Important consumer commentary from management.


CAKE posted in interesting quarter.  Same store sales up 1.6%, traffic up 1.4% and price up 1.4%. The implication is that pricing was down1.2% for the quarter.  As management state the consumer is doing a little “check management” when they come to the Cheesecake factory.  This is a problem - especially with commodity prices increasing. 


The company has touted the success of the new section on the menu “Small Plates and Appetizers.”  Unlike some restaurant companies that count entrées to measure traffic trends, CAKE actually measure traffic in terms of actual guest counts, which the server inputs when inputting an order for the table.  While you can not directly draw this conclusion, it seems likely that the success of the small plates and lower price points are the driver of incremental traffic.


Despite this, the company wants to raise prices 1% with roll out of the summer menu.  The company is trying to balance an increase commodity pressures and other expenses, while at the same time trying to get back to peak margins.  With the incremental traffic being driven by lower price points, the risk to the business model increases.  In a cautious consumer environment, slowing traffic trends is real possibility.


As you can see from out CAKE sigma chart, the company is currently operating in “nirvana”, the quadrant where same-store sales and restaurant-level operating margins are increasing year-over-year.  Given the current trends the company will move down in the “trouble brewing” quadrant, where same-store sales are still positive but margins are contracting year-over-year.  And that is how I would describe the position the company is in.  There is trouble brewing when the incremental consumer is coming in for lower price points and you need to raise prices to maintain margins.  









  • Weary of macro environment
    • Fed revision
    • Consumer confidence
  • Still produced traffic +1.4%
  • Sales were solid
  • Comps and savings helped drive 22% of EPS growth
    • Anticipating more in savings this year than in 2009
  • Opening new model (final for year) next month
  • Seeing more availability of quality restaurant sites



  • 1.3% increase in operating weeks due to opening new restaurants
  • Sequential sales comparisons impacted by gift card redemptions and holidays
  • Traffic up 1.4%, pricing up 0.6%
  • Check management by customers – particularly with beverages
  • G&A were down 80 bps vs 2Q09
    • Lapping accrual related to CEO retirement plan
  • D&A was down 30 bps yoy
    • Lower depr reslting from impairment charge being recorded
    • Positive sales leverage
  • Operating margins in the second quarter of 2010 improved 180 bps to 8.9%
    • On track to surpass operating margins of 07 – 7.3%
  • No more interest rate collars in place on remaining debt outstanding
  • 670,090 shares bought back at 17.4m dollars
  • Cash balance of 86m despite using sme cash to pay debt and unwind interest rate collar
  • Generated about $58m million in free cash flow


3Q Guidance

  • EPS between $0.31 and $0.33
  • Assumes comps between flat and +1%
  • Expecting dairy pressure, preopening expenses yoy (no new restaurant in 3Q09), and additional marketing expense to impact EPS by $0.04 (combined)


Full year 2010

  • EPS between $1.32 and $1.38
  • Assumes comps between 1% and 1.5%
  • In 4Q CAKE hits hardest compares yoy
  • 60% commodities contracted for 2010 but food inflation of flat to +1%
  • Lower contracted proteins but higher dairy and fish




  • The worst market we have is down 1% - California




Q: Changed back half of year earnings guidance?


A: Earnings outlook changed by 4 cents and 3 cents was upside of 2H. we changed it by a penny



Q: How are trends looking now, consumer habits?


A: Not talking about month by month.  We continue in the quarter to track closely to forecast.  When we expected soft comps because of difficult yoy compares we got them. 



Q: Still going to grow at low single digit range?


A: We’re looking at many sites, more than we did for 2010.  We won’t have color on 2011 until lease negotiations are further along.



Q: Price? Average check – still incremental boost from small plates?

A: Comps are up 1.6%, 1.4% is traffic, price is 1.4%, negative mix shift negated price.  Guests managed checks by buying fewer beverages.


Definitely some trading down. 


Expecting cost of sales for year to be about flat.



Q: On negative menu mix, do you think you’ll start to lap trade down that consumers have been doing? Do you think summer menu price may stick more?

A: They might…(not too confident!)



Q: Looks like volumes are lower, is there any reason to believe that there is not a capacity to grow comps based on historical range?


A: There definitely is capacity to gain our comps back if we take guest counts back.  We lost traffic, not pricing.  We can get it if we can get customers not managing check as much.



Q: How confident are you that you can control check management more?


A: It’s an art not a science, have to find a balance. We’ve seen TC’s increase over the last two quarters. (not convincing here)…



Q: What are some of the plans for this quarter?  Do you see trends move when you ramp up spending on marketing?


A: We are spending more in 2Q than we did in 1Q? it’s timing.  2010 marketing as % of sales will be about flat on last year.  We see redemptions in weekly sales, certainly.  Marketing is focused on remaining on brand and not doing deep discounting.  Engaging customer.  And creating positivity. 



Q: You introduced small plates and snacks as economy slid…considering the economy is not doing what we might of though, what is your take now? Guest satisfaction?


A: Last year we increased satisfaction every quarter.  Our expectation for this year is to maintain or slightly raise the level.  We are maintaining the high level of guest satisfaction. 

Menu innovation is one of our advantages. We have a new menu in just a few weeks.  Recently we brought our new cheesecakes that are the best selling we’ve ever had.



Q: Grand Lux has a small base but obviously slowed slightly…commentary?


A: Negative holiday shift in 2Q impacted Vegas and Florida strongly and they are a big part of the pie.



Q: 10-12 openings maybe in 2011, are any of those small formats?


A: Right now the Annapolis size is now our favorite – 8,500 sq ft.  The answer is yes and we’re looking at 7,000 when we think we can do 7m.  Might earmark one 2011 site for 7,200.  8,500 is the favorite at the moment. 



Q: Impact from the gulf?


A: No exposure there…Miami was strong though.



Q: Labor turnover vs where it was at the peak?


A: Incremental savings coming primarily on the labor line.  Turnover remains strong, slightly higher than peak retention but far above peer average. 



Q: Guidance, bakery revenues? Outside accounts?


A: Primary role of the bakery is to provide high quality desserts for restaurant.  They also sell externally; there is not a large amount of outside customers.  Bakery revenues are difficult to predict.  One customer can move the needle. 


Q: G&A guidance?


A: In 2009 we held back on a lot of things (raises, infrastructure) that we are spending on in 2010.  Going forward I would expect that our growth in G&A will be less than revenue growth so some kind of G&A leverage as soon as 2011.


Howard Penney

Managing Director

Big Boy Talks

“Expectations are the root of all heartache.” 

- Shakespeare


At Hedgeye, we use an expression called Big Boy Talks. These are discussions that occur when it is time to have a reality check and sometimes deliver a candid view about performance or expectations.  Or, in fact, to deliver news that might otherwise make a person uncomfortable.  The presumption is that Big Boys can deal with reality, which can sometimes be unpleasant in the short term.


Later today, the European Banks will be releasing the results of their stress tests.  The results will be released at 6 p.m. Brussels time, which is, of course, high noon for the equity markets in New York.  The timing, according to European officials, is appropriate to allow any major European banks to address capital issues through the weekend and not have to worry about the market’s immediate reaction.


As always though, there is a market open somewhere that will immediately vote.  In this instance, it will be the U.S. equity markets, which arguably have the largest single vote of any equity market globally.  The reaction of the markets is the equivalent of an Investor Big Boy Talk.  Markets react to facts, or perceived facts, and sometimes that reaction is not all that pleasant.


For weeks, European government officials have been talking up the results of these tests. In fact, as recently as last Friday, George Provopoulos, governor of the Bank of Greece, said in an interview published in the newspaper Imerisia:


“My feeling is that things will go smoothly for the six Greek banks included in the sample."


Typically, releasing results early to the market is called inside information.  In the instance of governmental data, it is more like business as usual.  Regardless, expectations have been largely set that there will be no major issues with the European bank tests.


In fact, the 54- member Bloomberg Europe Banks and Financial Services Index has risen 9.3 percent this month, boosted by optimism that these lenders will pass. If you didn’t know what expectations were for these tests, now you know.


Further, according to Dutch Finance Minister Jan Kees de Jager, the sovereign tests will not include a write down or the scenario of defaults on sovereign debts.  While we have not yet seen the results of the tests, we would of course have to seriously debate the validity of any European bank stress test that does not assume some form of sovereign debt write down.


In fact, as of yesterday’s close, Greek 5-year sovereign debt credit default swaps are trading at close to 800 basis points.  Credit default swaps are used, obviously, to insure against potential default.   When the cost of insurance against default is trading at such elevated levels, it simply implies that the likelihood of a potential default is not zero.  In fact, it is well above zero.


While obviously this is not entirely apples to apples, we have posted below a chart that compares Greek CDS to Lehman and Bear Stearns.  If history is a guide, the level of 300 basis points is a bit of warning line for potential default.  At least, that was the line at which Lehman and Bear passed the point of no return.


Currently, Greece (which is discussed above), Portugal, Romania, Latvia, and Hungary are trading at or above the 300 basis point CDS level.  This certainly doesn’t assure default, but it certainly does assume that there is some potential for default, which should be incorporated into the results of any legitimate stress tests.


As Confucius wrote about expectations:


“The expectations of life depend on diligence; the mechanic that would perfect his work must sharpen his tools first.”


Later today we will get to see how sharp the tools were that the Financial Mechanics of Europe used to analyze their 91 banks.  My expectations are not high that these tests will prove to be valid or thorough, and, in fact, may further highlight the real risks and real sovereign exposures of many European banks.


Some key questions to consider ahead of the test results later today are:

  1. How many banks of the 91 have failed?
  2. How many have written down sovereign debt? And what is the general exposure?
  3. What is the general validity of the tests?

Regardless of the answer to these questions, you can be sure of one thing: government invented stress tests are designed for banks to generally pass, and the results will simply reflect that fact.


Whether I’m correct in my assessment of these tests or not is somewhat irrelevant, as Mr. Market will be there to analyze the results and have a post test Big Boy Talk with us all.


Yours in risk management,


Daryl G. Jones

Managing Director


Big Boy Talks - cds1


Like SBUX, CMG seems to be doing the right things…investing in labor (to increase throughput), food quality and sourcing (“food with integrity”) and marketing to drive a better customer experience and improved traffic.  Higher YOY labor and marketing costs, along with modest food cost inflation, will put increased pressure on restaurant level margin in 2H10, but this seems to be a high quality problem and also a function of tough comparisons.


Comp Trends:


As I said in the CMG – FIRST LOOK post, comp performance will likely matter more to investors and CMG stated that its sales momentum continued into July.  Management said it is cautious about the current economic environment and the recently reported softness in consumer confidence, but it has not yet seen an impact on trends.


Due to the still fragile consumer, CMG has no plans to increase pricing unless they face significant food cost inflation, which they are not currently expecting (guided to modest inflation in 2H10).


Real Estate Strategy – A-model sites:


CMG commented on the success of its A-model sites, which is the new development model it is using to enter tier two trade areas.  These sites require less investment costs.  I criticized this strategy when CMG first announced it as I thought it might cause the company to be less disciplined about its real estate site selection.  Specifically, management had said the A-model sites allowed the company to “bolster [its] real estate portfolio while the sluggish economy limits the availability of the new developments that [it] traditionally pursued.”  I questioned whether the company would be better served to slow growth rather than pursue tier two sites.


The company is still in the early stages of this development strategy but management said that these A-model sites continue to open at similar sales levels to traditional units with lower occupancy and development costs.  We will have to see what happens after the honeymoon sales period, but the early results sound promising.  Only 10 A-model sites are open at this point but they are expected to account for 25% of the company’s 120-130 unit openings in FY10.




Howard Penney

Managing Director



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Another huge calendar 2Q10 comp surprise...


CMG’s 2Q10 earnings of $1.46 per share came in much better than the street’s $1.39 per share estimate.  Same-store sales grew 8.7%, better than both my 6.0% estimate and the street’s 5.4% estimate.  On a two-year average basis, trends improved nearly 200 bps from the prior quarter and the company’s press release stated that traffic drove most of the comp increase.  For reference, CMG was facing an easy comparison from 2Q09 when traffic was down 3.3%.  Traffic up close to an estimated 8.0% is impressive, nonetheless.  Management raised its full-year comp growth guidance to up mid-to-high single digit, from up mid single digit (prior to earnings, street’s FY10 estimate was +4.8%).


Restaurant level margin growth was up nearly 90 bps in the quarter to 26.9%, putting CMG in the “Nirvana” quadrant of our sigma chart for its sixth consecutive quarter.  The company’s rate of YOY margin growth slowed from the first quarter due primarily to the delevering of the labor and other operating expense lines, as expected as a result of increased wage rate inflation, lapping of labor efficiency initiatives and increased marketing expense.  Food costs were also not as favorable on a YOY basis in the second quarter.  We will have to see what management says on its earnings call, but maintaining positive margin growth in 2H10 will be more difficult as food costs put increased pressure on margins.  If the company is able to maintain its comp growth momentum, investors may not be too concerned.




Howard Penney

Managing Director

R3: From Underwear to Outerwear

A few noteworthy read-throughs on the consumer as we kick off earnings.



We’re getting an early look into the strength of consumer spending here today with results out of both Hanesbrands and VF Corp.. Perhaps the most noteworthy trend here are the results themselves with each company both beating expectations by a healthy margin and raising full-year guidance. While we’re not going to rehash all of the details of the calls here, there are several noteworthy read-throughs to consider as it relates to consumer spending:


-          Both companies exceeded top-line expectations suggesting that spending remained strong through June with broad-based results reflecting positive growth across product categories, distribution channels, and end markets. However, in speaking to trends since the quarter the view is decidedly more mixed with evidence of softness underway according to VFC this morning while HBI continues to see an overall increase in consumer spending. One of the areas of weakness highlighted by VF in particular was premium denim, which has deteriorated even further over the last 8-weeks.


-          While shelf-share gains accounted for 6% of HBI’s 9% top-line growth, the balance was driven by increased sell-throughs at retail. Among the reason’s management cited for raising guidance was both higher productivity of its new programs than expected as well as an continued increase in overall consumer spending. Yes, replacing one’s underwear is less discretionary than some might like to admit, but the reality is that this is not simply a basics business – quite the opposite actually.


-          All of HBI’s top brands (i.e. Champion, Just My Size, and Hanes) drove the outperformance in Outerwear segment (+16%) with particular strength in the new plus-size initiative Just My Size that’s sold through at Wal-Mart. Following better than expected sell into at the mass retailer over the last two years, this line continues to outperform. Granted the majority of growth here is coming from share gains, but Wal-Mart is obviously seeing healthy demand for the for product.


-          Cost inflation remains at the forefront of retailer concerns with the offset coming in the form of higher prices at retail. Interestingly, it appears that the channel with greatest price flexibility is at the mass channel. While pricing is going through across the board at HBI, VF noted that its sees the opportunity for continued pricing in its Lee and Ryder product, which is sold solely in the mass channel.


-          Lastly from a meteorological perspective, VF cited unseasonably warm weather over the last two months as a headwind for denim sales – no doubt. Challenging the obvious, The North Face best known for its winter jackets continues to post strong results.



Casey Flavin






- Add Brooks Brothers to the list of brands translating their adult fashions into kids. The company is testing two kids stores, one in Westport, CT and the other in Kansas City. The stores are called “Fleece”. With Crewcuts, Abercrombie, Ralph Lauren, AE ’77, and PS by Aeropostale all carrying an Americana aesthetic we wonder if this niche might be becoming overstored in a hurry.


- Rumors are swirling on Madison Avenue that Chanel is about embark on price increases for the company’s classic (iconic) handbags. The word on the Street is that prices are set to increase by 20% on August 1st. Now that’s serious inflation for a product that remains unchanged but cost about 40% less only two years ago.  


- Add a little fashion to what is otherwise a stable, but boring category, and you end up with Diaper Wars. After Kimberly Clark announced it sold 2 mm denim-printed diapers so far this summer, Procter and Gamble has responded with a fashionable item of its own. P&G and Target have joined up for an exclusive line of diapers with 11 styles designed by Cynthia Rowley. By the way, 60% of Mom’s purchase denim for their infant before the age of 6 months. As Fall approaches we wonder if a corduroy version of Huggies is on the horizon.





House Passes Miscellaneous Tariff Bill To Reinstate Expired Import Duty Breaks - Yarn spinners, fabric firms, footwear brands and retailers have been paying tens of thousands of dollars in duties on imported components since Jan. 1 because Congress let legislation expire that suspended tariffs on hundreds of imported products. Over the past seven months, companies have had to drop product lines, increase prices and find substitutes, all at a cost to the bottom line. On the plus side, the bill includes a retroactive provision that will provide full or partial refunds to companies on duties paid on all covered products since January. On the downside, the measure would increase duties on several hiking-boot and shoe imports because trade has grown significantly.  <>

Hedgeye Retail’s Take: Geared mostly towards a sundry of goods like basketballs, ski boots, and fishing waders, the duties re-imposed by the bill were estimated in the tens of millions of USD per year so a nice benefit to outdoor players, but not a game-changer per se.


Study Shows Toning Shoe Is A Myth - The American Council on Exercise (ACE), the organization that certifies fitness professionals, released what it believes is the first independent study on toning shoes. Results showed no evidence to suggest that the shoes help wearers exercise more intensely, burn more calories or improve muscle strength and tone. The study enlisted a team of researchers from the Exercise and Health Program at the University of Wisconsin, La Crosse. In particular, it explored the effectiveness of popular toning shoes including Skechers Shape-Ups, MBT (Masai Barefoot Technology) and Reebok EasyTone.  ACE's Chief Science Officer Cedric X. Bryant, Ph.D  stated, "Unfortunately, these shoes do not deliver the fitness or muscle toning benefits they claim. Our findings demonstrate that toning shoes are not the magic solution consumers were hoping they would be, and simply do not offer any benefits that people cannot reap through walking, running or exercising in traditional athletic shoes." <>

Hedgeye Retail’s Take: While we’re surprised it’s taken this long for an independent study to come out on the merits of toning shoes, were not surprised in the result…and don’t expect consumers will be either.


Luxury Spending Is On The Rise, But Apparel Isn’t Feeling The Love - The country’s richest consumers will drive luxury spending up between 6% and 8% this year, according to a survey of affluent Americans conducted by American Express Publishing Corp. and Harrison Group, but apparel is unlikely to benefit. Apparel spending by these consumers has recovered somewhat, but continues to slide, falling 5% in the first quarter and 4% in the second quarter. By comparison, apparel spending by this group slid 8% during the fourth quarter of 2008 and 9% in the first quarter of last year.   <>

Hedgeye Retail’s Take: Why buy something new when you can just pull the tag off something in your closet that has yet to be worn? We suspect a bit of over-supply in the wealthiest consumer’s closets is likely the culprit for share gains by more durable items (i.e. shoes, bags, and home furnishings).


SGMA Study: Nearly 80% of Americans Participate in a Sport, Fitness, or Outdoor Activity - While more than 50% of all Americans are considered 'frequent' sports participants,  12% are classified as 'regular' sports participants and 15% are active on a 'casual' basis. Unfortunately, 23% of all Americans are not active at all -- according to the Sporting Goods Manufacturers Association's Sports Participation in America report (2010 edition).   <>

Hedgeye Retail’s Take: Without this 20% sample the toning craze simply wouldn’t exist.


Wal-Mart May Open Hundreds of India Stores if Foreign Restrictions Lifted - Wal-Mart Stores Inc. may open hundreds of stores in India, the world’s second-most populous nation, should the government lift a ban on foreign direct investment in multi-brand retailers. <>

Hedgeye Retail’s Take: As multi-nationals continue to beat on the door of this lucrative market and now Wal-Mart…we suspect the mounting pressure will force the government update its stance on foreign direct investment in the near-term.


The Buckle Hits Some Hard Times - Are the glory days of double-digit comparable-store gains a thing of the past for teen retailer The Buckle Inc.? Once the golden child of specialty retail, Buckle startled analysts earlier this month with a 7.3 percent drop in June comps, far worse than estimates ranging from a small gain to a low-single-digit drop.  The company blamed the disappointing results on the economy and difficult compares. But, it appears that Buckle’s long-standing aversion to price promotion may have also played a role.  <>

Hedgeye Retail’s Take: While many in retail consider Abercrombie the last to adjust its pricing, which it did several quarters ago now, there’s still Buckle insisting on holding tight to price…and is falling fast in the process. It’s tough to help brands that can’t help themselves.


Ked's Exposure in Bloomingdale's - As part of Keds’ sponsorship of the Whitney Museum of American Art’s summer season, the brand installed a window at the Bloomingdale’s flagship store. Titled “Works on Canvas,” the installation — which closed last night — showcased shoes, a touch-screen mechanism for ordering customized kicks, and three art students in the windows making Americana-inspired art. Rubel said the initiative was a success by many measures. The window installation drew hundreds, while the blog for the event, at, attracted more than 10,000 unique page views. Keds also saw very high double-digit sell-throughs at Bloomingdale’s, as well as online at, in the two-week period that the windows were up, according to Rubel.  <>

Hedgeye Retail’s Take: Rubel and his team continue to find creative ways to promote this brand including the company’s recent collaboration with GAP – all indications here are that the brand is growing once again.


R3: From Underwear to Outerwear  - R3 7 22 10


JCP Showcases its New LIZ Line - With high expectations for market share and margin growth, J.C. Penney unveiled its exclusive Liz Claiborne collection on Wednesday. It’s an expanded version of its Liz & Co. line, which has been discontinued, but with comparable prices. Penney’s Claiborne collection launches next month in more than 1,100 stores and on with 30 categories across men’s, women’s, accessories and home, which joins the assortment in January. The fall collection stays true to the Liz Claiborne image with a versatile sportswear array of novelty knits, nautical striped sweaters, classic denim in a variety of washes as well as outerwear ranging from a country buffalo plaid jacket to a chic fake fur urban version. Accessories run the gamut, including shiny handbags, while jewelry exudes plenty of sparkle and shine.  <>

Hedgeye Retail’s Take: This is huge for LIZ. As we highlighted in a note out yesterday, August is a big month for the retailer in more ways than one.


R3: From Underwear to Outerwear  - R3 2 7 22 10



Mexican Headwinds

Position: Short Mexican equities via the etf EWW.


Conclusion: The outlook for Mexico’s macroeconomic health is tepid at best and incremental data points suggest there is more downside to come.


Last Thursday, Daryl Jones, our Managing Director of Macro, wrote a note outlining our short thesis on Mexico. In summary, the conviction is three-pronged: overreliance on oil, slowing growth in the U.S., and a drug war that by official estimates shaves a full percentage point off of GDP each year. In addition to these headwinds, additional bearish points on housing and government funding spell incremental trouble for the Mexican economy.




The first prong of our bearish outlook on the Mexican economy is an unhealthy reliance on oil will continue to be a headwind for the Mexican government’s budget, as oil production in the country continues to decline – down 29% in the last six years. The State-run oil conglomerate PEMEX funds an estimated ~35% of the federal budget, so as these funds continue to erode, the Mexican government will have to look elsewhere for support. While a substantial rise in the price of crude would be positive for the Mexican economy, we do not see that as a likely outcome for now. Oil is broken from an intermediate term TREND perspective ($78.50). We have been vocal in the past couple of months suggesting REFLATION based on U.S. dollar debasement will be less of a supportive factor this time around, as waning demand from tightening in China and economic slowing in the U.S. (the two largest consumers) continue to weigh on the price of crude oil (down 2.6% in the last month). As a point of note, the Mexico Bolsa Index has a 0.81 r-squared to the price of crude oil on a TREND duration.


 Mexican Headwinds - Mexico Crude Oil Production


The second prong of our bearish outlook for the Mexican economy concerns its leveraged exposure to the U.S. from a trade and investment perspective. Last year, 80% ($177 billion or 15% of Mexico’s GDP) of Mexico’s exports went to the U.S. A slowdown in U.S. consumption, of which we have a great deal of conviction (see Hedgeye Macro’s Q3 Themes: American Austerity & Housing Headwinds), is very negative to Mexican growth and job creation. This setup suggests Mexican retail sales will roll over hard from the 23-month high of 5% Y/Y in May of 2010.


The third prong of our bearish outlook for Mexico’s economy is the most obvious from a news flow perspective – drug wars. Weakness in May retail sales along the U.S. border (the most prominent area of violence) only tells part of the ominous story which has plagued Mexico for quite some time. Mexico has had upwards of 25,000 organized crime deaths related to the drug war since 2006 with 28% (7,048) of them occurring this year alone! The impact of violence is the single greatest threat to the Mexican economy, according to 57% of Mexican executives – up from 49% in March and 22% in December 2009. Furthermore, tourism, which accounts for 13% of Mexican GDP in aggregate, will continue to suffer as a result of the uncontained drug-related violence.




Mexico’s reliance on the U.S. for investment and aid is having an incremental negative effect on the Mexican government’s drug war efforts. According to a recent report from the U.S. Government Accountability Office, the U.S. has delivered only about 9% of the $1.6 billion in drug-war aid promised to Mexico and Central America, citing a lack of staff and funding. If the effects of American Austerity continue to gain steam, reprieve in the form of a U.S. hand-out may be unlikely in the near term.


Speaking of hand-outs, Mexico is seeking a $1 billion loan from a Chinese development bank and another $500 million from the World Bank to finance home lending. Sociedad Hipotecaria Federal (SHF) needs further funding to inject liquidity into Mexico’s mortgage market, even after receiving a $1 billion loan from the World bank in 2008 and installments of a $2.5 billion credit line from the Inter-American Development Bank. Rising delinquencies (delinquency rate +350bps Y/Y) brought on by the sharp increase in unemployment last year has SHF looking for further funding to finance an estimated 1 million mortgage loans this year. While the Chinese loan may be signed as soon as September, the delay or denial of either facility would be very bearish for the Mexican housing market – particularly if you factor in the employment headwinds brought on by a slowdown in the U.S. economy.


Darius Dale



Mexican Headwinds - Mexico Unemployment

Early Look

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