.”

-John Wooden


John Wooden has been widely celebrated as a great leader both on and off the courts, and rightfully so.  He was a champion that was dedicated to teaching others to be the best they could be.  In one of the most interesting articles I read about him over the past couple of days, it noted that one of his greatest character traits was listening. 


In the world of investing, listening is comparable to reading and thinking.  While we can all pontificate and get on our soap boxes to express our opinions, what we do in the quiet hours of the morning when our competitors are still sleeping is what will give us the “courage that counts”.


We recently had the opportunity to listen to Professor Charles Hill, a political science professor from Yale University who came by our office to lead a discussion with our clients on the emerging risks in the Korean peninsula.


Charlie’s ultimate conclusion was that despite saber rattling, the North Koreans would continue to be rational actors.  While the recent sinking of a South Korean warship was an act of war, it was a well thought out action, with expected responses.  North Korea pushed the envelope, and while the response has been negative, the likely expected outcome will be some sort of appeasement of the North Koreans by the world community. 


After walking us through the history of the Korean conflict and probabilities of increased conflict between the two Koreas (which according to Charlie is less than 10% and would only occur in a scenario where an action was grossly misunderstood), Professor Hill began describing an emerging Geopolitical Risk Zone in the waters of Asia.  He described a scenario in which the U.S. would have to reassert itself and its domination of the global shipping lanes to protect its allies against rogue attacks such as the North Korean submarine attack, but also reassert its strength vis-à-vis China in the Asian waters.


Obviously this type of new strategy would not come without a cost for the United States, and could require a massive build up and redeployment of the Navy.  As George Friedman from Stratfor noted in his recent book, “The Next 100 Years”:


“The U.S. only emerged as the decisive global power after World War II and is still immature. The U.S.'s power is based on its Navy and ability to control both

oceans, the Atlantic and the Pacific, which no other power has been able to do."


Over the coming year, we will be contemplating more of these Geopolitical Risk Zones as war, historically, has been a great way to outgrow sovereign debt burdens.


Changing gears slightly, and in the Golf Clap of the Day Award, according to a Bloomberg article this morning investors prefer the United States as the market with the best opportunities versus the BRICs.  According to the survey, 4 out of 10 investors surveyed prefer the opportunities in the United States versus only 2 out of 10 when the survey was last taken in October 2009.  In that time period, the equity markets in the U.S. are down ~-0.6%, while the BRICs on average are down ~-3.0%. So much for Professional Prognostication . . .


Larry Summers noted in an official response to this survey: “This attests to Obama’s efforts at restoring the United States to strong economic fundamentals.  While there remains much to do, the U.S. economy is growing.” 


While our Macro Team isn’t paid to be permanent bears, even if that is how we sound as of late, we all need to be realistic about these supposed “strong fundamentals”.   When I look at the U.S. economy, there are three issues that concern me most directly.


1. Domestic Debt – We have discussed this ad nauseam, but with the United States entering into the danger zones of 90%+ debt-to-GDP and 10% deficit-to-GDP, we need to keep this risk front and center. (As such, we have noted this long term trend in the chart of the day attached below.)  We are in unprecedented territory in terms of sovereign debt in this country.  On the State level, the cracks are already starting to show as evidenced by Fitch downgrading Connecticut bonds yesterday despite it being “one of the wealthiest states per capita.” 


2. Housing Inventory – Josh Steiner discussed this on the Morning Call yesterday, but with the tax credit in the rear view mirror and no talk of an additional credit, mortgage applications have dropped off meaningfully.  Even Bob Toll had to admit such when he revealed on a recent conference call that year-over-year growth in buyer traffic - traffic is among the best leading indicators for housing - actually declined by two-thirds in May vs April.  If these data points continue, housing inventory is set to ramp back up quickly, which will be very bearish for home prices.


3. Unemployment – While Friday’s employment report is in the rear view mirror, its forward looking implications need to remain in the foreground.  The report was abysmal, and if we normalize for census hiring private payrolls added for the month of May was reported at an anemic 41,000 – the first marginal deceleration since December of 2009.  Scarily, the massive stimulus had a very limited impact on employment, although the debt associated with it lives on.


Collectively, these issues make us bearish of U.S. equities, but as John Wooden also said, “A coach is someone who can give correction without causing resentment.” In our case, we hope that a Risk Manager is someone that can call corrections without causing resentment. 


After all, we have no dog in this Global Market Fight, other than to help our subscribers punch, counter punch, and ensure that their “failures are never fatal.”


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Courage That Counts - US Debt to GDP