Is India Out of Bullets?

Conclusion: We think India has little-to-no room to continue easing monetary policy over the intermediate term, particularly in light of the inflationary pressures emanating from the nation’s fiscal policy. Further, its bloated sovereign budget and current account deficits pose a fair amount of risk to India’s currency, equity and bond markets over the intermediate term.


Overnight, the Reserve Bank of India lowered its benchmark monetary policy rates by -50bps to 8.0% on the repo rate and 7.0% on the reverse repo rate. The -50bps cut was a full -25bps deeper than the median consensus forecast of 8.25% and 7.25%, respectively. This is in line with what we have been expecting out of Indian policymakers based upon our read-through of the country’s trailing 3-6 month GROWTH/INFLATION dynamics. Looking forward 1-3 quarters, we anticipate that the reflexive nature of the G/I/P interplay will produce a modest acceleration in both growth and inflation for India.


Is India Out of Bullets? - INDIA


The growth acceleration is supported recent monetary policy action, which should filter through the economy on a lag. In fact, we’ve already seen a measured reprieve in the cash crush that hampered the Indian financial system for much of the past six months, with Indian banks borrowing the least amount of daily funds from the central bank since NOV ’11.


Is India Out of Bullets? - 2


Still, the central government’s aggressive FY13 borrowing plan/incredibly weak fiscal consolidation plan will continue to be a headwind to liquidity in the Indian financial system absent further monetary policy easing. Refer to our MAR 20 note titled, “India Strikes Out Again” for our detailed analysis of how the central government’s FY13 budget is highly likely to contribute to a pickup in inflation, in addition to limiting the scope of monetary policy easing over the intermediate term. Moreover, in cutting rates today, the RBI signaled to the market that it is not willing to sacrifice an incremental slowing of growth to properly reign in the inflationary pressures from its economy; we believe their impatience will ultimately prove to be a mistake.


The RBI did indeed confirm our view that they have limited downside to ease monetary policy further. In the accompanying statement, Governor Subbarao stated that “… upside risks to inflation persist. These conditions inherently limit the space for further reduction in policy rates. Moreover, if subsidies are not contained as indicated in the Union Budget last month, demand pressures will persist, and will further reduce whatever space there is for monetary easing… Though inflation has moderated in recent months, it remains sticky and above the tolerance level [of +4-4.5%], even as growth has slowed.”


As such, the market-based outlook for future rate cuts in India over the NTM is rather subdued:


Is India Out of Bullets? - 3


Continuing our look forward, the Subbarao did say that the central bank’s “immediate comfort zone” for inflation is +5% and “achievable”. As previously mentioned, we are on the other side of this projection, given that 5% is a full 190bps below the latest WPI rate of +6.9% YoY and, more importantly, the tailwind afforded to the Indian economy in the form of currency strength relative to food and energy prices appears to be peaking/have peaked – absent a short-to-intermediate term strong-USD, deflationary shock. Thus, there appears to be limited downside in rates of Indian inflation over the intermediate term – a view in support of our quantitative modeling of the country’s Wholesale Price Index.


Is India Out of Bullets? - 4


Consistent with our 2Q12 Themes, we are, however, calling for a strong-dollar deflationary shock over the intermediate-term TREND. That is consistent with our views that global measures of financial market volatility are poised to break out to the upside over that same duration. No doubt, a further Deflation of the Inflation will eventually be supportive of the Indian economy; that said, however, we think India’s intermediate-term growth outlook, as well as the country’s financial markets are particularly at risk in an a higher-vol. environment over the intermediate term due to its widening current account and fiscal gap. India’s bloated fiscal deficit is of particular importance given that any slowing of capital inflows or outright capital outflows ultimately translates to a crowding-out of private sector funding.


Is India Out of Bullets? - 5


Is India Out of Bullets? - 6


As a rather sizeable net importer of capital India’s equity, currency, and bond markets are all at risk of correcting over the intermediate term – especially given the dramatic run-up in portfolio inflows YTD as consensus speculated on the country’s then-future monetary policy easing. Dramatic inflows are at risk of becoming material outflows, now that the aforementioned easing is largely in the rear-view mirror.


Is India Out of Bullets? - 7


As we’ve seen time and time again over the last 4+ years, demonstrable upticks in global financial market volatility have proven to be a severe headwind for cross-border capital flows – particularly to emerging market economies. Specifically, our proprietary Global Macro VIX is [highly] inversely correlated to the following EM indices (trailing 4yrs):

  • MSCI EM Equity Index: -0.86
  • Morgan Stanley EM Debt Fund: -0.90
  • JPMorgan EM FX Index: -0.62

Intuitively, these quantifications make sense, as in higher-vol. environments, exporters of capital (i.e. global investors) increasingly favor a home bias while importers of capital find it increasingly harder to price deals at favorable rates.


All told, we think India has little-to-no room to continue easing monetary policy over the intermediate term, particularly in light of the inflationary pressures emanating from the nation’s fiscal policy. Further, its bloated sovereign budget and current account deficits pose a fair amount of risk to India’s currency, equity and bond markets over the intermediate term. In what we view as a probable higher-vol. environment over the intermediate term, will be interesting to see whether the RBI decides to support liquidity by ramping up its purchases of sovereign debt or if it decides to bite the near-term bullet in order to promote sustainable economic growth by adopting a currency-supportive (i.e. hawkish) stance.


Darius Dale

Senior Analyst

Earnings Week At Hedgeye: Spotlight On Financials


Our financials team, led by Josh Steiner, has provided their key takeaways for earnings in the financial sector this quarter, which are outlined in the bullet points below.  Based on our quantitative levels, XLF is bearish on both TRADE and bullish on TREND.



Earnings Week At Hedgeye: Spotlight On Financials  - image001



1.            Earnings Season Update. Roughly one third of financial companies have reported earnings so far. 7 of  the 8 large or mid cap companies have beaten estimates on the bottom line. Revenue trends have been more mixed, with just over 1/3 beating estimates, 1/3 in-line and just under 1/3 missing.  However, this is a bit misleading because of Debt Value Adjustment. With DVA, the big banks’ revenue lines are adversely affected by an accounting convention that requires them to recognize negative revenues when their credit default swaps tighten.  First quarter saw sizeable CDS tightening, so the headwind was significant for all the large-cap capital markets sensitive names: C, JPM, BAC, GS, MS.


Other notable trends thus far include the regional banks outperforming the Moneycenter banks on both NIM (net interest margin) and loan growth. Regional banks M&T (MTB), Commerce (CBSH) and US Bancorp (USB) have all posted positive sequential loan growth this quarter, while Wells Fargo, JPMorgan and Citigroup have all posted negative growth. On the margin front, we’ve seen the strongest results from the regional banks where NIM has been flat to up quarter over quarter vs. a mixed bag at the Moneycenters with JPMorgan down 9 bps. Market reaction to the results has been roughly evenly split between gains and losses following the reports.


2.            Looking Ahead. Financial heavyweights yet to report include Bank of America (BAC), Morgan Stanley (MS), Capital One (COF), American Express (AXP), MasterCard (MA) and Visa (V). Thus far we’ve seen strong first quarter results in both mortgage banking and consumer-related credit, i.e. credit card.  Bank of America has sizeable exposures to both these categories, and considering the kitchen sink nature of their 4Q results, we wouldn’t be surprised to see strong results when they report Thursday morning. Morgan Stanley typically mirrors Goldman and JPMorgan, where results were frankly solid, but the reaction in the stocks was lackluster. As a further headwind, Morgan Stanley has less capital markets exposure, which was the source of Goldman’s improvement this quarter.


Looking at the credit card stocks, the playbook is always to look at Discover, as they are off-cycle and so we got their first quarter results a month ago. The big surprise there was much larger than expected reserve release. (Companies release reserves when they believe that credit quality is going to be better in the future than it is today. Released reserves flow through the income statement, adding to reported earnings.) We’d expect to see the same reserve release dynamic at Capital One and American Express. On the card volume side, intra-quarter updates thus far from Amex, Visa and MasterCard have all been reasonably consistent in suggesting activity has been stable compared to strong fourth quarter trends.


3.            Sector Outlook. Financials have been among the strongest performing sectors YTD on the back of European discount reflation and an improving perception of the US economic recovery. The calendar also plays a role: distortions to the seasonal adjustment factors have caused the September through February data to look stronger than it is (and the March through August data looks worse) since the bankruptcy of Lehman Brothers. This is a contributing factor to why the XLF, the Financials sector ETF, peaked on February 21, 2011 and lost 35% of its value by October 3, 2011 and why it peaked on April 15, 2010 and lost 23% of its value by August 25th, 2010. For reference, the XLF recently put in a closing high of $15.98 on March 26, 2012. We think there’s a very good chance that this year plays out like the last two years.


Keith shorted ASCA in the Hedgeye Virtual Portfolio at $18.81.  According to his model, the TRADE resistance is $18.89 and TREND resistance is at $20.38.



Despite much better weather and a favorable calendar, ASCA may disappoint investors when they report 1Q earnings in early May.  In particular, ASCA Kansas City was impacted by the new Kansas casino opening and some of their other markets failed to capitalize on what should’ve been a very strong quarter.  While we like ASCA’s management team, ROI focus, and competitive positioning, our longer-term outlook on regional gaming is grim as demographics, the housing malaise, and other long term trends should continue to weigh on casino demand.



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U.S. retail sales fell 1% for the week ended April 14th, according to the ICSC-Goldman Sachs weekly retail sales report.  This was the first decline in three weeks.


Commentary from CEO Keith McCullough


Trying to be on vaca w/ the family this wk – updates will be short:

  1. JAPAN – the Nikkei was down for the 9th of the last 10 trading sessions last night, taking its correction from the March YTD top to -7.7%; Asian equities were generally weak w/ the exception of India who reverted to the broken playbook, cutting rates.
  2. SPAIN – you learn the most about bear markets on the bounces – this morning’s in Spanish Equities on no-volume tells you all you need to know as people keep focusing on last year’s game (bond auction yields); its now all about the economic gravity of the situation and the IBEX needs to close > 7585 to recapture its 1st line of support. France and Italy don’t look much better.
  3. COPPER – we continue to see Bernanke’s Bubbles in commodities popping. On the commodities bounce this morn, Copper is down again and remains in a bearish formation alongside 10yr UST yields < 2.03% at 1.99% last.

Immediate-term risk range for SP500 = 1





THE HBM: MCD, CMG, DPZ, CBRL, CAKE - subsector





MCD: McDonald’s has appointed Tim Fenton as Chief Operating Officer, effective July 1.  Fenton is a veteran of McDonald’s since 1973 and takes over Don Thompson’s seat as Thompson transitions to his new role as Chief Executive Officer. 


CMG: Chipotle’s purchasing manager for meats and dairy, Doug George, said that beef prices will probably climb by the end of the second quarter as supplies of cattle tighten in the U.S.  


DPZ: Domino’s is featured in an article in the Wall Street Journal detailing the company’s “take me as I am” approach to emerging markets, even those markets where competition is tough and its product is not a consumer favorite.  We do not see this approach as very logical but will be looking for more commentary from management on its strategy in China, Russia, Brazil, and other markets going forward.



COSI: Cosi seems to have a problem – the stock dipped 10% on accelerating volume yesterday.


SBUX: Starbucks also dropped back below $60, declining 3.3% on accelerating volume.





CBRL: Cracker Barrel announced that it has restructured and streamlined its field organization to better align its restaurant and retail operations under central leadership.  As a result, the company has fired 20 people and is taking a charge of roughly $0.05 per share.


CBRL: Cracker Barrel named Laura Daily Senior Vice President of Retail today.  Daily will join thecompany on May 7th.  Most recently, she served as Vice President for Ballard Designs, an internet and catalog home furnishings retailer that is part of HSN, Inc.


CAKE: Today’s ICSC data point, -1% for the week ended April 14th, was a negative for Cheesecake Factory.  The chart below shows CAKE’s comps versus the ICSC Chain Store Sales year-over-year change.  The expected comp for 1Q12 could be slightly aggressive, given the drop in the ICSC Chain Store Sales Index over the same period.


THE HBM: MCD, CMG, DPZ, CBRL, CAKE - cake comps vs icsc





Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, April 17, 2012




Visitor arrivals in package tours surged by 41.7% YoY to 661,320 in February 2012.  Visitors from Mainland China (438,720) increased by 32.0%, with 155,036 coming from Guangdong Province; besides, those from Taiwan (68,233); Hong Kong (38,944); and the Republic of Korea (34,498) soared by 174.1%, 95.9% and 34.8% respectively.


The number of available guest rooms of the 95 hotels and guest-houses totaled 22,310 at the end of February 2012, an increase of 2,227 rooms (+11.1%) YoY, with those of the 5-star hotels accounting for 63.5% of the total.  Hotels and guest-houses received 721,036 guests in February 2012, an increase of 20.1% YoY; the average length of stay decreased by 0.12 night to 1.4 nights.



Japanese businessman Shinichi Takami was ordered to pay $2MM to Marina Bay Sands on Monday after he failed to meet the deadline to pay the cash into court.  Takami had been ordered by the High Court earlier this month to pay the sum into court, or provide a banker's guarantee if he wanted to avoid summary judgment on his gambling debts claimed by the casino.


MBS lawyers had sought such a judgment - which means the case would not have to go to a full trial - on the grounds that Takami has no real or valid defense against its claim.  MBS's successful ruling is understood to be the first against a foreigner in the many suits it has lined up to recover debts owed by defaulting patrons since the casino commenced operations in April 2010.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%