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Tossing Up BRIC(k)s: India’s Upcoming Roadshow

Conclusion: We do not currently view the announcements of truly positive reforms as a probable events in the near-term and, thus, remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective.


For those of you who may be unable to get allocated a share of the upcoming Facebook IPO, next month the Old Wall will roadshow another “juicy” deal for interested parties. That’s right, gov’t and central bank officials from India will enlist the services of investment banks such as C, GS and JPM to embark on their own version of a global dog and pony show.


The plan is to attract an incremental $75 billion of capital into the Indian economy over the next two years – a marked acceleration from the $117 billion cumulative investment into India’s debt and equity capital markets since they were opened up to the world in 1993. They are certainly working uphill here; global investors have withdrawn 447.8M and 2.1B rupees from India’s equity and debt markets, respectively, from their respective YTD peaks in foreign ownership.


Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 1


Since we are all but certain that the accompanying presentation will be filled with hopeful projections surrounding India’s growth potential and outlook for both urbanization and industrialization, we thought it would be helpful to equip you with a mini-presentation designed to help you appropriately combat the pollyannaish storytelling you’re very likely to hear in these meetings.


Key “Highlights” of the world’s ninth-largest economy:

  • Real YoY GDP growth at an 11-quarter low (+6.1% in 4Q11) and below the rate of headline inflation in every quarter since 4Q10;
  • A fiscal deficit target of 5.1% of GDP in FY13 – 50bps wider than the 4.6% target that was missed in FY12 (actual figure came in at 5.9%);
  • Record sovereign borrowing needs of 5.69 trillion rupees in FY13 to crowd out a record requirement of international capital (all-time wide current account deficit of 3.6% of GDP in 2011);
  • 75% of its 1.2 billion population living on less than $2 per day;
  • A reliance on external supplies for 80% of its crude oil consumption;
  • A ranking of 95th (out of 182 countries) in Transparency International’s 2011 Corruption Perceptions Index;
  • A ranking of 56th (out of 142 countries) in the World Economic Forum’s 2011-12 Global Competitiveness Index (89th in Infrastructure);
  • A currency that has fallen nearly -17% over the LTM to a record low of 53.96 per USD in concurrence with rate cuts and ongoing QE (despite inflation consistently hovering 300-500bps above the central bank’s unofficial 4.5% target since DEC ’09);
  • An local equity market that has a dividend yield of only 1.47% that has fallen nearly -23% from an all-time high in NOV ’10; and
  • Partisan gridlock – made worse by routs of the ruling Congress Party in recent regional elections – that has delayed key economic reforms such as opening up India’s retail market to majority FDI stakes, the so-called Direct Tax Code Legislation and implementing a nationwide goods and services tax (GST). 

Net-net, if economic management were akin to basketball, Indian policymakers have truly put the “brick” in BRIC over the past ~18 months. Moreover, they have yet to introduce a credible strategy to reverse the negative course they are currently on.


That said, however, not only are the aforementioned bearish data points largely in the rear-view mirror, we’d be remiss to ignore the bullish storytelling that is likely to accompany next month’s roadshow. A such, we would view some combination of the following reform proposals as broadly bullish for Indian capital markets (from a price): 

  • An overhaul of the country’s tax code designed to widen the base and discourage tax evasion;
  • A focus on reigning in the country’s outstretched budget deficit via credible fiscal consolidation rather than hopeful expectations of revenue and/or GDP growth;
  • A shift to credible inflation-targeting out of the central bank, rather than hopeful expectations of where they’d like rates of inflation to eventually arrive at;
  • A shift away from supporting financial market liquidity at all costs towards protecting the nation’s currency from making continued all-time lows vs. the USD; and
  • A adoption of a credible system to investigate and, more importantly, punish officials convicted of corruption (currently, the average criminal case for Indian politicians lasts 15 years). 

All told, we do not currently view the announcement(s) of truly positive reforms as a probable event(s) in the near-term and our quantitative analysis of India's equity market affords us confidence in our view. Thus, we remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective – accepting any rallies into next month's storytelling as potential short opportunities if the risk management levels remain supportive of our fundamental thesis.


Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 2


Darius Dale

Senior Analyst


As an aside, we’ve been bearish on Indian equities since early NOV ’10 and the country’s L/C bond and currency markets since MAY ’11. India remains a country that can’t seem to get out of its own way from a monetary, fiscal and regulatory policy standpoint. An increasingly questionable long-term growth outlook and persistently elevated rates of inflation form a colorful backdrop for consistent “misses” relative to the country’s budget deficit, growth and inflation targets. India remains dramatically short of both capital and crude oil – having to import both in size at steep costs to the economy. As detailed in our recent work, India’s latest budget fiasco has set the country up for a repeat of our 2010-11 Nasty Trifecta thesis. 


Recent Relevant Research (email us for copies):

  • 11/9/10: India’s Two Big Problems;
  • 1/6/11: India’s Two-Factor Squeeze;
  • 1/26/11: Top Emerging Market Short Ideas – Indian Equities;
  • 2/28/11: India – Missing Where It Matters Most;
  • 5/3/11: India’s Nasty Trifecta;
  • 10/21/11: Weekly Asia Risk Monitor – Global Bankruptcy Cycle?;
  • 11/28/11: Weekly Asia Risk Monitor – The Many Faces Of King Dollar;
  • 1/20/12: Weekly Asia Risk Monitor – Stress-Testing Asian Risk;
  • 1/9/12: Awful Fundamentals – Out Updated Thoughts On India and Shorting INP Trade Update;
  • 2/17/12: Triangulating Asia – Is It Time for India To Take a Breather?;
  • 3/5/12: Triangulating Asia – Policy Ping Pong Sets Indian Equities Up For a Sustainable Breakout or Breakdown;
  • 3/30/12: India Strikes Out Again; and
  • 4/17/11: Is India Out of Bullets?

Athletic FW: Solid April


Athletic footwear sales for April came in better than we expected up +8% against the toughest month of the quarter. This implies the Feb-Apr quarter was up a robust +12.5% yy - incrementally bullish for FL & FINL as well as DKS & HIBB (even since our DKS note out earlier). The solid start to the quarter as highlighted by both FL and FINL clearly materialized making for a very good start to the year. We are incrementally more positive on both FL and FINL here. The only brand callout that catches our eye is the continued share gain at UA, which reflects steady progress.


Athletic FW: Solid April     - Fw table


Athletic FW: Solid April     - FW market share


Athletic FW: Solid April     - Monthly FW 1 yr growth


Athletic FW: Solid April     - Monthly FW 2 yr

Casey Flavin




DKS: Kicking off 2012


Conclusion: We expect a solid quarter, driven by not only healthy footwear and apparel sales in the athletic specialty channel, but an incremental boost from golf and youth bats. In addition to reaccelerated store growth that got us positive on DKS back in January, multiple tailwinds have since developed that we expect to drive upside in 2012.


TRADE (3-Weeks or Less): We’re at $0.40 for DKS headed into Tuesday’s print before the market open ahead of Street estimates at $0.38E.         

  • We’re modeling comps up +5.5% vs. +4.3%E and sales up 14% vs. +10.5%E driven primarily by footwear and equipment sales.
  • February and March footwear sales in the Athletic Specialty channel have come in strong up mid-teens in support of bullish reads from both FL and FINL. While April is up against a tougher compare, it’s the lowest volume month representing ~25-28% of Q1. We expect sales up LSD-MSD in April suggesting low double-digit footwear comps for the quarter. With footwear accounting for ~20% of total sales, we expect footwear to drive over 2pts of comp.
  • Apparel sales have been tracking at a more modest pace relative to footwear up MSD, which should add ~1pt to total comp.
  • Equipment is the big variable headed in the quarter. Golf continues to come in strong YTD across multiple metrics. With a strong start to the year, continued demand for TaylorMade drivers (Adidas raised its sales outlook due in part to this factor), and favorable weather compares in April, we expect golf to add roughly 1pt to comp. In addition, baseball bat regulation changes that are prompting a replacement cycle this season could account for another 1pt+ of comp.
  • While our top-line expectations are more robust, we are modeling GMs up +40bps only 10bps higher than consensus expectations due to residual cold weather inventory left to be cleared from Q4 as well as a greater sales contribution from lower margin hardgoods. Occupancy leverage will be the primary driver of gross margin expansion.
  • We expect SG&A of $296mm to come in higher than expected ($285mm) reflecting increased store investments offset in part by lower advertising costs.

TREND (3-Months or More):

The product cycle continues to improve while DKS comps are relatively easy. In addition to positive trends in apparel and footwear, there were a flurry of announcements in April that at in isolation don’t mean much, but combine the following a) its purchase of Top Flight, b) acquisition of minority interest in JJB Sports (with call option for majority interest in 1Q13), c) our recent analysis showing a meaningful improvement in its lease duration risk, d) equipment traffic drivers like Bubba Watson’s Pink Ping Limited Edition club come June and baseball bat regulation changes, and you have a series of positive intermediate-term traffic and sales drivers. Many people say that equipment does not matter because of the low margins. But it gets a heck of a lot more profitable when the shopper also walks out of the store with a shirt or pair of kicks. When we plug these factors into our model, it gets us above consensus for not only this quarter, but also for this year ($2.50 vs $2.43E) and next ($3.00 vs. $2.80E).

TAIL (3-Years or Less):

DKS’ recent acquisition of Top Flight, and shift to the UK with a minority stake in JJB Sports is noteworthy. That converts into a call option for a controlling stake in 1Q13. Specialty retail is historically a regional business. DKS might not only evolve into the preeminent national retailer, but perhaps global as well. At $48, DKS is trading at 19x and 16x this year and next year’s earnings toward the lower end of its 10-year range. While our model suggests 20% earnings growth over the next two years with potential for upside from international growth opportunities, DKS probably isn’t going to make you rich here, but we are still positively inclined on the name.

Casey Flavin



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European Banking Monitor: CDS Widen

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

Key Takeaways:


* Nearly all European Bank CDS widened last week.  Two of the four big French banks are now trading above 300 bps on CDS, while the major Spanish banks we track are all above 400 bps.  European Sovereign CDS all widened last week as well, with Spanish CDS rising 11.5% to 541 bps. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Bank swaps were wider in Europe last week for 37 of the 39 reference entities. The average widening was 5.4% while the median widening was 4.9%. 


European Banking Monitor: CDS Widen - AA. BANKS


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 3 bps to 35 bps.


European Banking Monitor: CDS Widen - AA. EURIBOR


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  The latest overnight reading is €763.12B.


European Banking Monitor: CDS Widen - AA. ECB


Security Market Program – For a ninth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/11, to take the total program to €214 Billion.


European Banking Monitor: CDS Widen - AA. SMP


Matthew Hedrick

Senior Analyst


The Knapp Track numbers for April suggest a slight sequential improvement in casual dining sales trends from March. 


Malcolm Knapp released his Knapp Track casual dining sales numbers for April this weekend.  This release was a departure from Knapp’s usual release, which comes in the form of a longer text report offering different insights into consumer trends during the month concerned; this weekend Knapp released the numbers alone with the text report, presumably, to follow in the coming days.


Estimated Knapp Track casual dining comparable restaurant sales grew 0.8% in April versus an estimated -0.7% in March.  The sequential change from March to April, in terms of the two-year average trend, was 30 bps.  While this is an improvement, the two year average trend is still well below the strength we saw in December through February. 


Estimated Knapp Track casual dining guest counts declined -1.9% in April versus an estimated -3.4% in March.  The sequential change from March to April, in terms of the two-year average trend, was +50 bps.  This is an improvement but the decline in March was so substantial that a more sustained move higher will be necessary to convince investors that traffic can get back to positive territory. 





Besides the broader casual dining group, for Darden and Brinker this result is especially meaningful since those companies’ systems represent a large portion of the unit base from which the numbers are calculated.


Traffic trends remain disappointing; it seems likely that weather was supporting traffic trends for much of 1Q.  Now that the weather impact has dissipated, we are seeing numbers more representative of the true traffic trends in casual dining.


The price action is confirming our CASUAL DINING CAUTION stance we took ahead of 1Q earnings season.  The group’s performance versus the broader market is slowing markedly.  BWLD, however, remains a volatile name and outperformed the market last week by 4%.  We still like BWLD on the short side but there are no catalysts until the company reports earnings on July 26th.  The stock has not been performing very strongly relative to its peers over the last three months; we think consensus is too bullish on FY12 EPS.


APRIL KNAPP TRACK - cd rel spx


Howard Penney

Managing Director


Rory Green



Gnarly: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV), Short Industrials (XLI)


Friday morning’s bounce was a Selling Opportunity (see 11:44AM EST note 5/11). Today is a wait and watch.


There is no immediate-term support to 1329 and, over the intermediate-term, the mean reversion zone we have been focused on is the long-term TAIL of support down at 1282.


Here are the lines across risk management durations that I am focused on: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE support = 1329
  3. Long-term TAIL support = 1282 

I see zero irony in this market giving back essentially its entire gain from the January 25thPolicy To Inflate day (where Bernanke arbitrarily pushed 0% policy to 2014).


Quantitative Easing, from here, only spikes oil and slows real consumption growth further. The only way out of this is to Deflate The Inflation in food, energy, etc. so that the 71% (US Consumption as a % of US GDP) can stop slowing and solidify itself (like it did in December and January).


Letting free-market prices clear – I know – the horror of the idea.



Keith R. McCullough
Chief Executive Officer


Gnarly: SP500 Levels, Refreshed - SPX

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