Takeaway: With its recent rate hike, India continues down the path towards much-needed monetary and fiscal policy reform. That’s a good thing.

This note was originally published October 29, 2013 at 15:26 in Macro



  • A continued pursuit of demonstrably tighter monetary policy in India would be positive for the country’s structural GIP outlook in three ways:
    1. Inflation decelerating to levels consistent with its regional/global peers (benchmark WPI has averaged +7.6% since the Congress Party took the helm in mid-2009 vs. a GDP-weighted average of +5.1% YoY for “BRIC” economies since then);
    2. Fiscal policy stability amid lower inflation (i.e. the #1 political issue in India) and a reduction in the fiscal deficit/GDP ratio (5.8% in 2Q13) via lower subsidy expenditures (13.7% of total expenditures); and
    3. Lower domestic demand and higher real interest rates contributing to an improved domestic savings/investment ratio would tighten up the bloated current account deficit (the latest current account deficit/GDP ratio came in at 5.3% for 2Q13).
  • Additionally, India is also developing some noteworthy tailwinds with respect to its intermediate-to-long-term fiscal policy outlook that are likely to make the country’s equity and debt capital markets look increasingly attractive on the long side at the current juncture (CLICK HERE for more details).


In conjunction with its newfound hawkish bias, the RBI hiked its benchmark policy rates today by +25bps, taking the repo rate and reverse repo rate up to 7.75% and 6.75%, respectively. The bank, led by its new governor Raghuram Rajan, also lowered its marginal standing facility rate -25bps to 8.75% (a continued unwind of former governor Subbarao’s INR crisis measures) and held its cash reserve ratio flat at 4%.




Today’s hike was predicted by 32 of 42 analysts surveyed by Bloomberg, a marked shift from Rajan’s first hike roughly 1M ago when we were the only firm on the Street calling for this demonstrable shift to tighter monetary policy in India. Indeed, the Indian rupee has appreciated +2.2% vs. the USD since we began to call for the currency to strengthen amid this drive to combat inflation back on SEP 20. That is the largest gain across the 21 currency markets we actively cover across Asia and Latin America over that time frame.




At the time, we thought investors would penalize India’s equity and debt capital markets for what appeared to be the start of a prolonged series of rate hikes, but with the SENSEX Index up +3.3%, 10Y INR Yields flat and 2Y INR Yields down -44bps since then, it appears investors feel very comfortable looking through this obvious near-term headwind to economic growth with an eye towards an improving structural outlook – a scenario we discussed then, but ultimately failed to sign off on at the time.








Going back to the aforementioned rate hike, accompanying commentary from the Dr. Rajan-led RBI board was undeniably hawkish:


  • “We can’t live with close to double-digit CPI for an extended period of time.”
  • “It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth.”
  • “Wholesale-price inflation is expected to remain higher than current levels through most of the remaining part of the year, with consumer inflation probably remaining around or above 9 percent.”


Indeed, a continued pursuit of demonstrably tighter monetary policy in India would be positive for the country’s structural GIP outlook in three ways:


  1. Inflation decelerating to levels consistent with its regional/global peers (CPI has averaged +9.9% YoY since over the past 3Y vs. a GDP-weighted average of +5.3% YoY for “BRIC” economies over that same duration);
  2. Fiscal policy stability amid lower inflation (i.e. the #1 political issue in India) and a reduction in the fiscal deficit/GDP ratio (5.8% in 2Q13) via lower subsidy expenditures (13.7% of total expenditures); and
  3. Lower domestic demand and higher real interest rates contributing to an improved domestic savings/investment ratio would tighten up the bloated current account deficit (the latest current account deficit/GDP ratio came in at 5.3% for 2Q13).


It’s worth noting that the +90bps premium to the benchmark repo rate is a signal that participants in India’s on-shore swaps market are pricing in the equivalent of 3-4 more +25bps rate hikes over the NTM.








Indeed, this is the three-pronged “turnaround story” we think investors have begun to speculate on recently and, with Global Macro entropy at levels not seen since early 2Q, we continue to think it pays to play the long and short side of EM assets on idiosyncratic country fundamentals in the absence of a clear, co-directional trend in the USD and US interest rates.


On that front, India is also developing some noteworthy tailwinds with respect to its intermediate-to-long-term fiscal policy outlook that are likely to make the country’s equity and debt capital markets look increasingly attractive on the long side at the current juncture (CLICK HERE for more details).


Of course, a confirmed quantitative breakdown in the DXY through its long-term TAIL line of support in conjunction with a breakdown in the UST 10Y Yield through its intermediate-term TREND line of support would make us broadly bullish on emerging market assets, amongst other asset classes (CLICK HERE for more details).






Our central planning overlords at the Fed convene today and tomorrow to determine which asset classes we are allowed to speculate in; we await their commands with baited breath. If the most recent fundamental and quantitative signals (CLICK HERE for more details) are correct, investors will continue getting paid to speculate in emerging market assets with respect to the intermediate-term TREND. In the context of India’s real GDP growth basing here in the fourth quarter, that bodes well for INR denominated assets.




Lastly, the SENSEX Index is within a half-a-percent from its all-time high; we would interpret a close above that price as a quantitative signal that India’s well-documented policy blunders (email us for “the list”) are likely/finally in the rear-view mirror. That would be HUGE for helping India finally tap into its vast growth potential. It’s worth noting that real GDP growth has decelerated to a decade-low of +5% in the most recent fiscal year and even further to +4.4% YoY in 2Q13 (-1.1x standard deviations below the trailing 3Y mean); additionally, today the RBI reduced its FY14 GDP forecast to +5%, which is -50bps below the previous estimate of +5.5%.




Please feel free to ping us with any follow-up questions.


Darius Dale

Associate: Macro Team

$WMT: Made in USA? Kind of.

Takeaway: Hedgeye Retail Sector Head Brian McGough tosses some cold water on Wal-Mart's "Made In USA" initiative.

Hedgeye Retail Sector Head Brian McGough tosses some cold water on Wal-Mart's "Made In USA" initiative.


$WMT: Made in USA? Kind of. - madus


From Women's Wear Daily:

  • "Bill Simon, Wal-Mart’s U.S. president and chief executive officer, revealed at an investment summit here Thursday that three of its suppliers have committed to moving production back to the U.S., or expanding existing capacity, as part of the retail giant’s longer-term commitment to buy $50 billion worth of American-made products over the next 10 years."

Takeaway: We are all about boosting U.S. production. But let's put this news into context. $50 billion over 10-years is likely $1 billion in year one, and $10 billion in year ten. But even if we want to be generous, and call it $5 billion per year, it's still only 1% of the half a trillion worth of product Wal-Mart will sell next year. Bottom line is that this is hardly Wal-Mart going all-out. It's a PR campaign more than anything else.







Macau gross gaming revenues reached 36.477 BN MOP (35.415 BN HKD, 4.568 BN US$), up 31.7% YoY. 



The risks of changing China visa policies and shifting tourism trends should also be taken into account by investors. The biggest unpredictable factor for gambling stocks in Macau is still the Chinese government, and investors seem to be underestimating the risk. 


Signs that Beijing could add restrictions are detectable. The government seems frustrated that Macau hasn't moved beyond gambling to offer leisure and entertainment activities that might appeal to families world-wide, not just hard-core gamblers from China.


One reason Macau casino stocks have thrived this year is what hasn't happened. Even amid an austerity campaign in China, Beijing has made no move to cut off the flow of Chinese gamblers to the city.  But Macau stocks deserve a discount because they effectively operate at the whim of Beijing, which can block the flow of customers at any time.


The peak-time minimum bet at mass-market tables has more than tripled in the past two years, to $125 from $40, much higher than at peers such as Las Vegas ($20), the Philippines ($7) and Singapore ($50).



WYNN's lawsuit against its former director Kazuo Okada was halted for six more months so the U.S. can continue to investigate possible bribery of Philippine officials by the Japanese billionaire.  Nevada state court Judge Judge Elizabeth Gonzalez in Las Vegas granted the Justice Department’s request for a second six-month stay of the civil case so that the government can pursue the criminal probe unhindered.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Get Busy

This note was originally published at 8am on October 18, 2013 for Hedgeye subscribers.

"Get Busy Living or Get Busy Dying"

-Morgan Freeman, Shawshank Redemption


Earlier this week, I raced a 95 year old lady down the Merritt Parkway on my way home from work. 


Well, kinda. 


To review:  while driving north from our new HQ in Stamford, I watched in my rearview mirror as a navy blue Mustang darted back & forth between lanes before pulling up beside me, then speeding ahead. 


After racing to catch-up for a confirmatory, second look…90 is, apparently, the new 25.     


The age was undeniable, but there were no coke bottle glasses, no cautious, granny-fied 3 o’clock- 9 o’clock hand positioning, no squinty eyed lean forward, no Buick or Oldsmobile.


Just a sharp gaze and tangible life energy. 


The experience was a pleasant surprise and a welcomed contrast to the latest, consuming iteration of beltway brinksmanship – which, unsurprisingly, lacked both pleasantness and originality. 


Back to the Global Macro Grind…..


I don’t know granny’s life recipe for sustained physiological alacrity – but the ‘pleasant surprise’ of her apparent vitality dovetails nicely with one of our top 3 Macro Investment themes for 4Q:  #GetActive


Without giving away the full, institutional macro alpha thunder, our call for an increase in active investment management is predicated on a few key points:


1.   Big Government Intervention:  Our fiscal policy creation process remains a circus and the new golden boy in the monetary policy arsenal – the “communication tool” – remains in beta testing and breeding decidedly more market uncertainty than price stability at present.  Collectively, we expect policy intervention to continue to perpetuate Market/Currency/Economic Volatility.  Volatility breeds both opportunity and a heightened probability for an expedited drawdown in equities and …


2.   Active Management outperforms in down markets:  Historically, on average, the HFRX Equity Hedge index outperforms the SPX in down markets and that outperformance increases as the magnitude of negative monthly S&P500 performance increases.  At extremes of negative market performance, the HRFX has outperformed by ~800bps on a monthly basis.  Hedge funds apparently hedge after all.


3.   Sector Picking will Matter:  As the Chart of the Day below illustrates, the variance in sector performance this year is near a historic low Put differently, it hasn’t really mattered what sector you bought  – beta has been the new alpha and simply buying the market was the best allocation decision.  Over the intermediate term, a mean reverting breakout in the variance of sector returns is almost a guarantee.  Consider the performance delta between Financials  and Utilities in the quasi-analogous post-1994 period, after Greenspan began his rate raising campaign.  Financials returned 50%, 32%, and 45% in 1995, 1996, and 1997 respectively.  Utilities returned 25%, 0%, and 18% over that same period.  A 3Y CAGR of 42% for Financials vs 14% for Utes. 


In truth, #GettingActive is really just an investment euphemism for Trading.   


Trading generally gets a bad rap because it doesn’t fit the canonical ‘stocks for the long-term’ dictum, it doesn’t market well and, well, it’s hard – the recent multi-year trend in collective hedge fund benchmark underperformance hasn’t been a siren song for incremental actively managed AUM either. 


Keith has actively managed market risk in the Hedgeye portfolio for 5+ years, actively manages the Hedgeye HFT (High Frequency Tweet) machine and is probably more” active” than constrained in opining on markets, policy and policy makers.


To the latter point, sometimes I think the punditry of the Early Look prose occasionally belies the reality of our risk managed positioning. 


For instance, while we were highlighting an increased likelihood for a policy induced deceleration in domestic growth back on Oct 9th/10th, at the same time, we were taking up both our gross and net long positioning into the back end of the 4% market correction. 


From a process perspective, our conviction level rises and we typically get louder about an idea when both the research (fundamental) view and the quantitative risk management signal are both in agreement. 


But what if there is no fundamental data?


The gov’t shutdown the last two weeks has served as an illustrative example of how our risk management process works in practice – primarily because  there was no incremental fundamental data to inform our marginal macro view,  leaving the risk management signal as our principal signaling mechanism for driving portfolio decisions.


Contrasting yesterday’s price signals and subsequent allocation decisions with those made a week ago exemplifies the process.  


What were the market and price signal dynamics back on Oct 10th and why did we buy the dip:

  1. $USD – V-bottomed off its long-term tail line of support at 79.21
  2. VIX – was breaching its TREND support level of 18.98 on the downside
  3. SPX – recaptured TREND support at 1663
  4. 10Y Treasury – Held TREND support of 2.58%
  5. U.S. Stocks moving towards immediate term oversold, down for 11 of the prior 15 days

With all the price signals in agreement, the highest probability swing was to get longer and play for the 24 handles of immediate term upside. 


Yesterday’s price signals were very similar:

  1. 10Y Treasury – 10Y was back to flirting with a TREND breakdown through 2.58%
  2. $USD – The dollar was moving back towards testing TAIL support at 79.21.

Down Rates + Down Dollar + Rising Policy Uncertainty is not a factor setup we want to be long of over the intermediate term, but we kept the portfolio unchanged at 6 Longs, 3 short into the close. Why?

  1. SPX – higher highs are bullish and equities were not signaling immediate term overbought
  2. VIX – Debt Default fear remained for sale with the VIX continuing in free fall
  3. Squeezage – with  hedge fund short positions as YTD highs there’s room to let the squeeze rally breath a bit.
  4. Hilsenrath’s mid-afternoon proclamation that Oct-Taper is officially a no-go & Bernanke/Yellen risk remains acute juices the immediate term downside risk for both the dollar and interest rates. 

So, we didn’t buy the rip or tighten up net exposure. 


What will we do today?  I don’t know – and that’s largely the point.  As always, we’ll let the market signal tell us which way to lean.


Does timing matter?  Implicit in allocations to active strategies is a belief that it does.


As Keith queried on twitter yesterday afternoon:


“If timing didn't matter, why are you watching Twitter right now?”


Similarly, are markets efficient or irrational and reflexive? 


Fama won the Nobel prize for “proving” the former.  At the same time, Shiller won for proving the latter.  Seems about right. 


Activity/Variety is both the spice of life and nature’s most potent cerebral exfoliant. 


Take a different route to work in the morning, eat dinner with your left hand, simplify a few radical expressions,  invest some incremental capital in the growth inflection happening across the pond, turn down CNBC and turn on #tweetshow today at 3pm.  


Switch it up, Get Busy. 


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.55-2.67%

SPX 1695-1745

VIX 12.61-15.24

USD 79.21-80.31

Euro 1.35-1.37

Pound 1.60-1.62


Enjoy the Weekend. 


Christian B. Drake

Senior Analyst 


Get Busy - Get Active


Get Busy - z. vp 10 18

Ambition and Avarice

“Sir, there are two passions which have a powerful influence on the affairs of men.”

-Benjamin Franklin


And, in case you wondered whether or not your central planning overlords in Washington have yet to eliminate those two passions, they have only amplified them: “These ambitions are ambition and avarice; the love of power and the love of money.”


Franklin went on to add that, “separately each of these has great force in prompting men to action; but when united in view of the same object, they have in many minds the most violent effects. Place before the eyes of such men, a post of honour that shall be at the same time a place of profit, and they will move heaven and earth to obtain it.” (The Liberty Amendments, pg 23)


That’s why we all have no choice other than to Embrace Uncertainty in macro markets. There is nothing normal about a man from an un-elected US post moving your entire risk exposures with a whisper to the Wall Street Journal. Therefore you should not invest “normally.” Either #GetActive and do real-time macro or, as Dan Och recently said, “macro will do you.”


Back to the Global Macro Grind


BREAKING: Budget Deficit In US Narrows To 5 Year Low on Record Revenues –Bloomberg News


Not to be confused with the fear-mongering headlines Bloomberg/CNBC were running about how a US debt “default” could spell the 6th #EOW (end of the world) event of 2013, the fine folks in NYC’s groupthink tank finally nailed it.


Eleven months ago, we got ragingly bullish on the US Dollar because the only 2 factors in the (P) part of (POLICY) in our GIP (Growth, Inflation, Policy) Model @Hedgeye were Dollar Bullish:


1. FISCAL FACTOR: US Deficit/GDP was going to get cut in half to 4% (it was just reported at -4.1%, so we were off by a bit) because A) sequestration is good (spending down) and B) US #GrowthAccelerating would drive the denominator (GDP) up

2. MONETARY FACTOR: US #GrowthAccelerating would surprise those anchoring on last year’s Q412 GDP report of 0.14%, the Fed would fall behind the curve, #RatesRising would surprise to the upside, and tapering expectations would take hold


So easy a hockey head can do it. Then, sadly, the Fed gave into the mega Bond Bull Lobby on September 18th, 2013, smoked the Dollar, took rates back down, and the MONETARY FACTOR for USD Bulls was lost (again).


But the FISCAL FACTOR (which can only be obfuscated by the Fed as opposed to arrested like Bernanke did with USD and Bond Yields) continued along its path of least resistance and US Government Revenues were +15.2% year-over-year in September (not a typo)!


Oh, and the SP500 ripped the front-teeth out of all those #OldMedia mouth-pieces who shorted the October 2013 fear-mongered low about a US default when the US credit position was in its best position in half a decade. #NewAllTimeSPYHighs


And so it begins, after all-time SP500 and Russell2000 highs in October (SPY = +4.5% OCT 2013), it’s November. What in god’s good name are we supposed to do next?


To answer the question in any country, I always go back to the playbook:


  1. USA: FISCAL = hawkish (bullish USD); MONETARY = dovish (bearish USD)
  2. EUROPE: FISCAL = hawkish (bullish Euro); MONETARY = hawkish (bullish Euro)
  3. UK: FISCAL = hawkish (bullish Pound); MONETARY = hawkish (bullish Pound)


And to be clear, when I say hawkish or dovish, I mean what’s happening from a 2nd derivative perspective (i.e. what’s happening on the margin relative to the last 3-6 months).


This is why we’re #EuroBulls (see our Q413 Global Macro Theme deck) relative to being as bullish as we were, literally up until September 18th (shame on you Bernanke), on US growth. Same playbook; different relative pick.


Everything in macro is relative. Every asset allocator has a choice. And when push comes to shove in the coming 3-6 months, what will it be, German stocks or US stocks?


While the Russell2000 dropped -1.9% from its all-time performance chasing high in the last 2-days, German stocks hit a fresh all-time high. Fortunately, Mr. Market keeps score; not you or me. He gets it.


Since I’ve been bearish on Commodities and Fixed Income relative to Equities for the better part of a year now, I consider this shift to European Equities vs US Equities within an asset class that I like. If the Fed leans on the long-end of the curve, you can still be long US Equities, just not the Equities that worked best in 2013. The Growth Style Factor gets repressed by Bernanke’s intervention.


Having had an asset allocation to Commodities of 0% all year (CRB Commodities Index is 19 Commodities and it’s -6.1% YTD, on its YTD lows), getting long Gold for the 1st time in a long time gets interesting here too. I haven’t pulled the trigger yet, but front-running the next Hilsenrath article is a compelling catalyst.


How would that work? On a Friday, Bernanke’s boys float a headline to the WSJ that there won’t be a December taper, the Dollar gets slammed, Rates fall, and Gold rips. Oh yes, ambition and avarice matters in the land of the conflicted and compromised. And we aren’t yet dumb enough to not front-run proactively predictable behavior.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.48-2.60%



USD 79.21-80.35

Euro 1.35-1.37

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ambition and Avarice - Chart of the Day


Ambition and Avarice - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.