CONCLUSION: We are suspending our bearish bias on rupee-denominated assets – particularly Indian equities – on the event that INR-supportive inflows pick up in the immediate-term ahead of a potential rate cut. Further, higher lows in the rupee has the potential to develop into a sustainable TREND, making the risk/reward on shorting India from here a lot less asymmetric than it has been recently.


Over the weekend, RBI Deputy Governor Subir Gokarn explicitly confirmed a shift in the central bank’s policy bias to growth-supportive, rather than constrained by ever-present inflationary pressures stemming from infrastructure bottlenecks, elevated food and energy prices, and, of course, the central government’s bloated fiscal budget.


Into and through the event, India’s interest rate swaps market went from pricing in no monetary policy changes over the NTM (a core component of our bearish thesis) to pricing in -39bbps of easing, suggesting to us that the market has taken this rhetorical shift quite literally.




International inflows to India’s INR-denominated debt market are picking up as well, as Global Macro investors attempt to get ahead of pending rate cuts, etc. India’s 10yr sovereign debt yields have declined -30bps over the past month, 19bps of which occurred in the past week.




Indian equities, still decidedly in a Bullish Formation, flashed a critical positive divergence overnight, closing up +15bps with most of the other major markets in the region down 2-4% on the day. If the tide on Global Macro sentiment turns in the coming weeks – particularly on the heels of politicized action out of the Fed or ECB – India could potentially test its TRADE and potential TREND lines of resistance. Importantly, this would coincide with the RBI lowering rates by 25-50bps at its JUN 18 meeting.




Our proprietary G/I/P analysis suggests that it would be imprudent to for the RBI to streamline the current disinflationary forces they point to as supportive of adopting an easing bias. In fact, our models point to limited downside in Indian inflation over the intermediate term, a finding supported by the recent peaking of the disinflationary tailwind that is Deflating the Inflation (commodities) due to measured weakness in the rupee (-12.3% vs. the USD from its YTD peak).






To the RBI’s credit, however, the decline in crude oil prices does reduce inflationary pressure stemming from the fiscal deficit, as it allows the gov’t to reduce subsidy expenditures on capping gasoline and diesel prices.




Net-net-net, with the RBI now shifting to a growth-supportive policy stance, you could actually see capital inflows accelerate in the short term (positive for the INR vs. the USD); whether or not this becomes a sustainable trend remains the key question – we’ll let the market tell us what to do here. We’ve said all along that Deflating the Inflation would be a bullish factor for the global economy (India included), but also that getting from point A to point B required short-term pain from a financial market perspective. India, which was one of the first major equity markets to start breaking down in the YTD, may indeed signaling to us that “point B” has gotten incrementally closer from a domestic perspective.


All told, we would be reckless to fight the whims of Indian policymakers, who are eschewing vigilance on inflation (currently 270bps above their unofficial target) in favor of adopting a growth-supportive monetary policy bias. As such, we are suspending our bearish bias on rupee-denominated assets – particularly Indian equities – on the event that INR-supportive inflows pick up in the immediate-term ahead of a potential rate cut.


Darius Dale

Senior Analyst

European Banking Monitor: French and German Bank Risk Widens

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:


* European Sovereign CDS mostly widened along with European Bank CDS. French and German banks widened across the board.  


 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 26 of the 39 reference entities we track. The median widening was 7 bps.  


European Banking Monitor: French and German Bank Risk Widens - 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 widened by 1 bps to 40 bps.


European Banking Monitor: French and German Bank Risk Widens - 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 €784.97B.


European Banking Monitor: French and German Bank Risk Widens - aa. ecb facility


Security Market Program – For a twelfth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/1, to take the total program to €212 Billion.


European Banking Monitor: French and German Bank Risk Widens - aa. SMP


Matthew Hedrick

Senior Analyst

Shorting EUR/USD (FXE): Trade Update

Positions in Europe: Short FXE

Off of a bounce towards our immediate term TRADE resistance line of $1.25 Keith shorted the EUR/USD via the etf FXE in the Hedgeye Virtual Portfolio as we’re looking for the cross to test $1.22 on the downside. As we show in the chart below, our TRADE and intermediate term TREND levels of support are both at $1.22. Our call remains that if $1.22 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it; however we see a runway of uncertainty until the June 17th Greek elections that should put significant downside risk in play.


Shorting EUR/USD (FXE): Trade Update - 11. eur


This cross remains incredibly shifty driven on the backs of Eurocrat posturing, including on the main topics of Eurobonds, a Pan-European Deposit Guarantee facility, another LTRO, and the reach of the ESM. We’ll be highly sensitive to price as we manage risk around this position. 


Matthew Hedrick

Senior Analyst

real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

No Man's Land: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


With the SP500 under my long-term TAIL line of support, this market is in No Man’s Land right now.


There’s a big difference between trading the short side of your book aggressively (Short Covering Opportunities) and ramping up gross long exposure when we are immediate-term TRADE oversold.


Across all 3 of my core risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1308
  3. Long-term TAIL resistance = 1283 

In other words, I am in no hurry to buy/cover (unless I get an immediate-term TRADE oversold signal at the security level) and won’t be provided that 1283 is confirmed as resistance.


There’s immediate-term TRADE support (oversold) at 1268.




Keith R. McCullough
Chief Executive Officer


No Man's Land: SP500 Levels, Refreshed - SPX


Early June data suggests 14-19% growth



It’s only 3 days so there is no real takeaway, especially related to market shares.  Average daily table revenues for June were HK$876 million versus May’s average of HK$775 million.  We think June will post a significant increase in YoY growth than May.  We are currently projecting full month GGR at HK$23-24 billion, which would represent YoY growth of 14-19%.  Remember that May only grew 7% YoY.  Given the precipitous drop in the Macau stocks, we believe June’s accelerating growth will be a positive catalyst.


We should be getting the May detail by tomorrow.  The detail should show stronger VIP volume growth (+10%), solid Mass growth of 25-30%, and blowout slot revenue growth of close to 50%.  Investors should react favorably to the details vis a vis the headline growth of only 7%.





Fortune Cookie

This note was originally published at 8am on May 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A different world cannot be built by indifferent people.”

-Jack’s fortune cookie


My son Jack was born right around the same time that I came up with this crazy idea to start Hedgeye. I love them both dearly.


Last night was the typical Sunday night at the McCullough dinner table. Our kids were exhausted from spending a beautiful day outside, but fired up enough to pound back a few more fortune cookies.


By the time I made my last cover/buy move late on Friday afternoon, that’s pretty much how I felt too.


Back to the Global Macro Grind


As my son grows up, he’ll be taught that it’s always better to be early in life than late. If he ever gets into this business, we’re going to have to work on how early though. Being too early, for too long, is also called being wrong.


In buying US Equities, I’m at least a few days early. That’s definitely better than being a few months late in selling them. The last 2 months have been flat out nasty. The highest conviction position you should have had was Cash.


We peaked at 91% Cash. That’s 5% lower than where we went in Q3 of 2008. This morning’s Cash position in the Hedgeye Asset Allocation Model is 61% (down from 85% at the start of last week).


Here’s how our asset allocation looks this morning:

  1. Cash = 61%
  2. US Equities = 27% (SP500, Consumer Discretionary, Healthcare, and Apple – SPY, XLY, XLV, and AAPL)
  3. Int’l Equities = 12% (China and Brazil – CAF and EWZ)
  4. Int’l Currencies = 0%
  5. Fixed Income = 0%
  6. Commodities = 0%

Not being long anything in Commodities wasn’t something Jack came up with at dinner last night. It’s been part of our Q2 Global Macro Themes calls that include Fed Fighting and Bernanke’s Bubbles (email if you’d like an updated slide deck with our refreshed risk management levels – all of the long-term bubble charts are in there, most of them Commodities).


Buying Brazilian Equities early was my biggest mistake on the long-side (buying anything Global Equities other than Chinese Equities has pretty much been a big mistake since the end of Q1). Of the major countries, China is the world’s top performer since April.


My long SPY (SP500) position is at 9% in the asset allocation model and that’s likely to have a short leash. If the SP500 doesn’t hold our long-term TAIL line of 1282 support, I won’t have a position in it at all. That’s when the crash (YTD peak to trough drop of 20% or more) risk comes into play. Being early by a few days is one thing – buying into a crash is not what we do.


With the SP500 down -4.3% last week, down -7.4% for the month-to-date, and down -8.7% from the YTD high, this is either the only obvious “buying opportunity” we’ve had since early January, or a not so friendly signal for the weeks and months ahead.


Growth Slowing and Deflating The Inflation – we get that. What we don’t get is how quickly these fundamental research factors get fully priced in. That’s why we reserve the unalienable right to change our mind any minute of the day.


Embrace Uncertainty.


If we get a lift today and/or tomorrow, we’re likely going to sell into it. That’s because A) we’re too long and B) the Macro Catalyst Calendar starts to get gnarly again starting on Wednesday:

  1. Wednesday = New Home Sales for April (expectations are high at 335,000 given the weather in Feb/Mar)
  2. Thursday = Durable Goods for April are “expected” to rise, sequentially, versus March – that’s not a given either
  3. Friday = University of Michigan Consumer Confidence (for May) is expected to hold fairly elevated gains at 77.8

Then you have the long weekend…


And then… you have Europe, a potential mess of a Q2 “earnings season”, and Volcker Rule implementation in July.


Don’t be indifferent. Keep moving out there. And keep a Fortune Cookie or two nearby if you need to feel better about America’s economic future. If we don’t evolve our policy making process soon, our kids are going to need all the help they can get.


My immediate-term support and resistance ranges Gold, Oil (WTIC), US Dollar Index, EUR/USD, 10-year Treasury Yield, and the SP500 are now $1575-1618, $90.57-94.42, $80.67-81.81, $1.26-1.28, 1.66-1.80%, and 1282-1335, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Fortune Cookie - Chart of the Day


Fortune Cookie - Virtual Portfolio

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