Revisiting Brazil

Conclusion: Favorable consumer trends have been positive for Brazilian credit expansion and growth. Also the real is likely to continue appreciating from here, despite accelerated intervention efforts from the Brazilian central bank.


We’ve been admittedly quiet on Brazil over past couple of weeks for the simple fact that there haven’t been any meaningful inflection points to report. We remain favorably disposed to the Bovespa due to Brazil’s defensive consumption growth which is supported by near all-time lows in unemployment, inflation that has slowed sequentially to an eight-month low in August (4.49% YoY), and a favorable interest rate environment that is fueling domestic credit expansion (no Selic rate hike expected through year-end).


 One data point that caught our eye was homebuiler debt offerings backed by homebuyer contracts and retail lease payments  that are on pace to reach 6 billion reais ($3.5B) this year, up 87.5% YoY, according to the Sao Paulo-based Capital Markets Corporation. Currently, YTD issuance is at 4.7 billion reais, up 47% from full-year 2009.


Demand for these bonds has been quite strong due to low vacancy rates driven by Brazil’s domestic growth. According to Jones Lang LaSalle, the office vacancy in Sao Paulo, Brazil’s largest city, is at a record low of 8.5%. That compares to 12% in Midtown Manhattan, up from 5.3% in June 2007. While we don’t support the idea of Brazil’s households and private sector levering up on real estate, we do remain confident in Brazil’s ability to grow and fuel the underlying demand needed to sustain robust growth in this segment of the Brazilian economy.


To tune of cautious optimism, a few “not-quite-red” flags have surfaced recently regarding the Brazilian consumer: 

  • Brazilian retail sales dropped sequentially in July (+10.9% YoY vs. +11.3% in June).
  • Consumer delinquencies rose 11.5% in August – the highest August reading since 2005.
  • While the headline FGV Consumer Confidence reading rose 70bps MoM in September, the future outlook index dropped 1.1% MoM to 111.6. 

Clearly, we’re nitpicking here, so we’ll take these marginal deteriorations with a grain of salt. Growth on the ground in Brazil remains strong, which caused the government to revise up their growth and inflation estimates recently (GDP up 70bps to 7.2%; and CPI up 13bps to 5.1%). We don’t put too much weight on government projections, as they are typically lagging or wrong, but we do agree this revision is warranted based on the recent string of positive economic data.


It remains to be seen, however, how the recent ascent of the real will affect Brazilian growth going forward. On one hand, the strong real restricts on the margin exports of manufactured goods. On the other hand, dollar debasement has fueled parabolic up-moves in the prices of many agricultural products and commodities. Roughly 50% of Brazil’s exports are commodities/basic materials, so they’ve been riding the recent wave of Fed-sponsored dollar debasement. Some of Brazil’s key commodity exports have benefited (three-month % change): 

  • Orange Juice – up 11.6%
  • Coffee – up 14.5%
  • Soybeans – up 18.4%
  • Copper – up 22.3%
  • Sugar – up 52% 

Clearly, these prices moves are positive for Brazilian farmers and miners. Despite this, the Brazilian central bank remains committed to slowing down appreciation of the real, which is up 10.2% versus the U.S. dollar since its May 25th low. The commitment stems from Brazilian Finance Minister Guido Mantega’s resolve to maintain favorable repatriation rates for Brazilian exporters. His commitment has been backed decisive action: in the YTD through August, the central bank has purchased $18.6 billion dollars – up 155% YoY though the same period! He’s even gone on record to suggest Brazil can use its sovereign wealth fund and/or issue debt to fund incremental dollar purchases.


Unfortunately for Mr. Mantega, we don’t think the Brazilian government checkbook is nearly as boundless as Mr. Bernanke’s printing press, so his efforts will likely do nothing more than to marginally slow the rate of real appreciation driven by fund flows to the country (see: Petrobras’ $70 billion share offering).


Darius Dale



Revisiting Brazil - 1


Revisiting Brazil - 2


The note below is from our recently-launched energy Sector Head, Lou Gagliardi. If you'd like to trial his energy sector research, which includes access to the replay of his launch presentation on natural gas, crude oil, and opportunities in the global E&P sector, please email .


Conclusion: We believe that historical levels of the crude oil to natural gas ratio will not be revisited. Crude oil will remain in the new normal range versus natural gas of 14 – 18x, and thus not return to the historical average of ~10x, which would imply $40/barrel oil at current natural gas prices.


We looked at the historical relationship of oil to gas prices since 1994, on oil to gas “fundamental” multiple basis based on the historical average, oil would be trading at an average price of ~$40/bbl. But we don’t think the probability of that occurring is high, particularly since crude oil’s emergence as a “trading” financial asset over the last few years, and the willful, or not, of the debasement of the U.S. currency through extraordinary liquidity injected into the U.S. monetary system and the ensuing ballooning of our fiscal deficit.  In effect, a weak U.S. dollar equals higher oil prices.


 From 1994 to today, the price of WTI (West Texas Intermediate) crude oil and HH (Henry Hub) natural gas has averaged ~$40.70/bbl, and $4.55/Mcf, or at an average oil to gas multiple a shade over 9 times, which is close to the Btu equivalent of 6 times oil to gas. In contrast, the average multiple for 2010 year-to-date is about 17 times, as natural gas has dropped and oil has remained above $70/bbl, whilst the U.S. dollar has remained weak relative to the Euro. The average standard deviation for each year since 1994 has been just under 2 times, year-to-date for 2010 it is 2.3 times. So it appears that the volatility in the relationship has returned to its historical mean.


Over the last few years, we have seen crude oil traded increasingly as a financial asset, which has created incremental demand for crude oil.  In addition, the general decline of the U.S. dollar over the last few years has led to an increase in crude oil since it is priced in U.S. dollars.  But not all of the price increase in crude oil is attributable to its relationship to the U.S. dollar, or financial demand.  In fact, a fair portion of its meteoric rise in price is due to fundamental structural imbalances and deficiencies in the supply/demand equation.


There are many fundamental factors from rising Resource Nationalism across the globe, to the acceleration of the developing world’s industrialization, i.e., China, India, Brazil, Russia, to insufficient energy infrastructure, to geopolitical instability, to rising lifting and finding & development costs, to insufficient excess supply capacity, which all have fueled crude’s rise upward. Indeed, increasing supply constraints due to declining production from major oil producing regions from Mexico, Venezuela, Alaska North Slope, North Sea, to Canadian Conventional, and the lower U.S. 48, have exerted upward price pressure on crude prices. While there does not appear a high probability of oil prices returning to $40/bbl for a sustained period, it does appear that the price of oil pegged to supply and demand has shifted higher on an energy equivalent basis vis-à-vis natural gas. This is in line with our long-term TAIL bullish outlook for oil.


A counter weight to the oil to gas multiple remaining higher could be the price of natural gas. Our outlook is bearish for natural gas over the intermediate term trend, driven by drilling technology ahead of supply needs; we believe that increasing natural gas supply will compete away some crude oil usage in areas where oil is used as a commercial fuel source. Increased switching to natural gas as a commercial fuel source away from crude oil due to its low gas price could exert some modest downward pressure to crude prices from a fundamental basis in the intermediate term.  But, in the long term, crude oil supply constraints will continue to pull crude prices higher. The wild card in the oil to gas multiple will remain the U.S. dollar driven by U.S. monetary policy and global deficit spending. So watch the multiple, long-term we expect it to stay wider than historical levels as we enter the new normal of natural gas and crude oil energy equivalency.


From the Oil and Gas Patch.


Lou Gagliardi 

Managing Director





Bull/Bear Battle: SP500 Levels, Refreshed...

You’ll notice a welcomed change in the title of this risk management product – we change as prices do and, unless we see a breakdown through 1144 before today’s market close, we can’t call this an intermediate term Bear Market anymore.


What we’ll call it is a Bull/Bear Battle however. With Q3 performance problems in the hedge fund industry capitulating into month and quarter end, I see no reason to make a decisive move yet in the SP500 – that’s why I am neither long nor short SPY in the Hedgeye Portfolio.


Where would I consider taking a position? From an immediate term TRADE perspective, the 1148 line is the most interesting spot on the short side and 1131 is support. The range in my 3-day probability model is as tight today (30 SPX points) as it has been in all of 2010. A tight range of probabilities (on a very short term duration) simply gives me a higher confidence interval in trading around my gross exposure and in/out of long/short positions.


May the Battle begin,



Keith R. McCullough
Chief Executive Officer


Bull/Bear Battle: SP500 Levels, Refreshed...  - S P

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


McDonald’s has been dominating the QSR space of late and is looking at expanding its reach with a new product.


McDonald’s is testing a larger premium version of its Chicken Snack Wrap.  The wrap is burrito-sized and costs about $3.99, according to media reports this morning.  Containing chicken, cucumber, cheese, tomato, lettuce, and coming in three varieties, this product is clearly aimed at the chipotle customer.   The current, much less substantial, Snack Wrap product costs $1.49.




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - September 24, 2010

As we look at today’s set up for the S&P 500, the range is 19 points or -1.05% downside to 1113 and 1.62% upside to 1143. Equity futures are trading higher ahead following a weak close yesterday and ahead of key US Durable Orders data later today. Also, Federal Reserve Bank of Richmond President Lacker speaks today on economics and policy, while the Federal Reserve Bank of Philadelphia President Charles Plosser speaks on monetary policy. Today's macro highlights include: August Durable Orders at 08:30 ET and Aug New Home Sales at 10:00 ET.

  • Advanced Micro Devices (AMD) forecast 3Q rev. ~$1.58b-$1.64b, vs estimate of $1.71b
  • Bristol-Myers Squibb (BMY) plans to cut 3% of global workforce during next 6 months
  • Comtech Telecommunications (CMTL) reported 4Q rev $257.0m vs estimate of $236.7m
  • Finish Line (FINL) reported 2Q EPS 31c vs est. 36c; rev. $301.1m vs estimate of $317.4m
  • Nike (NKE) reported 1Q EPS 17c vs estimate of 15c
  • Vical (VICL) plans to sell shares, amount undisclosed


  • One day performance: Dow (0.72%), S&P (0.83)%, Nasdaq (0.32%), Russell 2000 (1.20%)
  • Month-to-date: Dow +6.47%, S&P +7.20%, Nasdaq +10.08%, Russell +7.77%
  • Quarter-to-date: Dow +9.09%, S&P +9.13%, Nasdaq +10.33%, Russell +6.46%
  • Year-to-date: Dow +2.25%, S&P +0.87%, Nasdaq +2.55%, Russell +3.75%


  • ADVANCE/DECLINE LINE: 1216 (-452)
  • VOLUME: NYSE - 944.37 (-1.08%)  
  • SECTOR PERFORMANCE: All sectors were down and the XLF was the first sector to break TRADE.  The MACRO calendar was somewhat of a mixed bag, with little upside evidence of a recovery in the labor and housing markets.
  • European sovereign contagion concerns continued to escalate - Ireland and Portugal the big focus.  Concerns seemed to be exacerbated by weak Q2 GDP data out of Ireland, along with the seven-month low in the Eurozone September composite PMI.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Red Hat +9.02%, Washington Post +4.31% and NY Times +4.30%/Novell -6.61%, Wynn -4.53% and Metlife -3.88%
  • VIX: 23.87 +6.04% - YTD PERFORMANCE: (+10.10%)
  • SPX PUT/CALL RATIO: 1.70 from 2.14 -20.57%


  • TED SPREAD: 14.13, 0.203 (1.458%)
  •  3-MONTH T-BILL YIELD: 0.16% unchanged
  • YIELD CURVE: 2.11 from 2.12


  • CRB: 280.14 +0.45%
  • Oil: 75.18 +0.63%
  • COPPER: 359.05 +0.72%  
  • GOLD: 1,295 +0.48%


  • EURO: 1.3356 -0.07%
  • DOLLAR: 80.01 +0.23%  




  • European markets are trading lower on the back of Irish banking concerns which was offset by better than expected German Ifo business confidence data.
  • Trading remains choppy amid low volumes as investors remain unsure on market direction.
  • Basic resources, Oil & Gas, Construction and Telcos are pacing declining sectors with Autos and industrial Goods showing modest gains.
  • Germany Sep Ifo Business Climate Index 106.8 vs consensus 106.2 and prior 106.7
  • Current Conditions Index 109.7 vs consensus 108.5 and prior 108.2
  • Business Expectations Index 103.9 vs consensus 104.0 and prior 105.2
  • French Q2 GDP revised up to +0.7% vs prev given +0.6%
  • European Automobile Manufacturers' Association;  Commercial Vehicles Registrations +5.4% y/y in July, +10.1% in August


  • Asian Markets: Nikkei (0.99%); Shanghai Composite (closed)
  • Asian markets were mixed today.  Indonesia +1.81%; India +0.93
  • Automakers led South Korea higher on expectations that the strong yen will harm their Japanese rivals.
  • Technology stocks fell on bad economic data from the US.
  • Miners fell in Australia despite higher metals prices. Rio Tinto fell 1% after it said it would invest $230M to expand its Pilbara operations.
  • Banks followed their US peers down.
  • Japan started down, turned positive as the yen weakened, but then finished down again.  More intervention; the yen is trading at 84.57 to the US dollar.
  • China was closed for Mid-Autumn Festival.
  • Singapore’s industrial production slowed M/M
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













FINL: A Few Callouts

FINL’s earnings of $0.31 after the close yesterday came in considerably lighter than consensus estimates at $0.35 causing shares to trade sharply lower in the aftermarket. After taking a closer look at the numbers, here are a few notable callouts ahead of the company’s call this morning:

  • Top-line growth of +1% marked a clear divergence between on and off-mall players in the space with both DKS (+9%) and HIBB (+14%) posting solid numbers while results out of FINL and FL (-0.3%) lagged their off-mall counterparts considerably.
  • Inventories down only -2% relative to +1% sales growth resulted in the most significant SIGMA turn in the space following several quarters of significant reductions in inventory. Similar to top-line trends, within the four company peer group, Q2 was evenly split between those building inventory (DKS +4% & HIBB +2%) versus those reducing inventories (FL -5% & FINL -2%). While top-line trends lagged for mall-based players, inventories remain tighter. With sales in August and into September improving materially, this is a good scenario and likely to continue to keep promotional activity in check.
  • The comp (+2%) is reflective of just how soft Q2 was during June and July. Additionally, while the early read on Q3 was positive with comps up +7% in the first 3-weeks of June, it’s important to consider that comps were considerably more difficult on a 1-year basis due to the timing of stimulus checks in ’08 - see the monthly comp trend table below. Comps up +6.7% on a +7% comp in the same period last year so far through September 19th is consistent with what we are seeing in weekly data trends.  
  • Footwear comps up +2.0% were in-line with softgoods comps up +2.1% in Q2.

While comps are catching our eye once again, we are confident that industry weakness in June and particularly July was the primary cause of a weaker comp relative to consensus expectations. We’ll have additional color after the call at 8:30am EST.


FINL: A Few Callouts - SG SIGMA 9 10


FINL: A Few Callouts - FINL MoComp 9 10


FINL: A Few Callouts - SG CompTable 9 10


FINL: A Few Callouts - SG CompChart 1 9 10


FINL: A Few Callouts - SG CompChart 2 9 10


Casey Flavin