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Buyem: SP500 Levels, Refreshed

Takeaway: As Cyprus fear abates, I expect to see higher-highs in stocks and lower-lows in volatility.

POSITION: 15 LONGS, 5 SHORTS @Hedgeye

 

Unless you think the end of the world call is real this time, this is right where you buyem. My signals just registered immediate-term TRADE oversold and overbought on both the SPY and VIX, respectively, at the same time.

 

For the last 4 months consensus bears have been looking for a crisis (Congress in late DEC, Italy in late FEB, and now Cyprus, yes Cyprus!, in late MAR). All the while, the fundamental growth outlook continues to improve – instead of down stocks, you get a Stronger Dollar, Down Oil, and Down VIX.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1566
  2. Immediate-term TRADE support = 1538
  3. Intermediate-term TREND support = 1486

 

In other words, as Cyprus fear abates, I expect to see higher-highs in stocks and lower-lows in volatility.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buyem: SP500 Levels, Refreshed - SPX


Retail: A Rare Positive Data Point

Takeaway: Despite much negative commentary from many retailers (including DSW today) we got a rare positive data point on sales cadence from ICSC.

This note was originally published March 19, 2013 at 14:02 in Retail

This morning’s ICSC Retail Sales Index, a measure of nominal sales growth across 80 retail concepts by the International Council of Shopping Centers, showed the most upbeat reading all year.

 

We find this index useful not only in tracking the yy change in sales, but also in the sequential direction of spending by week relative to prior years.

 

The chart below shows that 2013 (the red line) has consistently lagged the percent gain relative to 2012 until this week, where it took a noticeable turn upwards. We can’t declare victory with only one data point, but it’s a rarity given the reports we’ve seen from retailers that have more often than not noted some form of slowdown in consumer spending year-to-date.

 

ICSC Retail Sales Index

Retail: A Rare Positive Data Point - icsc

 

Johnson Redbook Retail Sales Index, % Chg vs. Year-Ago Also Had A Good Week

Retail: A Rare Positive Data Point - redbook


Retail: A Rare Positive Datapoint

Takeaway: Despite continued negative commentary from many retailers (including DSW today) we got a rare positive datapoint on sales cadence from ICSC.

This morning’s ICSC Retail Sales Index, a measure of nominal sales growth across 80 retail concepts by the International Council of Shopping Centers, showed the most upbeat reading all year.

 

We find this index useful not only in tracking the yy change in sales, but also in the sequential direction of spending by week relative to prior years.

 

The chart below shows that 2013 (the red line) has consistently lagged the percent gain relative to 2012 until this week, where it took a noticeable turn upwards. We can’t declare victory with only one data point, but it’s a rarity given the reports we’ve seen from retailers that have more often than not noted some form of slowdown in consumer spending year-to-date.

 

ICSC Retail Sales Index

Retail: A Rare Positive Datapoint - icsc

 

Johnson Redbook Retail Sales Index, % Chg vs. Year-Ago Also Had A Good Week

Retail: A Rare Positive Datapoint - redbook


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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).

 

BUY INDIA ON WEAKNESS? - 2

 

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).

 

BUY INDIA ON WEAKNESS? - 3

 

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.

 

BUY INDIA ON WEAKNESS? - 7

 

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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