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After unplugging for 3 months, I’m back and headed to G2E as I have for the last decade. To prepare for my trip, I reread my notes from last year and spoke to a number of vendor contacts.  Below is a summary of my thoughts heading into the show.


– Anna Massion


Industry commentary

  • Based on data we’ve collected, replacements have been stagnant the last 12 months excluding the RFP units shipped to Canada.  The larger venders we’ve spoken to have confirmed that they have seen no pick in replacement demand from their customers.
  • The competitive environment remains fierce, with smaller players getting some of the pie that used to go to the big 5.  The promotional environment around G2E remains heavy but no different than in past years based on our conversations.  BYI remains one of the more disciplined players and WMS claims it is as aggressive as in the recent past.  Their Blade cabinet is still new and capturing about half of their domestic demand.
  • Manufacturers and operators alike continue to struggle to attract new slot players and the existing customer base continues to age
  • WMS’s new poker concept has yet to make any real dent into IGT’s dominance of the video poker market
  • Everyone is still focused on how to monetize on i-gaming but there is nothing new to report in the real money space.
  • On the systems front, BYI is still the leader and seems to be making slow and steady headway with DM applications.  IGT is still giving it away as a tool to garner more floor share.  Hearing the same thing to a lesser extent with ALL (Aristocrat).  Konami has an robust system but has yet to turn operator interest into big contracts.


  • As much as BYI wants to keep the focus on their games, systems and interactive, we have no doubt that there will be many questions surrounding their pending acquisition of SHFL.  Here is what we will be focused on:
    • How BYI can leverage SHFL’s success in Australia? While BYI has a small presence in Australia they haven’t been able to garner much traction in that market. Moreover, we know that SHFL has started trying to see if their Australian success can be transported to the NA video slot market.  Can BYI help push more of SHFL’s Australian product into other Asian markets? This is one of the bigger revenue “synergy” opportunities of the deal in our opinion.
    • If and when real money online wagering materializes in the US, BYI should be able to leverage SHFL’s proprietary table content
  • Bally’s products have been performing well this past year, especially on the video side, which has been a historic weak spot for them.  Some of their competitors attribute part of this success to their new relationships with 3rd party developers (i.e. High-Five).
  • Bally will be showcasing two new cabinets (part of the Bally’s Pro Series cabinet family) that support almost all of their content
    • Wave:  40-inch concave LCD touchscreen.  March 2014 release
    • Pro V55 Jumbo: A nine-foot cabinet with a 55-inch vertical touchscreen display (supports all V32 content).  December 2013 release
  • 5 new licensed themes:
    • New WAPS:  Titanic (March 2014 release) and Magic of David Copperfield (June 2014 release)
    • Followup WAPS:  MJ and Grease follow-ups
    • Premium Lease:  ZZ Top Live from Texas
  • 10 new game mechanics will be showcased
  • 100 new titles;  including games from their new Reno studio (run by former IGT executive), content from Australia and 3rd party developer content
  • Systems:  More emphasis on the Elite Bonusing Suite and the competitive advantage it creates for casinos from a marketing standpoint.  Will also demonstrate DM wagering features – allowing patrons to enter into tournaments when they want to, not when the casino prompts them too
    • Super Slot Line: Wireless solution to a serial floor. Doesn’t require you to ramp up your floor to high speed to enable your floor.  Much cheaper solution.  Opens the door for older casinos to upgrade their floors and start using DM and Bonusing Suite.
    • Chip Recognition
  • I-gaming:  Nothing new per se but will showcase how they can present operators with a single view of the player across online, mobile, and traditional brick-and-mortar gaming platforms and provide complete cross-platform gaming experience for both free play and wagering.


  • While we don’t have specifics, we’ve heard that IGT continues to be aggressive in its pricing strategy; no doubt using its product breadth to achieve scale orders
  • New MegaJackpot titles:
    • Avatar:  Center Stage Platform
    • Avatar Treasures of Pandora:  New Crystal Core Cabinet
    • Bridesmaids
    • Jurassic Park:  IGT Duo 103” and 70” Center Stage
    • Wheel of Fortune Ultra 5 and 3 Reels:  will introduce 3D reels
      • New game mechanics
    • Card Up! Dragon & Phoenix:  allows players to choose volatility of bets based on color, suit or individual features in a table-games style bonus format.
    • San Xing:  rewards players with progressive awards during bonus rounds when selected lanterns are matched up during gameplay.
    • Seaside Park:  awards players with credits and the opportunity to win multiple progressives through interactive bonus rounds.
  • For sale games:
    • Atari Centipede:  Video Reel Edge
    • Winner’s Choice:  New multi-game 4-1 experience
    • Sweet Three:  Based on proven classics allows a trio-slot game that creates progressives with frequent jackpots
  • New Video Poker themes and more playlines
  • Systems:  Features that encourage social play


  • Has experienced declining YoY sales to NA over the last 9 months and the September quarter is likely to see more of the same.  Konami is suffering from their lack of new products, the stagnant state of the replacement market, and no Canadian exposure.
  • Expanding their manufacturing capacity in Nevada and are building a world class development facility that will double their manufacturing and R&D capacity.  The project should be completed in Summer 2015.
  • Promotions:  offering volume-based incentives in-line with prior years’ offers based on orders of 8 or more machines.  Post promotion pricing in the range of $14.5k
  • New & Newly Released Products
    • New Multi-Game (Selection):  Multi-game that has instant load time. Getting great feedback during the company’s pre-G2E meetings.
    • Titan 360:  Multi-player slot machine released in Harrah’s AC this July.  Doing 3x house average. They only have 5 units out in the field at this point but expect to have strong demand if the number keep coming in the way initial results have.
    • Podium Goliath: 93" tall, includes dual 32" high-definition LCD displays, 360 degree attract lighting, an ergonomic button panel, and an enhanced sound system. It supports KONAMI's K2V and KP3 library, including stand-alone progressives.
      • Timing: Beta testing currently, should be ready to commence shipping December 2013
    • Game with 6 huge reels on top (unnamed):  release scheduled for June/July 2014
    • Dungeons & Dragons (Leased product):  will not be on the floor planning to showcase it at NIGA 2014
  • In Development
    • Developing a new box which is currently still in “concept” stage which they believe will set the industry on “edge” when released.


  • Steady as she goes:  WMS will continue to focus on their Blade & Gamefield cabinets and content  - will showcase 45 new Blade titles to add tp the current 14
  • Working on a Blade Stepper, which will be the first new stepper introduced to the market in a while, meant to appeal to the traditional gaming player that likes the traditional three wheel experience.  They are apparently receiving great reviews of the product during their pre-G2E meetings.
  • On the participation side
    • New Monopoly game on the Blade
    • Iron Man just released on Gamefield and is killing it so far but it’s still very early
    • Clue and Beetle Juice for Gamefield
    • Introducing Wizard of Oz in the motion chair this winter
    • Willy Wonka was released in June 13 and is doing very well
    • Superman was released in March 13 and is doing “ok”
    • Kiss Game has run its course – they have a few hundred out on the field but aren’t placing any more
  • Displaying 100 new games (same as last year) including some targeted for the Asian market, although they are getting positive feedback from their US customers on the Asian content as well
  • Video Poker: Coming out with a new version. Have sold over a 1,000 in FY13. Games are doing on par with the competition. They expect to sell about 1,000 in FY14.
  • They are done with their Canadian fulfillments but there may be some follow up orders
  • September Q:  Always a tough Q for WMS, especially with the early G2E show.  They aren’t discounting as much as the competition since the Blade cabinet is new.  ASPs may be depressed though since the September Q has more of an international focus (which like lower priced products).


Takeaway: Current Investing Ideas: BNNY, FDX, HCA, HOLX, MD, NKE, NSM, RH, SBUX, TROW and WWW


Here are the latest comments from Hedgeye Sector Heads on their high-conviction stock ideas.


BNNY - Consumer Staples analyst Matthew Hedrick reiterates his positive outlook and expectations for Annies. Hedrick believes BNNY’s premium valuation is justified by higher growth rates across organic offerings, of which Annie’s is a leader, especially as it increasingly moves its products to the mainstream aisle from the organic aisle. BNNY caters to a higher income demographic that Hedrick says should continue to pay a premium for organic foods despite fluctuations in macroeconomic conditions. 


Hedrick says BNNY’s strategy to innovate everyday foods and create healthier and better tasting options should sustain long-term growth, and Hedrick looks for BNNY to maintain its market leadership and gain share as it moves more of its items to the center of the store.



FDX - Hedgeye Industrials Sector Head Jay Van Sciver remains positive on the long-term potential for shares of FDX. According to Jay, “We think it is fair to say that the FedEx report on Wednesday exceeded muted expectations and added credibility to the Express restructuring program." 


He adds, “FedEx continues to show that it can deliver higher Express margins and, as it does, the market should move to price in continued success.  We continue to think that there is significant potential value at FedEx Express that the market is not pricing in. We would look for weakness to buy.”


Bottom line according to Van Sciver is he continues to think that FDX will prove a rewarding long-term position, as FedEx Express focuses on profitability instead of market share.  FedEx is also well positioned to benefit from signs of stronger economic growth.



HCA – Hedgeye Healthcare Sector Head Tom Tobin says there are mounting fears over a government shutdown as Republicans want to defund Obamacare.  In the event this does occur, Tobin sees it as a net negative to HCA Corp. since the hospital operator will not see the bad-debt relief due to less uninsured patients from Obamacare. 


However, Tobin believes a government shutdown is highly unlikely for any extended period of time, and believe the HCA’s fundamentals remain intact into 2014



MD – Healthcare Sector Head Tom Tobin’s proprietary OB/GYN Tracking Survey suggests utilization trends may be slowing for Mednax in 3Q, which is concerning given the run-up in the stock lately. 


However, MD has two additional growth drivers that should compensate for any softness in volume.  The first is Medicaid parity, which should help drive accelerating pricing growth through at least 1Q14.  The second is acquisitions, which currently have been slow to ramp through 2013, but is likely to pick up through the remainder of the year.



HOLX – Healthcare Sector Head Tom Tobin has no update on Hologic this week.



NKEAccording to Retail Sector Head Brian McGough, this week, the biggest item on Nike has nothing to do with Nike whatsoever. Specifically, Adidas, Nike’s top competitor as measured by size, market share and global diversification, updated guidance for the quarter and the year following an Executive Board meeting. The announcement was simply horrible. The details are as follows…

  • “Firstly, the further weakening of several currencies versus the euro throughout August and September such as the Russian rouble, Japanese yen, Brazilian real, Argentine peso, Turkish lira and Australian dollar have intensified the negative currency translation headwinds already highlighted by management during the course of the year.
    • This is estimated to lead to a high-single-digit percentage point negative translation impact in Q3.
  • Secondly, an unexpected short-term distribution constraint as a result of the transition to the adidas Group's new distribution facility in Chekhov, close to Moscow, is impacting the quantity of new product flow to stores.
    • While the problem is expected to be resolved at the beginning of Q4, this, together with the weakness of the Russian rouble, means that the group's 2013 goals for Russia/CIS are no longer attainable.
  • Finally, the continued softness in the global golf market and TaylorMade-adidas Golf's focus on maintaining healthy inventory levels in the marketplace will lead to a lower sales and profit contribution from the segment than originally forecasted.
  • Taking all of these issues into account, management now expects:
    • a low-single-digit currency-neutral sales increase vs prior guidance for a low- to mid-single digit increase
    • an operating margin of around 8.5% vs prior guidance of "approaching 9.0%"
    • net income attributable to shareholders to increase at a mid-single-digit rate to a level of €820-850M vs prior guidance €890-920M and FactSet €910M.
  • In terms of phasing, a significant portion of the negative impact will be in Q3, with management continuing to expect a strong rebound in sales and profitability growth in Q4.”

The reality is that this simply does not happen at Nike. Investors often compare the two – especially in Europe – but when we see announcements like this we think it further polarizes the divide between the two companies.


NSM- Financials Sector Head Josh Steiner says that Nationstar Mortgage continues to benefit from new positive initiations of coverage from the sell side, as well as ratings upgrades from existing coverage. In fact, there have been 3 positive initiations/upgrades since just September 10th.


While this has been beneficial, we’re beginning to feel like NSM is getting closer to becoming a consensus long idea. For now, we’re still bullish in the short term as we expect the company to announce some new business wins in the form of servicing portfolio purchases. That said, with the move the stock has had and with the pressure we’re seeing elsewhere on the mortgage originations front, we’ll be keeping the NSM long idea on a shorter leash from here.


TRADE: In the short-term, we think the market will be watching for the next sizeable MSR sale.


TREND: Over the intermediate term, the stock will key off 3Q13 earnings results, deal announcements and the direction of long-term interest rates.


TAIL: In the long-term, there is still a tremendous opportunity for non-bank servicers like Nationstar to roll-up the servicing business. NSM is well positioned to be a prime beneficiary. 


RH - Here’s the Hedgeye Retail ‘Visual of the Week’. We can promise that it will scare most people who see it. 




What you see above is a picture of a recording artist named Edei. That’s not the scary part. The eyebrow-raiser is the massive backdrop showing that she was performing under the label RH Music.


This concert was in New York at the Highline Ballroom and was part of the RH Music private concert where it showcased its initial artists under its label. If RH starts a new kitchen business (which it is), people won’t question it for a minute. If they start an antiques and collectibles business (which they have), people will give RH a free pass.


But Music??? Seriously???


We were initially surprised by this move, but we think that people need to look at it not as an effort to gain revenue in the category as much as a way RH is redeploying marketing dollars away from traditional media (no more mailing out an 8 lb catalogue) in order to broaden out its customer base into a younger demographic.  Wall Street is not used to this yet…but we think that the company will give people reason to believe.


SBUX – Hedgeye Sector head Howard Penney says Starbucks is the best growth stock in the restaurant space that he covers.  He likes Starbucks on both an intermediate-term TREND and a long-term TAIL basis.


On a TREND basis, Penney says the company will show above-trend revenue growth, due in large part to U.S. and international growth as well as ongoing expansion in the Consumer Products Group (CPG).  CPG refers to Starbucks’ business of selling products through grocery stores and warehouse clubs, in addition to selling other branded SBUX products worldwide.


On a TAIL basis, Penney says that Starbucks will achieve impressive long-term growth as long as it continues to focus on its core business.  Moving forward, Penney sees vast opportunities for the company to expand through various channels and geographies.”



TROW - With asset management giant Blackrock (nearly $4 trillion in client assets) signaling a rotation from bonds into equities in an update this week, there’s no better time to invest in a leading equity manager who will benefit from incremental stock flows, according to Jonathan Casteleyn,  Director of Financials Research.


T Rowe Price has the best investment performance in the equity business and should continue to outflank the investment management industry in generating the highest new client inflow says Casteleyn. 


In addition, T Rowe’s client assets which are 70% stock based also have the opportunity to appreciate along with equity markets which increases TROW’s billable fees, an important attribute with the ongoing effort of quantitative easing by the U.S. central bank which has historically boosted stock values.



WWW - Wolverine is quiet on the news front. It just finished up a European Investor Relations tour and topped it off with a sell-side conference. And with the quarter closing in less than two weeks its quiet period is just about to begin.  


The company reports EPS in the first half of October, where we’re coming in at $1.20 vs. the Street at $1.02. It goes without saying that we think it will have a great quarter. To keep the hype going, WWW is hosting an analyst day in NYC on October 15th.


Needless to say, we think that the catalyst calendar is lining up nicely.




Editor's note: In light of the Fed's surprising decision not to taper earlier this week, we would like to republish Hedgeye Founder and CEO Keith McCullough's "Morning Newsletter" from Friday morning. As Keith points out, there are major market and economic implications from this decision. Incidentally, as we're sure you know by now, Keith is no shrinking violet. His note below is no exception. For more information on how you can subscribe to Keith's Morning Newsletter, please click here.



09/20/13 07:55 AM EDT

Buffet's Fed

“The Fed is the greatest hedge fund in history.”-Warren Buffett


The Big Picture

That’s what Buffett told students at Georgetown University yesterday. He was trumpeting “how much money” the Fed makes: “it’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”


Now isn’t that just fantastic. One of the greatest financial minds in US history is now marketing a political message that is about as anti Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these said “profits” come from?




They come out of American savings accounts. Even the Fed itself (St. Louis Fed) reminds us that the “growth rate of real GDP has been higher on average when the personal savings rate is rising than when it is falling (Gilder, pg 72).” The Founding Fathers wanted our children to respect their piggy banks, not some un-elected money printer clipping our hard earned coins.

Macro Grind

As George Gilder goes on to absolutely nail this topic in his new book, Knowledge and Power, “the entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital… socialists believe their mission is to seize capital for the masses…” (Gilder, pg 77)


That’s what Mr. Buffett should be marketing. It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.


Moving on… where the rubber meets the road here is in terms of the purchasing power of your hard earned currency. While I was disgusted with Bernanke’s decision to debauch the Dollar again this week, that doesn’t mean he’s going to win this war for good. In the last 24 hours, both the data (economic gravity) and Mr. Market are fighting back:

  1. US Dollar Index is up +0.2% this morning to $80.41 (holding long-term TAIL risk support of $79.11)
  2. Gold and Silver are down -1% and -2.4%, respectively (both are still bearish TREND and TAIL in our model)
  3. Oil (Brent) failed to breakout above our immediate-term TRADE resistance line of $110.94/barrel



Economic data? Yes, as in the stuff Bernanke has un-objectively ignored since almost every high-frequency US economic data series we follow started to accelerated in July.

  1. JOBS: non-seasonally adjusted rolling US Jobless claims hit yet another YTD low (-16.4% y/y) yesterday!
  2. ORDERS: the Philly Fed’s “New Order” component ripped a +21 SEP vs +5 in AUG
  3. HOUSING: US Existing Home Sales hit a 6-month high yesterday

Now most Fed apologists (which are mostly those who get paid by A) Government Power and/or B) Down Dollar) will whine about the impact of #RatesRising on the “housing’s recovery” instead of focusing on what really drives housing demand – confidence.


Although US Savings are at generational lows, US Net Worth is currently tracking at an all-time high. We’d argue that’s been largely driven by real (inflation adjusted) #GrowthAccelerating more so than anything else. US Home Prices up +12.4% y/y obviously helps, but the demand for housing won’t be impacted until the 30-yr mortgage rate blows through 6% (it’s at 3.79% today, get over it).


In other words, the greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that didn’t coincide with:


1.       Strengthening US Dollar

2.       Rising US Interest Rates


Why doesn’t every discussion about the Fed start and end with that?


While Buffett might love the impact Bernanke has on his P&L (fat net interest margins are driven by marking the short-end of the curve at 0% - that pays insurance companies (Berkshire) in size), I’d like to remind him that the “greatest hedge fund manager in history” is also the only un-elected central planner in US history to attempt to ban the economic cycle.


What is an economic cycle?


$USD/Interest Rates Higher --> Energy/Commodities/Inflation lower --> Real Consumption Growth Higher  --> Pro-Growth Equities Higher


With all due respect Mr. Buffett, why don’t you and your pal, Mr. President, want the rest of us “middle classers” to have that?


Sadly, there are very few leaders in Washington who have my back on this. That’s one of the reasons why I have the highest CASH position in the Hedgeye Asset Allocation Model since July 23rd. I don’t trust this rally to all-time highs anymore.




The biggest thing Bernanke lost this week was whatever was left of the trust I had in someone at the Fed doing the right thing. The timing was perfect. And he chose politics instead. If growth slows from here, Gold help him. Because history won’t.


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer




The Economic Data calendar for the week of the 23 of September through the 27th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



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Takeaway: India may finally be starting on the long road to correcting its structural imbalances.



  • Aided by new RBI governor Dr. Raghuram Rajan’s appropriately hawkish monetary policy, we think the Indian economy may finally be starting on the long road to correcting its structural imbalances.
  • That said, however, any meaningful adjustments will require the Indian economy to “take its medicine” by undergoing short-term pain for the sake of long-term gain.
  • Perhaps most importantly, it is still unclear how much of that “prescription” will be tolerated ahead of next year’s parliamentary election.
  • A more-traditional hawkish monetary policy mix should provide some support for the rupee over the intermediate-term TREND, though that same mix should weigh on India’s equity and debt capital markets over a similar time frame.


Overnight, new RBI governor Dr. Raghuram Rajan hiked rates. That’s a big deal in India, where, despite the country having a near world-beating inflation problem over that time frame (YoY WPI has averaged +7.1% since 3Q11), the RBI has not hiked either of its benchmark policy rates until now. In fact, those rates have been cut by a cumulative -125bps since peaking in OCT ’11.




Bravo, Dr. Rajan. Bravo.


On the move, both the repo and reverse repo rates were increased +25bps to 7.5% and 6.5%, respectively. The cash reserve ratio was held flat at 4%. Inclusive of today’s price action, 1Y OIS are now trading at a 135bps premium to the repo rate; that premium has shrunk -131bps MoM amid pro-EM FX Global Macro beta, but is still up +113bps on a 3M basis.  




Interestingly, despite the INR being down -13.4% vs. the USD over the past 6M, not one of the 36 analysts surveyed by Bloomberg expected Dr. Rajan to hike rates.




Perhaps Bloomberg should’ve surveyed us; it would appear that we were the only firm openly expecting Dr. Rajan to come out of the box in a hawkish manner (refer to our AUG 6 note titled, “WILL THE INDIAN RUPEE MEET ITS [NEW] MAKER?” for more details).


Even more interestingly, by cutting the marginal standing facility and bank rates by -75bps each (both are now at 9.5%) and lowering the daily balance requirement for the cash reserve ratio to 95% from 99%,  Dr. Rajan started to unwind former RBI Governor Duvvuri Subbarao’s previous “extraordinary” measures designed to curb volatility in the rupee.


It is our view that these incremental measures should be taken as a message to market participants that Dr. Rajan won’t try to be as cute as his predecessor when it comes to defending India’s currency. Thus far, Dr. Rajan has introduced himself to market participants as a monetary traditionalist who favors using blunt policy tools to get the job done.


The one caveat being that on SEP 4 Dr. Rajan offered concessional swaps for Indian banks’ FX deposits, with the intent of boosting the country’s FX reserves. That being said, the rupee was still in the process of making all-time lower-lows back then, so we’ll write that off as a one-time deal.


Let us refocus our attention back to his current job, which he himself has defined as needing to tackle India’s inflation problem [via promoting currency strength and tightening domestic monetary conditions]. Per this morning’s commentary:


  • “We want to fight against inflation and we’ll bring it down. The goal is to slow wholesale price inflation to below 5%.”
  • “Today’s steps start the process of a cautious unwinding of exceptional measures taken since July to reduce exchange rate volatility.”
  • “They also intend to address inflation risks to mitigate pressure on the rupee and create conditions for revitalizing expansion.”


Amalgamating all of these signals leads us to conclude what we had already concluded six weeks ago – Dr. Rajan will be more hawkish than his predecessor Duvvuri Subbarao, who was obsessively focused on stimulating economic growth to a fault (something we have written about many times in our bearish work on India over the years).


So what does this all mean to India’s GROWTH/INFLATION/POLICY dynamics?


It’s safe to conclude that India is likely to finish the year mired in Quad #3 (i.e. Growth Slowing as Inflation Accelerates), as reported inflation plays catch-up to recent currency weakness. Moreover, too much foreign capital has been withdrawn from the Indian economy in recent months (-$1.9B out of India’s equity market and another -$9.1B out of India’s credit market since MAY) for us to expect anything but sequential deterioration in real GDP growth throughout 2H13.






The aforementioned outflows have certainly weighed on India’s local currency fixed income markets (2Y Yields +21bps DoD and +126bps on a 3M basis; 10Y Yields are up +37bps DoD and +118bps on a 3M basis) and we anticipate Dr. Rajan will continue to perpetuate selling pressure via continued hawkishness over the intermediate term.






India’s equity market is tougher call from here.


We could see a scenario whereby the market “pulls and Indonesia” and starts to celebrate rate hikes as a newfound commitment to economic sobriety; recall that India’s twin deficits (current account and fiscal balances) are in the double digits on a combined basis. If India can shore up its current account imbalance by tightening the screws on domestic demand, we would view that as positive for India’s long-term economic outlook.




On the flip side, it’s tough for us to get to a scenario whereby we see commensurate fiscal tightening out of Indian parliament – especially not with a parliamentary election that needs to be called by MAY ’14. If anything, Prime Minster Singh will be under political pressure to continue “buying votes” like he did back in AUG with his food distribution bill, which plans to spend 1.25T INR per annum (equivalent to 7.5% of budgeted expenditures for FY14) on delivering grain to the Indian poor (i.e. two-thirds of the population).


Rather than get too cute with making a low-conviction bull call here on Indian equities, we’ll just stick to our process and anticipate continued weakness over the intermediate term (a couple of quarters in Quad #3 tends to be particularly bearish for a country’s equity market). That is in line with the signal the SENSEX Index provided us on today’s rate hike news.




All told, aided by new RBI governor Dr. Raghuram Rajan’s appropriately hawkish monetary policy, we think the Indian economy may finally be starting on the long road to correcting its structural imbalances. That said, however, any meaningful adjustments will require the Indian economy to “take its medicine” by undergoing short-term pain for the sake of long-term gain.


Perhaps most importantly, it is still unclear how much of that “prescription” will be tolerated ahead of next year’s parliamentary election.


Have a great weekend,


Darius Dale

Senior Analyst

Get Out of the Way, Ben

Takeaway: The greatest threat to US growth recovering is the government intervening in the economic cycle.

Editor's note: The brief excerpt below is from Hedgeye CEO Keith McCullough's morning research. For more information about Hedgeye's research products please click here.


Famed investor Warren Buffett told students at Georgetown University yesterday that, “The Fed is the greatest hedge fund in history.” He was trumpeting “how much money” the Fed makes. “It’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”


Isn’t that fantastic?


Get Out of the Way, Ben - Bernanke


One of the greatest financial minds in US history is marketing a political message that is about as anti-Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these “profits” come from?


It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.


The greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that did not coincide with:


1.       Strengthening US Dollar

2.       Rising US Interest Rates


Why doesn’t every discussion about the Fed start and end with that?


Get Out of the Way, Ben - 888





Takeaway: While we believe Merkel will remain Chancellor, it’s unclear who her coalition partners will be.

German Federal elections will be held this Sunday. The race has been a tight one; not only in the last few weeks, but also over the last few months. While we believe that Angela Merkel will remain the Chancellor, with an estimated 30% still undecided, it’s unclear who her coalition partners will be. 




In polling week-over-week, Merkel’s CDU/CSU party has held 40% while her current coalition partners, The Free Democrats (FDP), slipped half a point to 5.5%.  The opposition, led by Peer Steinbrueck’s Social Democrats (SPD), gained 1% on the week to 27%, while its potential coalition partners the Greens lost -2% to 9% and the Left gained half a point to 8.5%.  Other Parties, which include the anti-Euro Alternative for Germany (AfD), gained 1 point to 10%.


The polls equate to a lead of 1% for Merkel’s party with its current FDP coalition partners over the opposition SPD in coalition with the Greens and the Left.  Note that despite slight shifts in the polls, Merkel’s 1% advantage this week is the same as she had a week ago.   (See charts below)


As it relates to Monday’s financial markets, we expect that any coalition government that is formed with Chancellor Merkel’s party will represent a smooth transition to the market. 





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