Takeaway: The FY15 budget and out-year fiscal policy guidance are in line with the structural GIP improvement we’ve been calling for; buy the dip(s).

Newsflash to all Keynesians, monetarists, neo-monetarists and any other Ivory Tower economics gangs that I’m not yet familiar with: you don’t have to burn your currency at the stake for “exports” in order to generate economic and financial market prosperity (you actually can’t – at least not on a sustainable basis).


If you haven’t yet learned anything from the 2013-14 UK experience, you’re getting another opportunity to witness what sound monetary and fiscal policy can do for a country in present-day India. Specifically in the UK, real GDP growth accelerated +280bps or +1400% to +3% YoY from EOY ’12 through 1Q14; the FTSE All-Shares Index appreciated +15.2% in conjunction with a +5.3% appreciation in the GBP/USD exchange rate on David Cameron’s austerity and Mark Carney’s regime change at the BOE.


Looking to India, today new finance minister Arun Jaitley introduced the FY15 budget and out-year fiscal policy guidance and both were in line with recent, irrational fears of fiscal consolidation. Specifically, Modi’s new finance chief is maintaining the existing target of 4.1% for the FY15 deficit/GDP ratio – a seven year low – while pledging to reduce that ratio to 3.6% in FY16 and 3% in FY17.


Underneath the hood, both the guidance and commentary were quite hawkish as well:


  • “We can’t spend beyond our needs. We can’t leave debt and liability behind for our future generation.” – Arun Jaitley
  • “We are committed to providing a stable and predictable tax regime which will be investor friendly and spur growth,” said Jaitley. He also stated that he’d decide on a much-needed goods and services tax (GST) by year’s end. That, coupled with his pledge to limit retroactive tax demands on businesses, should actually help increase the nation’s tax take, at the margins, by promoting marginal capital formation and FDI. With respect to promoting the latter, we’re pleased to see that he lifted the FDI limits for the defense and insurance sectors to 49% from 26% currently.
  • Much to the chagrin of gold bulls, Jaitley also left import taxes on gold unchanged after hiking them from 2% to 10% over the past two years, while also mandating that 20% of imports be re-exported. The associated restrictions on gold imports help slash India’s current account deficit by more than half to $32B last fiscal year. The government is expecting a further decline in gold purchases in FY15 to 650 metric tons from 847 metric tons in FY14.
  • Perhaps most importantly, Jaitley also stated that the India’s new fiscal policy roadmap is “only the beginning of a journey” towards reviving India’s downtrodden economy (e.g. India’s latest real GDP growth rate of +4.6% YoY is in the bottom decile of all readings over the trailing ten years). He cautioned investors that it would be “several years” before growth would get back up to the 7-8% figures India had been putting up consistently.


The latter catalyst is a clear signal that the Modi regime is “in it to win it” for the long haul, opting to put the economy on a sustainable growth path rather than trying to jump-start the ailing economy in an inflationary manner – something we’d expect any long-term investor worth his/her shirt to adore. This is in stark contrast to the tactics of the previous administration led by the Monmohan Singh of the Congress Party.


While it will be somewhat difficult for India to meet the FY15 budget guidance given that 46% of the deficit target has been achieved through only the first two months of the fiscal year, we like that Jaitley is not relying on overly-optimistic growth forecasts to get the job done. In fact, he openly criticized the previous finance minister, Panaliappan Chidambaram for assuming pollyannaish revenue growth amid aggressive GDP growth forecasts, while consistently understating and deferring subsidy expenditures, which have grown fivefold over the past 10Y and now account for 16% of total expenditures.


All told, this the kind of structural improvement in India’s GIP fundamentals we’ve been calling for since last OCT and is in line with what Dr. Rajan has been promoting as governor of the RBI. On that front, “Dr. Raj” was out this morning reiterating his EOY ’14 CPI target and his previous guidance that controlling inflation is paramount for Indian growth and that the RBI and new administration are working in conjunction on that task.


Click on the following hyperlinks to review the aforementioned thesis, which was out in front of a +31.4% gain in the WisdomTree India Earnings Fund ETF (EPI) since then. That performance compares to a sample mean of only +3.4% across the 24 country level ETFs we track in the EM space. #Alpha:



As such, we’d expect continued improvement in India’s budget balance and current account balance over the intermediate-to-long term.






Both would be positive for the Indian rupee (and Indian growth via current account financing) – which our FX valuation models see as roughly 6-16% undervalued at current prices.






In five years of writing research notes on India’s budget, this is the first one that has a takeaway that isn’t extremely negative; in fact, it’s overwhelmingly positive. India’s new “management team” is flat-out killing it. We’ve said this before and we’ll say it again: if we could LBO entire countries, India would be our primary acquisition target!


Feel free to ping us with any questions, comments or concerns.






Darius Dale

Associate: Macro Team

Q3 2014 Macro Themes Conference Call: U.S. Consumer Beware

Q3 2014 Macro Themes Conference Call: U.S. Consumer Beware - HE MT 3Q14


Hedgeye's Macro Team will be hosting our highly-anticipated Quarterly Macro Themes conference call tomorrow, July 11th at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities.



  • #Q3Slowing:  Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.  
  • #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish. 
  • #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.



Attendance on this call is limited. Please note if you are not a current subscriber to our Macro research there will be a fee associated with this call. Ping for more information.

PBPB: Staying Short

We added PBPB to the Hedgeye Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, 2014 EPS estimates have been revised down from $0.39 to $0.18 and the stock has acted accordingly (down ~60%).  We remain short PBPB and continue to have concerns with the company’s aggressive growth strategy, particularly in the face of fundamentals that suggest the chain shouldn’t be growing at all.

Potbelly preannounced disappointing 2Q14 results yesterday, including revenues of $83.6m ($86.7m est.) and adjusted EPS of $0.06 ($0.12m est.).  In addition, same-store sales declined -1.6%, 240 bps below consensus estimates, and traffic declined for a sixth consecutive quarter.  Management guided down full-year adjusted EPS to the $0.18-$0.21 range ($0.34 est.) and full-year same-store sales to flat to negative low-single digits (+0.8% est.). 


Back in November, when we made our original short call, we wrote:


“At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.”


Though this seemed harsh at the time, the company’s results as a public company have given us little reason to retract these words.


Management provided few details, but did note that they are maintaining their guidance for 40-48 new unit openings in 2014 – a foolhardy decision, in our view.  This range implies 12-15% unit growth for the full-year when, in fact, the chain hasn’t justified any form of expansion.  It is likely that we will continue to dislike the company until management pulls their foot off the accelerator.  PBPB currently trades at 50.05x P/E (FY14), a multiple that typically reflects a strong growth company.  Considering declining same-store sales, traffic, margins and a questionable growth strategy, we continue to view the stock as unattractive.


As it stands, we believe FY15 estimates are too aggressive and will be revised down over the coming weeks.  At that time, we will reassess our positioning.


PBPB will hold its 2Q14 earnings call on Tuesday, August 5th, 2014 at 5:00pm EST.


Research Recap:

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worth of the Multiple

Potbelly (PBPB): The Latest Restaurant IPO


 PBPB: Staying Short - chart1


Howard Penney

Managing Director


Fred Masotta


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%

Cartoon of the Day: What's In A Name?



Cartoon of the Day: What's In A Name? - Gold Bond cartoon 07.10.2014


In this case, it’s  two long ideas for investors. 


Russell 2000: Levels Refreshed

Position: 11 Longs, 6 Shorts


Back on 7/1, with the index overbought and the setup for pro-growth exposure at the beginning of July beginning to look a lot like it did back in March, we issued a fresh Sell Signal at 1208 on the Russell. (Selling: Russell Levels, Refreshed)     


After a big drop Monday, the Russell tested its Intermediate-Term TREND line for two sessions before breaking through on the open.  


Looking across both sectors and asset classes, prices are telling a cohesive, slow-growth story:  


  • Bonds bid; yield-spread compression
  • Gold +1% (+1.7% on the week)
  • Consumer Discretionary (-0.6%)
  • Utilities (+0.8%)


REITs and Gold Miners outperforming vs. consumption driven sectors (consumer retail getting crushed) as our cyclical bearish call on U.S. consumption growth continues to unfold in sector divergences.


Tomorrow in our Q3 Macro Themes call (ping for access) we’ll outline our bearish thesis on the U.S. consumer into in the back half of the year. We continue to like Gold, Treasuries, and defensive sectors (XLU, REITs, XLE) in the face of further #Dollar Devaluation crushing already thin consumer margins. #Q3Slowing will be our first theme in the deck on tomorrow’s call.


Our core risk management levels on the RTY, with their respective durations, are as follows: 

  1. Intermediate-Term TREND Resistance = 1173
  2. Immediate-Term TRADE Oversold = 1154  

In other words, after an expedited -4% slide from the 1208 overbought signal, we got most of the correction we we’re looking for.  From here, we’ll remain better sellers of consumer centric, small-cap growth style factors on strength. 


Russell 2000: Levels Refreshed - Russell Levels 07.10.14

VIDEO: McCullough Explains His Caution to Fox Business' Maria Bartiromo

Hedgeye Risk Management CEO Keith McCullough sat down with Fox Business’ Maria Bartiromo for the hour on “Opening Bell” this morning and explained why he’s cautious on the markets, his concerns about stagflation, and why he continues to like gold.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.