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India FDI Inching Closer to Reality


It looks like India is inching closer to easing its policy on foreign direct investment (FDI) – a shift that would be positive for WMT and other global retailers. But, we’ve been down this road before.

It’s been nearly two-years since the Department of Industrial Policy and Promotion put forth a proposal regarding FDI in multi-brand retail in July 2010. Then last November, a proposal to allow up to 51% FDI in multi-brand retail was approved only to be subsequently shelved following political upheaval.

While the implications for India and global retailers alike remain largely unchanged from when we wrote on the issue last fall, two key factors at play increase the likelihood of government action: 1) the Presidential election takes place July 19th, and 2) an additional ~8% devaluation in the rupee since FDI reform was parked at year-end. While jockeying headed into the election could produce a multitude of outcomes, the reality is that the two are closely intertwined as the government is looking to encourage foreign flows to India in order to buoy the currency.

As for what this means for retail, here’s some context from our November note:

The Indian government has approved a policy to allow 51% FDI in multi-brand retail and 100% FDI in mono-brand retail in an effort to help buoy the currency. This effectively opens the door to one of Retail’s most attractive international markets to (aspiring) global retailers. (Hedgeye note: the policy for 100% FDI in mono-brand retail has been rolled out, it’s the multi-brand policy that was not)

Previously, multi-brand retailing was forbidden in India and the country restricted mono-branded retailers to 51% ownership requiring a local partner. The new shift in policy no longer blocks the likes of Wal-Mart, Carrefour, or Tesco from entering the market and enables mono-brand retailers to pursue more aggressive self-funded expansion plans (i.e. Nike, VFC, etc…).

As a point of reference, the Indian retail sector is currently worth approximately $450-$500Bn in USD, but has been growing at a HSD-LDD digit rate over the last few years One recent study called for the market to double by 2015.

Sounds like a lot, but keep in mind that India’s per capita GDP stands at US$1,410, while China currently sits at about $4,428. So perhaps not a stretch. No, India is not China, and vice/versa. There are distinct geographical, cultural and ideological differences that make them both distinct.

Also, keep in mind that with just ~6% of India’s retail distribution organized (i.e. not via stalls, etc.), it will take years for investment from global players – especially multi-brand retailers – to establish adequate supply chains to make  meaningful progress so we need to be mindful of near-term expectations.

But 10-years ago, no one cared about China. It was not every other word out of a CEO’s mouth because the core markets are too mature to grow. The companies that are successful there today are the ones who invested when no one cared.


While India accounts for roughly 1% of the global luxury market compared to China at closer to 10%, the opportunity for global retailers is clearly evident. Several companies like VFC, SHOO, and others have already established a foothold with local partners. For a company like VFC, which has clearly outlined its plan to grow sales in India from ~$50mm in 2010 to over $200mm by 2015 accounting for a mere 20bps of growth annually, this announcement could accelerate efforts in the region. Either way, we expect India to quickly become part of the expansion dialog among retailers – particularly in light of slowing growth across much of Europe and China.


Casey Flavin


India FDI Inching Closer to Reality - India GDP



NKE: Farewell, Olympic Trade

For 9 out of 10 of the past Olympic sessions, there has been the infamous “Nike trade.” Essentially, this involved NKE stock outperforming the S&P 500 by several percentage points in the run up to and during the Olympics. The streak continues into a six month span after the end of the Olympics as well.


But now, it appears that the trade has been discovered by the masses and the spread has eroded completely. NKE now UNDERPERFORMS the S&P 500 by 200 basis points (+3% versus +5%).  Throughout history, NKE outperformed the S&P 500 by an average of about 18% in 9 out of the 10 recent Olympic event years we mentioned. This is now a thing of a past.



NKE: Farewell, Olympic Trade - NKE Olympics

HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All?

We all know about the Nike ‘Olympic Trade.’ Furthermore, we think that once ‘seasonal trade’ gets to a point where it is so widely known, it should probably cease to exist. But the reality is that it still tends to come and go like clockwork.


That is, until this year. As of today, NKE underperformed the S&P YTD by 2 points (NKE +3%, SP500 +5%). But looking through history, NKE outperformed the S&P500 by an average of ~18% in 9 out of the 10 recent Olympic event years. The only time the trade did not work was in Nagano, Japan, showing how much more important this trend is for Summer Olympics vs. Winter.


Most interesting to us is that the opportunity continues for 6-months after the event as well. Over the past three Summer Games, we’re looking at about a ~13% move vs. the S&P during the window following the event.


After going through this analysis, it suggests to us that ‘The Nike Olympic Trade’ is far less consensus than we’d otherwise have thought. 


HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All? - NKE tables


HedgeyeRetail Visual: NKE Olympic Trade Not Consensus After All? - NKE chart

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  • A continuing recovery in the replacement market, coupled with a growing number of new openings and expansions should create a favorable fundamental backdrop for the slot manufacturers for the next few years
  • We estimate that slot shipments to North America will grow to 90k in 2012 and surpass 105k in 2013- representing a material increase over the past 3 years where slot shipments have teetered in the 62-71k range
  • Mid-to-high single digit replacement growth should be supported by aging slot floors and a more competitive environment driven by new openings.  Growth in new and expansion units will be propelled by Canadian RFP's, new casinos/slot tracks opening up in Ohio, and VLTs in IL 


Bearish Breakdown: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI)


Our Growth Slowing call has been consistent since March (we shorted XLI on March 12th). Our beta down-shift call from last week (100% Cash) into the Fed event was explicit.


We are in no hurry to buy stocks. That’s primarily because our immediate-term TRADE line of 1318 just snapped. That’s new as of this morning.


Across all 3 risk management durations, here are the lines that matter to me most right now:

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1318
  3. Immediate-term TRADE support = 1305

In other words, there’s no rush to jump out and “buy on valuation” because valuation is not a catalyst in a macro driven tape with Growth Slowing.


They sold this market on a good New Home Sales print this morning, which makes me feel all the more patient here.


Waiting and watching,



Keith R. McCullough
Chief Executive Officer


Bearish Breakdown: SP500 Levels, Refreshed - SPX

European Banking Monitor: RISK COOLING OFF FOR NOW

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:


* US/European bank swaps were broadly tighter last week on the heels of favorable Greek elections and Moody's downgrades being less bad than feared. We'd remind investors that (a) even if Greek austerity terms are eased, the rate of contraction in the Greek economy will make compliance nearly impossible, setting the stage for another showdown, and (b) Moody's downgrades have costs. While we saw lots of commentary about funding costs not being affected by the downgrades, the more salient takeaway is that institutions that moved to triple-B should see derivatives flow move away, on the margin.   


* Risk took a breather last week as large declines in high yield, MCDX and higher leveraged loan prices were indications that the temporary calm in Europe was enough for a broad-based rally. Interestingly, the one measure you'd have expected to contract actually expanded: Euribor-OIS.


 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 – 31 of the 39 European financial reference entities we track saw spreads tighten last week. The median tightening was 7.4% and the mean tightening was 1.8%. It's notable that the Spanish banks were the worst performers of the group.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. 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 has been moving higher of late for the first time in a long time. It ended the week at 43 bps.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. 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. This data shows through Thursday.  


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. facility


Security Market Program – For the fifteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/22, to take the total program to €210.5 Billion.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. smp