Monitoring the Battleground States: Advantage Republicans

Conclusion: Given the tightness of national polls it is likely that the 2012 Presidential race occurs in a wider list of battleground states, similar to the 2004 election between Bush and Kerry.  Based on the economic performance of those states, the Republicans currently have a battleground advantage.


As the Presidential election accelerates in 2012, we are going to start closely monitoring the battleground states from an economic perspective to provide insights into the battle for the Presidency.  Battleground, or swing states, are those states in which no candidate, or party, has overwhelming support and thus the states are realistically up for grabs. 


In the electoral-college system, all but two states, Nebraska and Maine, are winner-take-all states.  In Maine and Nebraska, two electoral votes go to the candidate that wins a plurality in the state and then a candidate is allotted one additional electoral vote for each Congressional District in which they receive a plurality.   Maine is considered a Democratic state and has 4 electoral votes and Nebraska is considered a Republican state with 5 electoral votes.


Typically, candidates will limit allocating resources in the states in which they have a limited chance of winning or a very likely chance of winning.  Incremental spending in those states will not help the candidate’s chances of becoming President simply because of the winter-take-all system.  Beyond a simple majority, incremental votes do not help a Presidential candidate.


Professor Joel Bloom, a political scientist from the University of Oregon, has identified three key factors in identifying swing states: the results of previous elections, political party registration numbers, and statewide opinion polls.  For purposes of this analysis, we are going to focus exclusively on the results of previous elections as a gauge for the battleground states in 2012.  As well, given our expectation that the race for Presidency will be close, which is supported by InTrade (Obama is at 51.7%) and most national polls (the generic Republican candidate currently beats Obama), we will use 2004 as the best proxy for battleground states.  In 2004, the Republican candidate won 50.7% of the popular vote versus 48.4% of the popular vote for the Democrat and the states that were decided by margins of 5% are outlined in the table below:


Monitoring the Battleground States: Advantage Republicans - 1


In the table below, we’ve looked at the change in unemployment in these battleground states and also added in Florida, which wasn’t a battleground state in 2004 or 2008, but is likely to emerge as one again in 2012.


Monitoring the Battleground States: Advantage Republicans - 2


As outlined above, based on these key battleground states, unemployment has worsened in seven of them, improved in four of them, and stayed flat in one.  Traditionally, the incumbent gets blamed for the current state of the economy, a point we will touch on in bit more detail, so in this scenario the Republicans have an advantage in seven battleground states.  From an electoral vote perspective, the Democrats have the advantage in states with 54 electoral votes versus 84 for the Republicans.  In a tight national race, 30 electoral votes can obviously be critical when a candidate needs 270 to win.


Professor Bruno Jerome from the University of Paris presented a paper at the American Political Science Association annual meeting in September of 2011 in which he analyzed the impact of state unemployment on state level voting.  Based on his math, which looks at every Presidential election going back to 1952, he concluded the following:


“On average, a 1 point rise in the unemployment rate generates an electoral cost to the incumbent of 0.56% of the votes in a given state.”


Given the tightness of both national and local polls, even a 0.56% shift in the vote based on state level economic factors can be critical in determining the outcome of the election.  In our analysis, this suggests that Wisconsin could go Republican and Pennsylvania narrows to within a percent, so is solidly in play.


Clearly, the economic situation in the battleground states is only one factor in analyzing eventual outcomes for the election, but history suggests a very important factor.  Currently, it is advantage Republicans on this score.


Daryl G. Jones

Director of Research

Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Consumer Staples (XLP), Utilities (XLU) – Short Russell 2000 (IWM)


It’s healthy to see some European and American bank stocks struggle and, at the same time, see the market succeed. It’s about time economies (and their markets) are more about economies that the compensation mechanisms of the few.


Strong/Stable US Dollar = Stronger US Consumption, Confidence, and Employment. It also Deflates The Inflation that strangled Global Growth in 1H of 2011. That’s why I was bearish then and bullish now (from a price). Inflation adjusted growth matters in real-life.


Here are the 3 lines across my risk management model’s durations that currently matter most: 

  1. Immediate-term TRADE overbought = 1302
  2. Immediate-term TRADE support = 1287
  3. Long-term TAIL support = 1267 

While plenty of pundits and their perma-bull theses have changed over the course of the last 12 months, my process has not.


Cheers to a great start to 2012,



Keith R. McCullough
Chief Executive Officer


Bullish TAIL: SP500 Levels, Refreshed - SPX

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@HedgeyeRetail #ICR (Updated)

We have updated this note to better accomodate viewing the larger images- there is no change to the content. 


@HedgeyeRetail was active on the twittersphere last week down in South Beach with notable commentary out of company presentations, management breakouts and Hedgeye sitdowns. Here’s a youtube of the team on Twitter throughout the course of the conference.


Of course, these are teasers for the masses. As Hedgeye clients, you get the full depth of our thought on any and all companies. Please ping us accordingly.


In addition to the @HedgeyeRetail Tweets, we have more detailed notes on many of the presentations and breakouts. We’ve also included a link to Brian’s Fast Money appearance on Wednesday afternoon regarding LIZ.


"Is LIZ the Best Retail Trade Today:"







@HedgeyeRetail #ICR (Updated) - TWEET image 6 



Keith managing risk around one of our high conviction TREND and TAIL longs by selling WMT from the Hedgeye Virtual Portfolio. To put it in his words… “USD down, Oil up, and WMT immediate-term TRADE overbought at a lower-high. McGough remains bullish on WMT's intermediate-term TREND, from a price. KM”

Absolutely no change to our fundamental outlook.




European Banking Monitor

No Positions in Europe 


Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"


If you'd like to receive the work of the Financials team or request a trial please email .


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. The Euribor-OIS spread tightened by 5 bps to 89 bps.


European Banking Monitor - 1 me a



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 ECB said banks deposited €501.9 Billion overnight, a new record high. 


European Banking Monitor - 1 me b



European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 39 of the 40 reference entities. The average tightening was -6.7% and the median tightening was -9.9%.


European Banking Monitor - 1. me c



Security Market Program – The ECB's secondary sovereign bond purchasing program bought €3.766 Billion in the week ended 1/12 versus €1.104 Billion in the week ended 1/6 to take the total program to €217.0 Billion.


European Banking Monitor - 1. me d


Matthew Hedrick

Senior Analyst

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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.