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BUY INDIA ON WEAKNESS?

Takeaway: As recently signaled by our quantitative factoring, the fundamental outlook for Indian equities just became far more convoluted.

SUMMARY CONCLUSIONS:

 

  • We think the RBI’s outlook for “limited headroom” to ease monetary policy from here will be proven incorrect over the intermediate term. Our call for further strength in the USD should continue to perpetuate broad-based commodity deflation, which should continue to lead India’s benchmark WPI inflation statistics lower and help reduce both the current account deficit (about 80% of which is attributable to gold imports, per the latest RBI estimates) and the fiscal deficit (subsidies account for 13.9% of the FY14 budget, which itself relies on a ~200bps acceleration in real GDP growth to fund a projected +21.2% increase in tax and fee receipts).
  • Additionally, we think the country’s 2Q13-3Q13 GIP outlook should insulate further downside in Indian equities (i.e. the SENSEX should hold TAIL support, which is -1.8% lower from last price), as the correction we have been calling for since JAN may now be largely in the rear-view mirror. Moreover, we think expectations on the reform front are pretty subdued ahead of the 2014 general elections, fostering risk of an upside surprise(s).  
  • As such, we now feel comfortable with holding a bullish fundamental bias on Indian equities w/ respect to the intermediate-term TREND duration. A TAIL line breakdown would obviously negate that bias, however, and put our Indian tail risk scenario (BOP crisis) squarely in play. For a deeper discussion of these risks, please refer to our 2/28 note titled, “IS INDIAN TAIL RISK OFFICIALLY “ON”?”.

 

Today, the RBI cut its Benchmark Policy Rates -25bps, as predicted by 30 of 35 analysts in a Bloomberg survey (Repo now at 7.5% from 7.75% prior; Reverse Repo now at 6.5% from 6.75% prior; and the Cash Reserve Ratio was left at 4%). In the accompanying statement, the board professed that “even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited”.

 

BUY INDIA ON WEAKNESS? - 1

 

The lack of headroom Subbarao & Co. are referring to stems from the country’s twin deficits on the current account and fiscal balance fronts, which are both in the area code of ~5% of Indian GDP. Both contribute to a gross savings-investment imbalance that leaves behind a hole(s) that ultimately needs to be filled with int’l capital – capital that may not always be there at the margins (particularly if the USD is in the early innings of a mid-to-late 90s style rip higher).

 

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The latest estimate from Finance Minster Chidambaram is that India may need more than $75 billion of incremental foreign capital this year and next to fund the current account deficit. As such, Chidambaram continues to push for structural reforms that are specifically designed to perpetuate foreign inflows; in a MAR 15 interview he said that India is reviewing foreign-direct investment caps and may scrap or relax many of the existing capital controls. That would be in addition to liberalizing foreign investment in the country’s pension and insurance industries to promote further inflows of capital.

 

As an aside, we think the RBI’s outlook for “limited headroom” to ease monetary policy from here will be proven incorrect over the intermediate term.

 

Our call for further strength in the USD should continue to perpetuate broad-based commodity deflation, which should continue to lead India’s benchmark WPI inflation statistics lower and help reduce both the current account deficit (about 80% of which is attributable to gold imports, per the latest RBI estimates) and the fiscal deficit (subsidies account for 13.9% of the FY14 budget, which itself relies on a ~200bps acceleration in real GDP growth to fund a projected +21.2% increase in tax and fee receipts).

 

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BUY INDIA ON WEAKNESS? - 4

 

BUY INDIA ON WEAKNESS? - 5

 

BUY INDIA ON WEAKNESS? - 6

 

Moreover, slowing core inflation (at a ~3Y low) should also keep the RBI’s policy bias squarely in dovish territory – especially with the threat of higher real interest rates posing risks to India’s cyclical growth outlook.

 

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BUY INDIA ON WEAKNESS? - 8

 

Jumping ship, Chidambaram will continue to have his work cut out for him on the reform front, as his Congress Party’s largest partner in the ruling coalition defected today. The Dravida Munnetra Kazhagam Party (DMK), with 18 seats in the 545-member Lower House, was previously one of the nine partners in the ruling alliance; the party withdrew its backing after a dispute over the government’s approach to alleged war crimes in Sri Lanka, while also signaling a patch-up is possible if its demands are met.

 

With emerging Asia’s arguably largest amount of political consternation over the TTM, it’s tough to make a call on where Indian politics are headed from here. Recall that the Congress Party-led administration infamously lost its majority in parliament last year when its then-largest ally, the Trinamool Party, formally defected over the government’s decision to allow FDI in supermarkets and multi-brand retail.

 

All that being said, however, we think the country’s 2Q13-3Q13 GIP outlook should insulate further downside in Indian equities (i.e. the SENSEX should hold TAIL support, which is -1.8% lower from last price), as the correction we have been calling for since JAN may now be largely in the rear-view mirror. Moreover, we think expectations on the reform front are pretty subdued ahead of the 2014 general elections, fostering risk of an upside surprise(s).  

 

BUY INDIA ON WEAKNESS? - INDIA

 

BUY INDIA ON WEAKNESS? - India SENSEX

 

As such, we now feel comfortable with holding a bullish fundamental bias on Indian equities w/ respect to the intermediate-term TREND duration. A TAIL line breakdown would obviously negate that bias, however, and put our Indian tail risk scenario (BOP crisis) squarely in play. For a deeper discussion of these risks, please refer to our 2/28 note titled, “IS INDIAN TAIL RISK OFFICIALLY “ON”?”.

 

Darius Dale

Senior Analyst


The US Dollar and Commodities

Takeaway: As this chart shows, as the US dollar is getting stronger, and commodities prices are falling. That's good news for the US consumer.

The strong dollar has been the fulcrum point for our bullish case. As the US dollar goes up, commodities prices go down in kind.

 

In the chart below, you'll that the US dollar index has had six up weeks in the last seven while the CRB Index has been down six of those seven weeks in that same time period. Lower commodities prices serve to keep the Fed on hold, and they act as a de facto tax cut for the US consumer. 

 

The US Dollar and Commodities - dxy.crb

 

 

 

 


Casual Dining Trends Not Spooking Stocks

Knapp released his casual dining same-restaurant sales estimate for February and the results confirmed the trend implied by the sequentially-worse Black Box data we saw earlier in the month.  The Knapp Track same-restaurant sales and traffic numbers were the worst since September '09 and July '09, respectively.

 

Knapp Sequential Moves

 

February estimated Knapp Track same-restaurant sales growth came in at -5.4%.  If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of -240 bps.  This would be the most significant sequential slowdown in the two-year average trend since December 2009.  It is important to note, however, that Knapp believes that snowstorms caused a drop of 1-1.5% in same-restaurant sales in February.

 

February estimated Knapp Track same-restaurant traffic growth came in at -6.3%.  If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of -250 bps.  This would be the most significant sequential slowdown in the two-year average trend since December 2009. 

 

 

Stock Prices Couldn’t Care Less

 

Perhaps in anticipation of sunnier times ahead, investors seem to be buying a casual dining recovery that is yet to materialize.  We continue to like Darden and Brinker, for very different reasons, but believe that many casual dining names are up on a rope at this point.  BWLD is one name we would avoid on the long side despite some recent strength that was prompted by decreasing wing prices.

 

Casual Dining Trends Not Spooking Stocks - KNAPP VS CAS INDEX

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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Chart: Gaming, Lodging and Leisure

Takeaway: Here's a fascinating chart that shows the latest quarterly earnings performance of stocks in the gaming, lodging and leisure sector.

As you'll see in the chart below, the regional gaming stocks dominate the lower left quadrant, which shows where companies miss adjusted EBITDA and revenue.

 

Chart: Gaming, Lodging and Leisure - CCLG



Nike: ahead of the print

Takeaway: We think that the quarter is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.

This note was originally published March 18, 2013 at 23:35 in Retail

Conclusion: Our analysis suggests that Nike’s quarter is in good shape. But let’s face it, Nike always manages to light off a firework or two. If that happens to be case on Thursday, we’re confident enough in our underlying thesis that we’d support any weakness.

  

Nike remains one of our favorite names right now. We think its fiscal third quarter to be released on Thursday after the close will be another datapoint to support our view that it is gaining share and returns are rising – and there aren’t many other names that are doing both of those two things right now.

 

Will the quarter be a blowout? Not exactly. We’re modeling $0.72 vs the Street at $0.67. Nice upside -- but not huge.  We’re about in line with the Street on the top line at about 11%, but we’re 50bp higher on the gross margin line. We think that’s fair given the easing product costs flowing through the P&L as well as 2Q ending with the most favorable inventory position in nine quarters.

 

Nike: ahead of the print - nke1

 

Futures: As it relates to futures, bears are calling me with the expected ‘futures are decelerating’ concerns.  The company is going against a 22% North American futures number in this quarter, and +18% globally. It doesn’t take a genius to figure out that this is a ridiculously tough quarter to comp. On a two-year run rate, a 7% North American or 5% global futures number suggests an even underlying trend.

 

We think Nike comes in two to three points above those levels. On a go-forward basis, keep in mind that after this quarter, we started to see China drop off precipitously. Beginning next quarter, we expect any slowdown in growth in North America to be offset by a rebound in China and an uptick in Western Europe (NKE is about to mark the anniversary of the latest downturn there, and Foot Locker recently noted a stabilization in Europe).

 

Sentiment is Flat-Out Bad: Lastly, we need to acknowledge sentiment and valuation. We agree that the stock isn’t cheap at 17x earnings. But let’s not forget that sentiment on Nike remains quite bad. Our sentiment monitor, which is based on both sell-side recommendations, short interest and insider trading activity, suggests that Nike is more hated today than almost any time over the past ten years.

 

Nike: ahead of the print - nike sentiment


Stay the Course

Client Talking Points

Stay the Course

While the fear mongering about the end of the world continues, we stay the course with our research process. They key element of our bull case is the strong dollar, which got stronger again Monday. The Dollar Index is up for the sixth week out of the last seven. Commodities have been down six of the last seven weeks. With commodities lower, it’s a de facto tax cut for the consumer who pays less.

What Could Go Wrong?

It’s simple. The thing that are going right are the ones that could go wrong. That’s why we’re looking closely at US employment and housing. We’ll look closely at all the housing data this week, including today’s February housing starts that rose 0.8%, as well as the jobless claims numbers on Thursday. Oh, and we would be remiss if we didn’t mention Cyprus. As we have said, Cyprus doesn’t matter.

Asset Allocation

CASH 38% US EQUITIES 20%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“The art of storytelling; make enough calls so that something is always working.” -- @KeithMcCullough

 

QUOTE OF THE DAY

“After six years, I feel it is the right time to pass the baton.” – Electronic Arts CEO John Riccitello, who resigned Monday, sending the stock of the video game maker higher.

 

STAT OF THE DAY

23, the consecutive-game winning streak of the Miami Heat, who beat Boston last night 105-103 to extend the second longest winning streak in the NBA


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