Keith added Nike to the virtual portfolio again. Zero change to our fundamental view. All that's changed is the price.
Conclusion: The Iowa caucuses begin tonight at 7pm, with results expected by 11pm. If Romney gets over 25%, it could be the knockout blow he needs to win the nomination. Both Paul and Santorum have had a consistent presence in Iowa that could lead to an upside surprise for either.
Today marks the beginning of the Republican nominating process with the Iowa caucuses. They key question to consider heading into today is whether Mitt Romney can land a knock-out blow to his competitors by winning in Iowa with a large enough margin to discourage the other candidates from continuing and their supporters from continuing to fund them.
As background, the Republican caucuses in Iowa are open to any Republican registered in Iowa who will be 18 by the general election on November 6th, 2012. The caucuses begin at 7pm at designated meeting places in Iowa’s 1,774 districts with a recitation of the Pledge of Allegiance and then an election of officers to run the meeting. Representatives from each campaign will then give a brief speech for their candidate. Following the speeches, caucus-goers will write the name of their preferred candidate on a piece of paper and the votes will then be counted. The caucus will then report the results to the room and then by phone to the Iowa Republican party. Typically, the candidates that are more conservative, and those with more passionate supporters, do well in the caucus format.
The success of the Iowa caucuses in predicting the eventual Republican nominee is somewhat mixed. In 1996, Bob Dole defeated Pat Buchanan 26% to 23% and went on to claim the nomination. In 1988, Dole also won Iowa, but 4thplace Iowa finisher, George Bush, went on to win the nomination. Bush was on the other side of the equation in 1980 when he bested his eventual running mate, Ronald Reagan, in Iowa by winning 31.6% versus Reagan’s 29.5%. Most recently, in 2008, Mike Huckabee won Iowa with 34.4% and eventual nominee John McCain finished fourth with 13%. History suggests a cautionary tale as to reading too much into the Iowa caucuses.
Based on the most recent polls, which we’ve highlighted in the table below, the race continues to look very tight.
The takeaway from looking at the five most recent polls is that Romney appears to hold a lead, albeit a very marginal one, over Ron Paul. Interestingly, Rick Santorum is now running a close third. Meanwhile, Newt Gingrich has fallen back to fourth in all of the recent polls, and can likely be expected to fall further by the end of the day as the polling trends are usually a decent leading indicator for actual results.
The ultimate determinant of victory today will be the undecided caucus goers. According to the recent Des Moines register poll, 49% of likely caucus-goers said their mind was still not made up. Reasonably, as my colleague Jeremy Pink noted this morning, face time in Iowa over the last year may turn out to be a key factor to get the vote of the undecided caucus-goers. On that front, of the three front runners Santorum ranks the best with more than 200 events in Iowa over the last year, followed by Paul at more than 100 events, and Romney trailing both with only 19 days of campaign time in Iowa.
On a national level, if there is a story over the past few weeks it is the rapid decline of Newt Gingrich. In the middle of December, after a couple of positive debate appearances, Gingrich was leading all Republican candidates with 35% in the Real Clear Politics poll aggregate. At that point, Romney was a distant second at 22.3%.
In the last couple of weeks, since Gingrich peaked, the Romney camp, or at least PACs advocating for Romney, have dropped the proverbial mitts in terms of going after Gingrich and more broadly defining him to the electorate. The best example is the attached video advertisement that highlights the fact that Gingrich isn’t overly conservative and likely has too much baggage to beat Obama.
In recent days, Gingrich has tried to fight back, most notably by outright calling Romney a liar, but it appears to be too little, too late. On InTrade, Gingrich’s probability of winning in Iowa is at 0.5% and his probability of winning the Republican nomination is at 5%. Conversely, Romney is registering a 52% probability of winning in Iowa and 80.2% of winning the Republican nomination, which is an all-time high for Romney. As we know from watching far too many hockey games, dropping the mitts can be a momentum changer and this seems to be the case in Romney versus Gingrich.
Daryl G. Jones
Director of Research
With both Sales Day and ICR over the next week, we’re likely to see 10-15 preannouncements. Here’s a roadmap as to the companies who have most commonly updated guidance in advance of the event. We’ll be back shortly with our picks and themes headed into the conference.
We’re officially in the “unofficial” earnings season for retailers with both Sales Day and the annual ICR Exchange set to take place over the next several days. History paints an interesting picture (and precedent) of pre-announcements over this two week period. As such, we’ve updated our matrix of companies with a history of pre-announcing at or around the annual pilgrimage to ICR. Those with positive releases are highlighted in green while those with less positive news are highlighted in red. This year should be no different than in years past, where we are likely to see 10-15 companies update guidance in the coming days.
As noted, we’ll be back soon with Part 2 of this analysis, which includes our targeted themes and companies headed into the event.
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Conclusion: Our models and interpretation of the high-frequency data suggests that: a) Asian economic growth is slowing at a slower rate; and b) the bottom is not completely priced in – yet.
In refreshing our country-specific predictive tracking algorithms (PTAs), we’re seeing a consistent pattern emerge as it relates to the slope of economic growth – specifically that economic growth is likely to bottom in 1Q12 for a host of key countries and economic blocs.
On the margin, being closer to the bottom is a bullish factor for global beta insomuch that having a shortened delta between current rates of economic growth and where those rates are likely to end up in the current global economic cycle is a variant setup to the one we had in JAN ’11 when we made an explicit call for Slowing Global Growth.
Make no mistake about it – global growth is still slowing. What we are trying to say is that: a) the bottom is in sight for a few key countries; and b) slowing at a slower rate can be a bullish factor in that it is a leading indicator for the turn. This is a key upside risk to consider in the context of depressed consensus sentiment surrounding the 2012 economic outlook as well as the positive effect on real-adjusted rates of growth stemming from further strength in King Dollar and a further Deflating of the Inflation in the commodity complex:
Of course, the latter point continues to hinge on the Bernanke/Dudley/Evans trio remaining on the sidelines and out of the way of the U.S./global economy. Refer to this morning's Early Look for further details.
Turning specifically to Asia, we’re seeing some supportive DEC PMI readings out of Asia, headlined by sequential gains in Chinese, Japanese, and Indian manufacturing to 50.3, 50.2, and 54.2, respectively. These coincident-to-leading figures are supportive of the aforementioned top-down takeaways from our PTA readings. This is in contrast to some important, but lagging, indicators such as Singapore’s recent 4Q11 real GDP release: +3.6% YoY vs. +5.9% prior; -4.9% QoQ SAAR vs. +1.5% prior.
Moreover, while the sample is not fully robust (we’re still waiting for Hong Kong manufacturing, India services, Singapore manufacturing, and Australia services to be released in the next 24-48 hours), the initial read-through from the first batch of DEC PMI data is that Asian economic growth in DEC was better, on the margin, than in NOV.
On the heels of this data and ahead of further key data points throughout the week, we’re seeing a few key Asian equity markets break out on our immediate-term TRADE duration – namely China, Hong Kong, and South Korea. We would expect Japan to follow suit, having been closed since 12/30. India remains an outlier, still bearish TRADE and bearish TREND. As the charts below suggest, none of these key Asian equity markets are bullish on our TREND duration, suggesting to us that we’re not out of the woods yet from an intermediate-term downside risk perspective. Keep those lines front and center in your notebooks to gauge for any consequential follow-through in Asia from today’s very green start to the New Year in U.S. equities.
All told, our models and interpretation of the high-frequency data suggests that: a) Asian economic growth is slowing at a slower rate; and b) the bottom is not completely priced in – yet. Stay tuned for any breakouts and/or failures at [nearby] consequential levels as determined by our quantitative models. Having enough patience the resist the Old Wall St. urge to identify oneself as bullish or bearish for the year in JAN is likely to prove to be the winning strategy going forward.
POSITION: Long Consumer Discretionary (XLY)
For the 2nd time in the last 3 months, the SP500 is making a valiant effort to close above my long-term TAIL line of 1268. The last time this happened, I shorted the SPY (October 28th). This time I’m not.
Everything that really matters in our Macro Model occurs on the margin. And, on the margin, the high-frequency data points out of the 3 major regions (Asia, Europe, USA) are more bullish today than they were in October. In December, Asian Growth appears to have slowed at a slower rate; European monthly data was better than toxic; and the USA’s confidence/employment data is being empowered by a Strong Dollar.
Across all 3 durations in our risk management model, here are the lines that matter most:
To be clear, this Bullish Formation (bullish TRADE/TREND/TAIL) can turn bearish (on a drop back below 1258) as fast as it turned bullish. But until that happens, the market’s last price is the right price to manage your risk around.
If it doesn’t happen, I’ll keep sending emails titled Bullish TAIL.
Keith R. McCullough
Chief Executive Officer
Positions in Europe: Short France (EWQ)
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".
We’d note that the TED spread declined by one basis point (57.1 bps) vs. last week's value of 58.1 bps, however we're hesitant to read much into this as it is essentially unchanged and reflected a quiet week. Euribor/OIS showed similar trends with that metric coming in at 97.4 bps this week vs. 97.3 bps last week.
The most current data from the ECB’s SMP shows €19 MM in secondary sovereign bond buying in the week ended 12/23, the smallest amount in nearly five months since the ECB resumed buying in early August. In the week ended 12/16, the ECB bought €3.361B. We continue to maintain that while the SMP and the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets. Italian 10YR yields, which reached 6.95% today, are but one indicator of this opinion.
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by less than 1 bp to 97 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding. The Liquidity Recourse hit a new all time high on Tuesday but has since fallen.
European Financials CDS Monitor – Bank swaps were wider in Europe last week for 30 of the 40 reference entities. The average widening was 0.4% and the median widening was 1.4%.
Security Market Program – The ECB's secondary sovereign bond purchasing program bought €19 MM in the week ended 12/23 vs €3.361 Billion in the week prior to take the total program to €211.0 Billion. No data has been released for the week ended 12/30.