Mon, 26th June 2017

Anirudh Sethi Report


Archives of “headwinds” Tag

GS Puts An INR Tgt of Rs 72 By Mar2014, GDP at 4 per cent

We are cutting our growth forecasts for India and most of Southeast Asia, reflecting more difficult external funding conditions for the region as markets increasingly anticipate US Fed “tapering” and eventual exit from unconventional monetary policies. The largest downward revisions are in India, followed by Indonesia, then Thailand and Malaysia. This reflects the principle that countries with larger macro imbalances (particularly external deficits) have faced greater financing pressures and consequently more growth headwinds.

In India, we have cut our FY14 real GDP growth forecast to 4.0%, from 6.0% previously, and our FY15 forecast to 5.4%, from 6.8% previously. Inflation is likely to be temporarily higher given the effects of a weaker currency on domestic prices. We expect the rupee to reach 72 per US dollar in 6 months’ time, recovering to 70 over a 12-month horizon. Read More 

IBM, Intel, eBay All Miss Top-Line Estimates.After Hrs IBM up 2.57% ,Intel down 3.52%,eBay down 6%

Those who have been following the ongoing “revenue recession” will hardly be surprised that in the trifecta of major corporate earnings releases hitting the tape after the close, there were precisely zero revenue beats. To wit:

  • INTC: Revenue misses $12.81bn, Exp. $12.89 bn, cuts guidance.
  • EBAY: Revenue misses $3.88bn, Exp. $3.89bn, sees earnings and revenue on lower end of guidance.
  • IBM: Revenue misses $24.92 bn vs $25.34 bn; But since this is the largest component of the DJIA, leaving it there may lead to unpleasant consequences for tomorrow’s Dow, the company had to inject a mega dose of hopium and boosted its forecast.

Since EPS is the most easily fudgable number in existence (just look at BAC’s “non MTM” EPS today), all companies beat on the bottom line. Without looking we will assume that at least 2 out of the 3 are trading higher after hours.  And if not, all the three companies need to do to make the algos forget about the top-line non-growth reality is take a page from the YHOO book, hold a very “edgy” video conference call, and see their stocks up 10% tomorrow.

Of course, everyone will ignore that the relentless decline in revenues is merely a function of depressed CapEx spending, a tapped out consumer, a crash in EM demand, and major FX headwinds, and blame it all on the [hot|cold] weather.

In the meantime, look for FASB petitions to make EPS equal to revenues as quite soon companies will run out of above the line items to fudge.

Emerging Market -Fundamental Headwinds

EM countries are facing serious growth headwinds that favor more monetary easing ahead. Fortunately, most countries are experiencing disinflation, and that should allow for more rate cuts in the coming months. Hungary, Israel, and Thailand all cut rates last week. The one glaring exception was Brazil, where the central bank hiked last week by a larger than expected 50 bp. 
This week, Poland is expected to cut rates again while Mexico is seen on hold for now. Most EM currencies remain under pressure. With the pace no longer measured and controlled, we believe policymakers are starting to think about intervention to prevent excessive currency weakness. We already had two interventions Friday, with one verbal (Turkey) and one actual (Brazil). More are likely to follow if disorderly conditions persist.
The Turkish government’s poor response to protests over a local development project that would have uprooted dozens of trees needlessly aggravated its political situation. This seemed to be last straw of a number of simmering grievances, including developmental projects that rode roughshod over local views, new restrictions on the consumption and sale of alcohol, and the government’s controversial support for opposition groups in Syria.  Read More 

Rand hits four-year low as investors flee

The South African rand has emerged as the one of the biggest casualties of the fall in commodity prices and the strength of the US dollar, as investors sent the currency to its weakest level in more than four years.

South Africa’s currency fell nearly 2 per cent against the US dollar to hit its lowest level since the bottom of the global equity market in March 2009, after the economy expanded at a slower rate in the first three months of the year.

Investors sold the rand after figures showed the South African economy grew just 0.9 per cent in the first quarter from the previous quarter, down from expectations of a 1.6 per cent expansion. The dollar hit R9.786 after the data were released. Read More 

Emerging Market-An Update ,Yes India too

EM countries are facing serious growth headwinds that favor more monetary easing ahead. Hungary and Israel have already cut rates this week, while Thailand and Colombia are likely to ease later this week. The one glaring exception is Brazil, where the central bank is expected to hike rates tomorrow. Most EM currencies remain under pressure. As long as the pace is measured and controlled, we believe policymakers are quite happy to see currency weakness.
Bank of Thailand meets Wednesday, and is expected to cut rates 25 bp to 2.5%. If so, this would be the first cut since its 25 bp move back in October 2012. Resumption of the easing cycle is long overdue, but it seems that policymakers wanted to see how the economy fared after the distortions from the flooding played out. So far, it hasn’t been very uplifting, with consumption and investment slowing sharply in Q1 and IP actually contracting -3.8% y/y in April. Officials have cut export growth forecasts recently. Inflation continues to ease, with headline at a cycle low 2.4% y/y in April. More importantly, targeted core inflation is at its cycle low of 1.2% y/y, very near the bottom of the 0.5-3.0% target range. Officials are also signaling greater willingness to combat baht strength, and a rate cut will help here. USD/THB is trying to break above the 30 area, and a clean break would target 30.50 and then 31.00.

Brazil central bank meets Wednesday, and consensus is a 25 bp hike to 7.75%. Brazil will also report May IGP-M wholesale inflation and Q1 GDP on Wednesday, followed by April budget data on Friday. Consensus for GDP growth is a pick up to 2.3% y/y from 1.4% y/y in Q4. Fiscal policy has been loosened even as inflation remains at the top of the 2.5-6.5% target range. This has fed into some calls for a 50 bp hike this week, including us. USD/BRL traded at a new high for the year above 2.06 today, and we do not think policymakers are unhappy with this bout of currency weakness. So far, the central bank has not come in with swaps to protect the 1.95-2.05 range, suggesting that it may not be in effect if the range is broken due to widespread dollar gains.

China factory output hits seven-month low

 China’s factory activity shrank for the first time in seven months in May as new orders fell, a preliminary survey of purchasing managers showed, adding to concerns that a recovery in the world’s second-largest economy is sputtering.

The flash HSBC Purchasing Managers’ Index for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first time since October. The final HSBC PMI stood at 50.4 in April.

A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting China’s domestic economy is not strong enough to offset soft external demand. Read More 

Record stampede by the dumbest money in gold: GLD holdings plunge

Gold has faced stiff headwinds lately as investors abandon alternative investments to chase record-high stock markets.  Probably the most significant has been the major selling hammering the flagship GLD gold ETF.  It has suffered such intense differential selling pressure that its custodians have been forced to dump enormous quantities of physical gold.  What are the implications of this flood of new supply?

 The amount of gold bullion GLD has hemorrhaged recently is amazing.  To put it into perspective, earlier this week the rumor that embattled Cyprus may be forced to sell its official gold reserves made news.  The Cypriot government owns 13.9 metric tons of gold.  But on a single trading day alone in February’s gold capitulation, GLD had to sell 20.8 tonnes!  The supply recently added by GLD dwarfs everything else.

 Why is GLD dumping gold so aggressively?  While silly conspiracy theories abound as always in the gold world, the reality is far less provocative.  GLD’s mission is simply to track the price of gold.  The World Gold Council (which is funded by leading gold miners) created this gold investment vehicle in November 2004 to offer stock investors an easy, cheap, and efficient way to obtain gold exposure in their portfolios.

 The gold miners created a direct conduit for the vast pools of stock-market capital to chase gold.  The only way for GLD to fulfill its mission of tracking gold is for this ETF to shunt excess GLD-share demand and supply into underlying physical gold bullion itself.  This capital sloshing into and out of gold via GLD has naturally had a massive impact on global gold prices.  And lately gold has suffered a major GLD exodus.

 During times like 2009 when gold grows popular among investors, GLD shares are bought up far faster than gold itself is rallying.  This excess, or differential, GLD demand would quickly force this ETF to decouple from the metal to the upside if not equalized into physical gold.  So GLD’s custodians sop it up by issuing new GLD shares to meet demand.  They then use the proceeds to buy more gold bullion

But when gold is falling out of favor like now, capital flows reverse.  GLD shares are dumped at a quicker pace than gold’s own selloff.  This differential selling pressure creates an excess supply of GLD shares.  This ETF would decouple from gold to the downside if this wasn’t equalized into the metal.  So GLD is forced to buy up this excess supply.  It raises the cash to do this by selling some of its gold bullion. Read More 

Oracle Loses 2013 Gains Following Top-To-Bottom Losses, Guides Lower



How quickly the mighty can fall. Once again, a leading market bellweather for how awesome everything is has missed. Missed Top-line; missed bottom-line; guided top-line lower; guided bottom-line lower. It seems, surprise surprise, currency headwinds are to blame for some of the damage.

  • *ORACLE 3Q NON-GAAP REV. $8.97B, EST. $9.37B


SocGen: This Will Be A Breakout Year For The US Economy, And A Watershed

Analysts at French bank Societe Generale have a big report out titled The Return Of Yield: Preparing For Rising Long Term Rates.

 The theme is very great rotation-y in that they argue that the economy is turning the corner, and interest rates are about to rise.

Their language is strong and dramatic. A watershed moment for the US economy is at hand, and the risk are that it will happen sooner rather than later. Read More 

Asset quality pressure to persist for Indian banks in 2013: S&P

The global rating agency Standard and Poor’s today said the factors constraining the asset quality of banks in Asia Pacific region including India will persist in 2013.

The region’s economy is likely to show a moderate recovery in 2013 after a sharp drop in growth in 2012, but some headwinds in the global economy, such as negative GDP growth in the eurozone, will continue to weigh on growth in Asia-Pacific.

Some of the more debt-laden corporate and household sectors in the region remain susceptible to external shocks, the report said. Outlook on ratings on half of the banks in Japan and all the banks in India are negative, reflecting negative outlook on these sovereign ratings, S&P said.

The other sovereign rating agencies in the region have stable outlooks. Read More