“People can forsee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”
In life generally and life as stock market operators in particular, our biggest enemy is often ourselves. As humans, we have mental biases. As much as we do to train ourselves out of them, they still broadly exist. In global macro analysis, an important area in which we see biases manifest themselves is political analysis. Particularly in the United States, people are tied to a political party, so have a difficult time seeing the world outside of that specific lens.
Stepping back, as many of you perhaps already know, in analyzing the top down prospects for a country and in particular the currency, we focus on three key factors: growth, inflation, and policy. In many instances, the policy and/or perception of future policy is the most critical factor. In the United States, the President, and his or her party if they control Congress, have the power to set the economic agenda, especially related to fiscal outcomes. Moreover, they appoint the Federal Reserve Board which has independent (in theory) control of monetary policy.
Understanding this, makes one realize that having a view of politics is important. The negative thing about analyzing politics, as I noted above, is that most people have their partisan biases. The positive aspect is that there is a lot of data to help us establish an unbiased view. This morning I’m going to spend some time going through the relevant data. That said, I’ll get to the punch line: Obama has the consistent edge. That might not make everyone happy, but that is a fact for now.
- National Polls – There have been six major national polls in August that look at Obama versus Romney in the general election. In aggregate, Obama has won four of these polls and his average edge over Romney is +3.5 points. Since the margin of error for these polls collectively is right around 3.0, this is a statistically significant edge. On the positive side of the spectrum, in the last two major polls, Romney has a slight edge, which may be indicative of some positive momentum from the Ryan announcement.
- Electronic Predictive Markets – The most prominent electronic predictive markets that have a contract that enables people to “bet” on the outcome of the Presidential election are Intrade and the Iowa Electronic Markets. On Intrade, Obama currently has a 56% to 43% edge over Romney. On the Iowa Electronics Market, Obama has a slightly more superior edge at 60% to 39%. Both of these markets measure the probability of either candidate getting elected.
- Economic Projections – Once again the key economic models that we look at, our own Hedgeye Election Indicator and Yale Professor Ray Fair’s model, both show a higher probability that Obama gets re-elected than Romney winning the Presidency. Currently, on the Hedgeye Election Indicator, which uses real time market and economic data to predict an outcome for the election, we have a 59.5% probability of Obama getting re-elected. Currently on Ray Fair’s model, a model that focuses on growth and growth surprises as the primary factors, the Democratic candidate is predicted to win 49.5% of the vote and the Republican candidate to get 46.3% of the vote.
On these broad national indicators, Obama has an edge, even if a slight one. The closeness of the aforementioned indicators suggests that this election will once again come down to the key battleground states and the overall electoral college map.
Based on the most recent polls, Obama has 237 electoral college votes and Romney has 191 electoral college votes. This is based on state level polls that are outside the margin of error. Even as Obama has an edge, 270 votes are needed to obtain the Presidency, so his edge is simply that, an edge. The states that remain in the toss up category combine for 110 votes and include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin. Ultimately, this election will be won or lost in those states.
For those of you who haven’t stopped reading and gotten bored because of my political meanderings this morning, you probably think that I’m painting a negative picture for Romney. And on some level you are correct, although I’m not painting but rather just relaying the facts. In that vein, there are a couple of facts that also auger positively for Romney – Obama’s approval rating and voter engagement.
In terms of approval rating, Obama’s approval rating is low for a President that hopes to get re-elected. According to Gallup, the most long running pollster in this category, Obama’s approval rating is currently 45 and his term average is 49. The only Presidents with lower approval ratings were Truman, Carter, and Nixon. Obviously, this not an enviable bunch and an approval rating that is broadly indicative of dissatisfaction with the Obama administration.
The more interesting wild card in this election will be voter engagement. This is the factor that led to the Republicans doing much better than expected in the midterm elections. As well, this is likely a key reason that Romney selected Paul Ryan, a conservative and Tea Party favorite, to motivate the base. Getting out to your base is from Karl Rove’s electoral strategy 101 and is a fundamental reason why George W. Bush won two elections.
So, not to pour cold water on the positive picture I’ve just painted above for partisan Democrats, but early indicators suggest that Republicans may be much more engaged that Democrats this electoral cycle. The most recent evidence comes from a USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same. This may be a meaningful and relevant edge for the election.
This election is likely to be tight, with Obama having a slight edge currently, but Romney has a number of factors that could swing his way, especially as he begins to outspend Obama this fall. Some suggest he may be able to outspend Obama almost 2:1 in key states. Regardless of your political affiliation, as a stock market operator if you get policy right, you will get a lot of other things right. And policy starts with politics.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on August 03, 2012 for Hedgeye subscribers.
“Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth…”
What do Louis Bacon, Stan Druckenmiller, and George Soros all have in common? They’re some of the best players in this Global Macro game, and they’re all either giving money back to their investors or getting out of the game completely.
They think these central planners are right nuts. So do I. But does the manic media that perpetuates this entire gong show get that? Have these pundits ever traded a macro market in their life? Or, like the worst players at a poker table, are they just the suckers trying to remain relevant until their ratings and/or credibility goes to zero % too?
As the old saying goes, look around the poker table; if you can’t see who the sucker is, you’re probably it.
Back to the Global Macro Grind…
We got longer yesterday (cutting our Cash position to 58%) but it was still a clean cut example of what Louis Bacon coined in a recent letter (explaining why he is giving back $2B to his investors) as Disaster Economics: “where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets.”
Don’t think this is turning into a Q308 like disaster? Ok. What would you call this?
1. 745AM EST (yesterday), Spanish stocks rip to the upside, +2% on the day, after the ECB decides not to cut rates, but plenty of print, tv, and radio pundits proclaim their faith that “it’s at 830AM that we get the good stuff.”
2. 835AM EST (yesterday), Spanish stock stop going up, and fast, as pundits comb the release looking for “hints” that the ECB really is going to deliver the drugs, like Bernanke was supposed to in the day prior.
3. 1130AM EST (yesterday), Spanish stocks close down -5.2% on the day, a 7% (not a typo) intraday reversal. Pundits feel shame.
Or do they? 430AM EST, I get up this morning and “European stocks rally” on new news that Spain (as in the country) is going to hold a press conference about something.
I couldn’t make this up if I tried.
Notwithstanding the simple math of the matter (a market that loses 7% of its value needs to “rally” +7.5% to get whoever got suckered in at 830AM EST yesterday back to break-even), I’d say Bacon is on to something here.
Then you have the other running narrative of people who are in the business of markets going up saying “but the SP500 is up 10% for the year-to-date.” That one is just a beauty – it’s as if people think about their life-long net wealth on the same calendar as Old Wall Street’s bonus season.
Just to get the record straight – and I mean how real people with real money think about the return of their moneys:
- SP500 is not +10% YTD anyway, it’s up +8.5%
- SP500 is down -3.8% from Q1 2012 (when #GrowthSlowing started)
- SP500 is down -12.8% from its 2007 high, where almost everyone of the Q1 2012 bulls were the same people
So, lucky you – you only have to be up +4% and +15% to get back to your 2012 and 2007 break-evens. This better be one heck of a US Employment Report this morning.
Better yet, if you’ve noticed this other little thing called a broad leading indicator (the Russell 2000 has led the SP500 the entire way):
- RUSSELL2000 is only up +3.6% YTD
- RUSSELL2000 is down -9.1% from its 2012 Perma-Bull high (March 26th, where the VIX bottomed at 14.26)
- RUSSELL2000 is down -6.1% in the last month alone
I know, I know. Don’t be spinning that storyline on us KM, we’re still living large over here on the everything fine front. Until you aren’t. What’s happened this year at MF Global, JP Morgan, and Knight Capital is an obvious reminder of Disaster Economics too.
As returns (both buy and sell-side) get tougher to concoct, we’ve created a culture on Old Wall Street of cheating and corner cutting so that people A) don’t get ridiculed by their peers internally and/or B) get paid.
That pressure is cultural. It’s also called causality. Much like central planning policies to suspend economic gravity, it’s only sustainable until it goes away.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1590-1605, $105.09-107.32, $82.95-84.11, $1.20-1.23, 5811-6649, and 1356-1376, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
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Takeaway: LVS's Mass exposure somewhat insulates it from the VIP volatility in Macau
Who's best positioned to weather the VIP storm?
- LVS mainains the highest Mass exposure as measured by the percent of its total gaming revenue (GGR) in Macau derived from that high margin segment
- VIP has been volatile and turned negative in July. We continue to expect that segment will come under pressure. Wynn and Galaxy are most exposed.
- After a big VIP push - mainly through its Four Seasons property - Mass once again drives over 40% of LVS's Macau GGR following the opening of Sands Cotai Central.
Takeaway: Keith is ready to short the S&P 500 and buy bonds. As far as Facebook goes, there's only one way to go: down. $FB $SPY
Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money Halftime Report today to discuss Facebook (FB) stock, which hit all time lows. Keith is bearish on the stock, noting that market momentum will continue to drag down shares. “Don’t catch a falling knife," said Keith. Wise words.
Also discussed was shorting the S&P 500 (SPY). We think the time is right to short stocks and buy bonds. The correlation with stocks and volatility brought the discussion back to March, when the VIX was between 14 and 15 and the time was right to short the market.. Again, with the VIX this low, a reversal in equities seems imminent.
Takeaway: The market is largely ignoring several problems associated with the broker; we believe the stock can go as low as zero. $KCG
Knight Capital (KCG) has a long ways to go to recover from its near-death experience. We don’t think the event is priced into the stock properly and thus, we see further downside for KCG. Keith shorted KCG in the Hedgeye Virtual Portfolio yesterday at a price of $3.01 a share.
There are three factors affecting Knight that will push the stock down further. One risk of being short is that the company could be acquired at a premium to its current share price. Whether or not it’ll be sold off piecemeal style or just swallowed whole remains to be seen. But for now, consider this:
-Knight took a $35 million loss on Facebook during the IPO. That debacle is still being sorted out with Nasdaq and other parties.
-Trading volumes have been insanely low. Knight’s trading volume has declined sequentially over the last five quarters.
-Knight sold about 70% of the equity to a consortium of buyers in order to save itself. It got $400 million in 2% preferred stock convertible at a $1.50 strike. There is a mandatory conversion provision that says the preferred must be converted if the stock price stays above 2x the strike price for 60 consecutive days.
The stock is entirely capable of going to $1, then $0.50 then $0. CEO Tom Joyce better have an ace up his sleeve because the company is not putting enough effort into saving face. Even more concerning is whether the $400 million will be enough capital to hold the company over heading into the back half of 2012.
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