Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Why We Removed BofA From Our Best Ideas List (Plus 3 New Ideas) | $BAC $COF $OZM $LM
Hedgeye Financials co-heads Josh Steiner and Jonathan Castelyn discuss why they took Bank of America off their Best Ideas list on Thursday and offer up three other long ideas.
Q&A: McCullough Answers Questions on Gas Prices and the Fed
Hedgeye CEO Keith McCullough answers two critical questions from institutional subscribers.
McCullough: The Return of Deflation?
Hedgeye CEO Keith McCullough explains during Thursday’s institutional call why we might be heading into Quadrant 4 of his model. That’s when both growth and inflation slow. Here’s how to position yourself.
On the spectrum of dovish vs. hawkish (versus expectations), this Fed statement was as dovish as it gets says CEO Keith McCullough.
Angels & Demons
47% of Nasdaq stocks and 41% of stocks in the Russell 2000 are crashing from their 12-month peak. The long bond? It's up +12% YTD.
In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.
If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.
Has Central Planning Reached Its Crescendo?
Cracks Remain Across Europe
As the ugly equation of declining growth + high unemployment + low and deflating inflation comes home to roost, the ECB’s newest response is to lever up its balance sheet (ECB President Mario Draghi has indicated the willingness to increase it by €1Trillion) and extend QE as the “elixir” to inflect weak and declining fundamentals across the region.
On Monday, we asked our viewers about the significance of the Alibaba IPO .
On Tuesday, as the Fed kicked off a two-day meeting, we asked our viewers about their expectations from that meeting. Here's what they told us.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Takeaway: Indian officials continue to enact policies that are structurally positive for the country’s GIP fundamentals.
India (EPI) Is Up +31% YTD vs. Only +8.7% For the SPY… For the Right Reasons
As you are probably well aware, we LOVE Indian equities. Per our July 7th note titled, #WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES:
“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!”
It should be noted that we turned bullish on India a full five months before we turned broadly positive on emerging markets (after having authored the bearish thesis in early 2013) because we were fortunate enough to anticipate India would begin to showcase the two things that’d make us bullish on any economy:
In the prose below, we highlight the key initiatives Indian policymakers have introduced recently that are in support of the aforementioned catalysts.
Secular Tailwind: Sustainable Monetary & Fiscal Policy
The seed for our bullish bias on Indian equities was planted back in September of last year when new RBI Governor Raghuram Rajan hiked interest rates. Since then, the RBI has hiked its benchmark repo and reverse repo rates a cumulative +50bps, which has aided a +10.8% recovery in the Indian rupee off its all-time low of 68.82 per USD.
In addition to hiking rates, “Dr. Raj” has introduced a number of supportive measures on the guidance and regulatory front that have been profoundly helpful in assuring international investors of the safety and sustainability of Indian financial assets:
Not surprisingly, consensus expectations for Indian inflation have been steadily falling over the past few months amid such policies:
Secular Tailwind: Investor-Friendly Regulations
Not to be outdone, recently elected Prime Minister Narendra Modi has been busy working deals and cutting red tape in an effort to make good on his plan to hit $1T in investment by 2017. Such efforts have helped perpetuate a record $18.7B inflow into Indian bonds this year, after an unprecedented $8B outflow in 2013.
The latest news on this front comes in the form of $53B in loans and investment pledges from China and Japan this month. Specifically, Chinese Premier Xi Jinping has just pledged $20B in investment over the next five years to help India narrow its largest trade deficit with any single country ($34.4B on imports of Chinese heavy machinery, telecom equipment and durable goods alone as of 2013). Japanese prime minister Shinzo Abe also promised $33B in loans and investment earlier this month – investments that are sure to be part of the GPIF asset allocation overhaul, which is coming down the pike in Japan.
Securing pledges for investment is one thing; actually putting the money to work has been and continues to be a decidedly different activity in India given the country’s well-documented issues with bloated bureaucracy and corruption.
For example, former Prime Minister Monmohan Singh actually had to form a committee in June of last year to help unclog 463 blocked investments totaling some 22T INR ($362B). Since then, the committee – officially dubbed the Project Monitoring Group – has approved up 176 investments worth 6.5T INR, but only 60 of those have actually begun construction, effectively highlighting India’s ongoing struggle with bureaucracy.
Corruption is not exactly a non-issue either. Per the World Economic Forum’s 2013-14 Global Competitiveness Report, “inefficient government bureaucracy” and “corruption” are the #2 and #3 most frequently cited responses in response to the “most problematic factors for doing business” prompt at 17.5% and 17.3%, respectively:
Not surprisingly, India ranks rather poorly in key fixed investment-related categories such as (rank of 148 economies):
In light of this, we are extremely encouraged to see Prime Minster Modi aggressively seek to cut red tape and promote foreign investment. Under his stewardship, the Project Monitoring Group has accelerated its efforts to unclog India’s investment pipeline. Per PMG head Anil Swarup:
“The pace at which things are happening is faster than what we saw in the past. In the previous government, our job was just to see that the clearances would happen and we would assume that it was translating to work on the ground. The present government has asked us to do the leg-work and make sure that it is.”
While just a start, efforts like this are in line with his decision to raise foreign investment caps on defense and railways and we’re excited to see that Modi is living up to his reputation as a pro-business, pro-growth leader during the early days of his administration. Moreover, we anticipate that such deregulatory efforts are likely to continue.
Not surprisingly, consensus expectations for Indian growth have been steadily trending higher over the past few months amid such policies:
India Has Cyclical Tailwinds As Well
Generally speaking in emerging market investing, “reform” is a buzzword that perpetuates capital inflows, which is exactly what we’ve seen in India over the past year or so. Specifically, outstanding foreign investment in Indian equities has increased +9.7% in the YTD to $160B, while outstanding foreign investment in Indian debt capital markets has increased +10% in the YTD to $44.4B.
With the tailwind of “reform” remaining at our backs, we are excited to notify you that the Indian economy is likely headed into Quad #1 on our GIP model in the coming quarter. Easy growth compares, difficult CPI compares and annualized currency strength all contribute to this forecast.
This would be a inflection from the 3rd quarter slowdown we called for back in May when we booked what effectively equates to a sizeable gain (we don’t run money) in the WisdomTree India Earnings Fund (EPI) ETF: +21.6% vs. a +4.6% gain for the MSCI All-Country World Index. Since then, Indian growth has taken a hit:
Investment Conclusion: Remain Overweight Indian Equities
Please note that we rotated back into India on June 3rd, post the election consternation (or lack thereof); the EPI has appreciated +2.6% since then, besting the MSCI All-Country World Index’s +1.1% advance by 150bps.
All told, Indian officials continue to enact policies that are structurally positive for the country’s GIP fundamentals. In the context of these secular tailwinds and cyclical ones as well, we think India (EPI) will continue to deliver investors a positive absolute return over the intermediate-to-long term.
Indeed, the EPI poised to finally break out of the $22-$23.50 trading range it has traversed since June amid the aforementioned slowdown in economic growth.
India remains our favorite way to play the long side of EM equity exposure – an asset class that both our Tactical Asset Class Rotation Model (TACRM) and global GIP fundamental analysis is signaling as having legs to the upside.
Have yourself a fantastic weekend and Go Seahawks!
Associate: Macro Team
Takeaway: It's been a big year for the "Morals Clause" in athlete endorsements.
This year is definitely setting a record for the number of athlete endorsements being pulled due to violation of the 'Morals Clause.' This is basically the brand's Get Out of Jail Free card. In some instances (like with Tiger Woods or Kobe Bryant) the brands will simply renegotiate the deals and make payout based upon winning percentage, on-field performance, or dollars associated with a specific product line.
Bottom line: The industry has come a long way since 1994 when Nike not only stuck by disgraced figure skater Tonya Harding after her boyfriend bashed Nancy Kerrigan's kneecaps, but also paid all of her legal bills.
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.