The Economic Data calendar for the week of the 22nd of October through the 26th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
"Based on our forecasting model, it becomes clear that the president is in electoral trouble"
On Wednesday, October 24th at 1:00pm EST, the Hedgeye Macro Team and Healthcare Team will be hosting a View From the Battleground States Expert Call with Professor Kenneth Bickers of the University of Colorado. Bickers and his colleague, Michael Berry, have created an economic forecasting model that has accurately predicted the outcome of the last eight presidential elections.
Topics will include:
Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below and presentation materials will be distributed prior to the call:
Takeaway: The first stop on the road to 1600 Pennsylvania Avenue is in Ohio, which favors Obama.
“Tin soldiers and Nixon coming, we’re finally on our own.”
-Neil Young, “Ohio”
On Wednesday October 24th we are doing a call on the Battleground States with Professor Ken Bickers from the University of Colorado. (Materials and dial in will be circulated.) Bickers and his colleague, Professor Michael Berry, have put together a fascinating projection for the Presidential race based on bottom up state based economic analysis. The key drivers of their model are both unemployment levels, state and national, and state level income levels.
According to their analysis, President Obama is currently slated to win 208 electoral votes. This is far short of the 270 he would need to retain the Presidency. This is an extreme outlier from other current Electoral College projections which generally show Obama winning. To their credit, the Bickers and Berry model has accurately predicted every Presidential election going back to 1980. The two wildcards this year may be the unpopularity of the challenger (with approval ratings below 50%) and the fact that the stock market has done well, even as the real economy has struggled.
On the last point, our Hedgeye Election Indicator (HEI) still has Obama at a more than 60% probability of being re-elected. This analysis is based on real time economic indicators, such as equities, so this makes sense. The dichotomy between the strength of risk asset prices and economic data released by the federal and state governments is a point that we will be pushing Bickers on in our call.
On a national level, Romney appears to be holding his narrow lead since the first debate. Based on the average of the last seven major polls, Romney is up +0.7. This also includes a Gallup poll that has Romney up +7 and is a clear outlier. Rasmussen who has been the most accurate nationally in the last two Presidential races, has the race has a tie. So, Romney has a slight edge, but basically it is too close to call.
Historically, races don’t shift much with only a few weeks to go, so we think it’s fair to say that this race will go into election night in a very tight range with no clear advantage in national polls. It will then of course come down to the a few key states with Ohio, similar to 2004, likely being the key state. In fact, Nate Silver, who in our view is one of the best political statisticians in the game, ranks the “Tipping Point States” and has the top five as: Ohio 46.9%, Wisconsin 10.2%, Virginia 9.4%, Colorado 7.6%, and Nevada at 6.8%. So, Ohio has a 1 in 2 probability of being the deciding state, which might not be good for Republicans.
For starters, Romney has and continues to struggle in Ohio polls. In the last seven Ohio polls, Obama has led in five of them and Romney has led in two. Of the two that Romney has led, it has only been by +1 point. On average of all the polls released in October, Obama is up +2.4. In 2008 Obama won Ohio by +4.6 and Bush won it by +2.1. No Republican has ever won the Presidency without winning Ohio.
From an economic perspective, Ohio also has a few things going in Obama’s favor. First, the Ohio unemployment rate, of 7.0%, is below the national average. This is well below the level of 8.6% when Obama took office. Second, personal incomes have actually been on the rise in Ohio under Obama, which makes sense given the decline in the unemployment rate.
No surprise for a state with such critical importance, early voting has already started in Ohio with more than 1.4 million people having requested a ballot or already voted. Currently both parties are claiming early victory. For example, in Cuyahoga County 250,000 absentee ballots have been requested, 80,000 have been returned, and those numbers favor Democrats by a ratio of 3:1. Meanwhile, in another key area of Ohio, Franklin County, Republicans account for 16.5% of registered voters and have made up 28.6% of early voting so far.
In general, it is probably premature to read much into early voting. But we should be very clear- the road to the Presidency goes directly through Ohio. With Ohio’s relatively positive economic performance and Obama’s current lead in most Ohio polls, the road looks bumpy for the Republican Party. (In the table below, for your reference on election night we’ve posted congressional district results for Ohio. Romney will have to outperform McCain meaningfully to win.)
Daryl G. Jones
Director of Research
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Takeaway: While consensus believes the Chinese economy has reached a critical inflection point, the data would suggest this view is a bit aggressive.
HAS CHINESE GROWTH BOTTOMED?
According to the Manic Media, it certainly has. While that’s hardly supportive enough to justify putting real capital to work, we would agree that investors certainly have to start asking themselves whether or not Chinese growth has bottomed and if their portfolio is positioned for it.
From our vantage point, the Chinese economy is near a bottom; our forecasting models have Chinese real GDP growth coming at +7.2-7.7% YoY in 4Q12E with probable downside to +7.0% in a worst-case scenario. In 1Q13E (subject to change pending the 4Q12 figures), we’re at +7.4%-7.6% with probable downside to +6.9% in a worst-case scenario. Our updated GIP model for China is outlined in the chart below; note the ranges in the GDP estimates:
Rather than celebrating a sequential slowdown to +7.4% (the slowest rate of YoY economic growth in China since 1Q09), we think it’s critical to debate the following two questions before claiming that China is “back”:
DATA DEPENDENCY: WHAT DOES THE EVIDENCE SUGGEST?
Given China’s importance to the Global Macro landscape (China has accounted for 43.9% of global real GDP growth since 2008, after only accounting for 15.9% in the five years prior) we routinely track a lot of Chinese economic data, understanding that some figures more important than others. Below we simply demarcate all of the major GROWTH indicators we think are worth tracking:
As outlined above, reported Chinese GROWTH data is inconclusive at best and not supportive of the view that broader economic growth has bottomed in China. Looking to PRICE data, markets on the mainland (assuming what we all learned in school about markets discounting future economic scenarios is accurate) are not pricing in a recovery in Chinese growth. That could obviously change with more data, but, for now, Chinese financial markets are signaling that the outlook for economic growth in China remains tepid at best:
In addition to the GROWTH and PRICE data, we think it’s very important to keep track of the rhetoric emanating from Chinese policymakers. POLICY data is paramount in China because it remains a command economy with pre-determined targets for economic activity. Additionally, Chinese policymakers are the architects of the current slowdown; at any point in time, they can ease off the brakes and accelerate – though our call continues to be that they have no intention to do so (refer to our note from Monday titled, “CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH?” for more details).
Below is a collection of official statements from just this week (as an aside, we generally publish any relevant commentary with each note we write on China, so we are deliberately being brief here; email us for a more comprehensive collection of POLICY rhetoric):
On balance, the aforementioned rhetoric would suggest that Chinese policymakers anticipate that domestic economic growth is at or near a bottom, but the marginally hawkish lean of central bank officials (including the direct warning from Song Guoqing on growth expectations) leaves us expecting subdued upside in Chinese economic activity over the intermediate term.
STORYTELLING SUMMIT: WHERE DO WE GO FROM HERE?
Who knows? All we can do is continue to highlight proactively predictable risk ranges, deltas and inflections, all the while measuring them against the slope of expectations. Speaking of, we continue to think the slope of Chinese GROWTH expectations over the NTM are a bit aggressive in the absence of any meaningful monetary or fiscal stimulus (our base case scenario) – stimulus that could include reversing curbs on the property market, for instance.
Our best advice on what to do with China from here would be to wait and watch for actual confirmation from both PRICE and GROWTH data rather than succumbing to encouragement by the Manic Media to chase the asset prices of pro-cyclical sectors any higher. Sure, there is risk that you underperform for a few weeks or a couple of months, but that’s a lot less negative than buying “risk assets” hand-over-fist at what appears to be another cyclical top – especially considering how binary the election, fiscal cliff and debt ceiling scenarios are.
According to both our predictive tracking algorithms and Chinese Premier Wen Jiabao, Chinese GROWTH appears to be “stabilizing”, though the ratty PRICE data suggests downside economic scenarios are still very much in play. And, relative to expectations, China sequentially slowing from here might feel like an outright recession for the consensus "China is back" crowd.
All that being said, if this is, in fact, a bottom in Chinese GROWTH, that does not at all mean that it’s time to party like it’s 2009. As we wrote on Monday: “Where our call [on China] has differentiated from the Street is that we have not anticipated any substantial stimulus efforts, and therefore are not expecting a meaningful acceleration in Chinese growth from here.”
For anyone looking to dip their toes in on the long side of Chinese equities (they are “cheap” – whatever that means), we would recommend doing so only after being reasonably certain that unreasonable consensus expectations for POLICY-based reflation and a return to persistent 8-12% real GDP growth continue to dissipate. Judging by preliminary indications, they are beginning to: “China Comfortable With Weaker Growth”. Now that’s progress.
Have a great weekend,
Takeaway: There is no one plan in crafting the Eurozone’s path forward. Spain’s bailout timing remains unknown as Europe trades on headlines and rumor
Positions in Europe: Short France (EWQ); Long German Bonds (BUNL)
Asset Class Performance:
EU Summit Disappoints, No Surprise
The EU Summit concluded its two day meeting today and leaders issued a statement indicating that they will continue to work towards the goal of a single bank supervisor “with the objective of agreeing on the legislative framework by 1 January 2013” and “work on the operational implementation will take place in the course of 2013”.
One of the main struggles that Eurocrats are running up against is how to create a fiscal and banking union. It appears that they’re trying to craft both simultaneously; however recent discussions suggest that a banking union is getting more attention which we find problematic because it means Eurocrats are putting the cart ahead of the horse.
We’ve written about it for many weeks, but the importance of establishing a fiscal union is critical for the Eurozone if it hopes to retain its existing structure (the global crisis showed the flaws of only having a monetary union). We’re of the opinion that states will very unwillingly give up their fiscal sovereignty, which should drive decision from a core consensus on how to set up a fiscal union far afield.
That said, given the linkage between sovereigns and their banks and across other member states, until there is a fiscal union there is little hope of having a functional banking union given the need for an authority (or authorities) to regulate both fiscal (think veto national budgets) and mandate banking conditions as well as determine bailouts of sovereign and banks throughout the region. And to boot, European politicians are considering crafting a banking union not only around the 17 Eurozone member states, but the entire EU27.
So what are the key and ongoing points of indecision following the Summit?
Of note this week was a paper from the EU Council’s top legal adviser contending that a plan to create a single supervisory mechanism for Eurozone banks is illegal and goes “beyond the powers” permitted under law to change governance rules at the ECB. We also heard France, the second largest economy in the Eurozone, express reluctance to cede sovereignty on fiscal policy.
This week’s Summit simply confirmed that there will be another plan to make a plan and plenty of details and questions that remain unanswered. David Einhorn's chart below sums this up pretty well:
Spanish Bailout in the Crosshairs
This week an unnamed senior Finance Ministry official said that Madrid is considering requesting a credit line, rather than a full-scale bailout from the ESM, and may qualify for the ECB's OMT.
Germany said it was open to a credit line for Spain, which makes some sense given the scope of the ESM undefined.
Yet we’re no further or closer this week to determining the timing of a Spanish sovereign bailout.
Our Real-Time positions in Europe remain Long German Bunds (BUNL) and short France (EWQ). See our note on 10/16 for our position on France.
The European Week Ahead:
Sunday: Spanish regional elections in Basque Country and Galicia
Monday: 2011 Eurozone Government Debt/GDP Ratio; Aug. Spain Mortgages-capital loaned, Mortgages on Houses; Aug. Greece Current Account
Tuesday: Oct. Eurozone Consumer Confidence – Advance; Sep. UK BBA Loans for House Purchase; Oct. France Production Outlook Indicator
Wednesday: Oct. Eurozone PMI Manufacturing and Services – Advance, PMI Composite; 2Q Government Debt; Germany DIHK Trade and Industry Group Releases Fall Outlook Survey; Oct. Germany PMI Manufacturing and Services – Advance, IFO Business Climate, Current Assessment and Expectations; Oct. UK CBI Trends Total Orders, Selling Prices and Business Optimism; Oct. France PMI Manufacturing and Services - Preliminary; Sep. France Jobseekers; Oct. Italy Consumer Confidence Indicator
Thursday: Sep. Eurozone M3; 3Q UK GDP - Advance; Aug. UK Index of Services; Spain Sep. Producer Prices; Italy Sep. Hourly Wages; Aug. Italy Retail Sales
Friday: Nov. Germany GfK Consumer Confidence Survey; Sep. Germany Import Price Index; Oct. France Consumer Confidence Indicator, Business Survey Overall Demand; 3Q Spain Unemployment Rate; Oct. Italy Business Confidence, Economic Sentiment
UK - BOE Minutes from October 3-4 meeting: officials were split on need for more stimulus.
France - French Finance Minister Pierre Moscovici said in an interview with Les Echos that he had "positive" discussions with Moody's regarding the country's triple-A rating. Recall that Moody's said in early September that it would conclude an assessment of France, which it currently rates triple-A with a negative outlook, sometime in October.
Banking Union - ECB President Draghi said that the ECB may not be operational as the single supervisory mechanism for Eurozone banks until 2014. He noted that “It’s very important that the council regulation enters into force January 1 but that doesn’t mean supervision will be in place on January 1 from an operational view point.”
Banking Union - citing EU officials Britain is pushing for changes to a proposed Eurozone banking union to dilute the power of the ECB. Britain plans to propose a system that would give countries outside of the banking union the possibility of blocking those within the group from banding together to influence EU-wide regulations, such as defining the type of capital reserves that qualify as a cushion against banks' risky assets. While the article noted that Britain is still in favor of a banking union, it said that its push for an effective veto for non-euro countries (something that has been discussed before in the press) could slow down the progression.
Spain - Faces a refinancing hurdle of €29.5B at the end of October. Finance Minister Luis de Guindos stressed that he was "very comfortable" with the debt repayments.
France - French Prime Minister Jean-Marc Ayrault said on Tuesday that reforms to make French industry more competitive will be spread over two to three years. While he did not detail what measures would be taken to improve companies' competitiveness. He also reiterated that France must meet its target of reducing the deficit to 3% of GDP by the end of 2013 from a projected 4.5% this year.
France - France's business federation has vetted its frustrations with Socialist President François Hollande’s polices. The group is rightly concerned about a competitiveness drag, including from Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.
Eurozone CPI 2.6% SEPT Y/Y vs 2.7% AUG
Eurozone ZEW Economic Sentiment -1.4 OCT vs -3.8 September
Europe EU27 New Car Registrations -10.8% SEPT Y/Y vs -8.9% AUG [dropped the most in 2 years]
Eurozone Construction Output -5.5% AUG Y/Y vs -6.2% JUL [0.7% AUG M/M vs 0.1% JUL]
Germany ZEW Current Situation 10.0 OCT vs 12.6 September
Germany ZEW Economic Sentiment -11.5 OCT vs -18.2 September
Germany Producer Prices 1.7% SEPT Y/Y vs 1.6% AUG
UK PPI Input -0.2% SEPT M/M vs 1.9% AUG [-1.2% SEPT Y/Y vs 1.1% AUG]
UK PPI Output 0.5% SEPT M/M vs 0.5% AUG [2.5% SEPT Y/Y vs 2.3% AUG]
UK CPI 2.2% SEPT Y/Y vs 2.5% AUG
UK RPI 2.6% SEPT Y/Y vs 2.9% AUG
UK ILO Unemployment Rate 7.9% AUG vs 8.1% JUL (Olympics boosts job creation)
UK Jobless Claims Change -4k SEPT vs -14.2K AUG
UK Retail Sales with Auto Fuel 2.5% SEPT Y/Y vs 2.5% AUG
UK Rightmove House Prices 1.5% OCT Y/Y vs 0.7% SEPT
UK Public Sector Net Borrowing 10.7B GBP SEPT vs 10.8B GBP AUG
Italy Industrial Orders -9.0% AUG Y/Y vs -4.9% JUL
Switzerland Credit Suisse ZEW Expectations -28.9 OCT vs -34.9 September
Switzerland Exports 2.6% SEPT M/M (exp. 0.5%) vs 0.4% AUG
Switzerland Imports 3.0% SEPT M/M vs 2.6% AUG
Switzerland Producer and Import Prices 0.3% SEPT Y/Y vs -0.1% AUG
Netherlands Consumer Confidence -32 OCT vs -29 SEPT
Netherlands Retail Sales 0.9% AUG Y/Y vs -3.9% JUL
Ireland PPI 2.2% SEPT Y/Y vs 6.0% AUG
Sweden Unemployment Rate 7.4% SEPT vs 7.2% AUG
Finland CPI 2.7% SEPT Y/Y vs 2.7% AUG
Portugal Producer Prices 4.6% SEPT Y/Y vs 4.2% AUG
Austria CPI 2.7% SEPT Y/Y vs 2.2% AUG
Slovakia CPI 3.8% SEPT Y/Y vs 3.8% AUG
Slovenia Unemployment Rate 11.6% AUG vs 11.7% JUL
Slovenia PPI 0.7% SEPT Y/Y vs 0.4% AUG
Czech Republic Export Price Index 3.7% AUG Y/Y vs 4.7% JUL
Czech Republic Import Price Index 5.8% AUG Y/Y vs 5.5% JUL
Czech Republic PPI 1.7% SEPT Y/Y vs 1.9% AUG
Poland CPI 3.8% SEPT Y/Y vs 3.8% AUG
Poland Producer Prices 1.8% SEPT Y/Y vs 3.0% AUG
Poland Sold Industrial Output -5.2% SEPT Y/Y vs 0.5% AUG
Russia Industrial Production 2.0% SEPT Y/Y vs 2.1% AUG
Russia Producer Prices 11.6% SEPT Y/Y vs 6.6% AUG
Russia Disposable Income 3.8% SEPT Y/Y vs 6.8% AUG
Russia Retail Sales 4.4% SEPT Y/Y vs 4.3% AUG
Russia Unemployment Rate 5.2% SEPT vs 5.2% AUG
Turkey Unemployment Rate 8.4% JUL vs 8.0% JUN
Turkey Consumer Confidence 88.8 SEPT vs 91.1 AUG
Interest Rate Decisions:
(10/18) Turkey Benchmark Repo Rate UNCH at 5.75%
(10/18) Turkey Overnight Lending Rate CUT 50bps to 9.50%
This note was originally published October 19, 2012 at 07:32 in Early Look
“What defined a good scout? Finding out information that other people can’t.”
I was eating a delicious lobster roll on a pier in Camden, Maine yesterday and all of a sudden my iPhone went batty. The market went from straight up, to straight down. Google was “halted.”
So, I jogged back up to my hotel room, fired up my machines, ran GOOG through my quantitative screens – and there it was – someone knew something! Someone always does. They don’t always get caught.
Most people in this business are honest, hard working and intelligent enough to not take on orange jump suit risk when they buy or sell securities. But some people are so “smart” they are stupid. This isn’t baseball. “Finding out information that other people can’t”, in many cases, is illegal. That’s why we have to continuously evolve our analytical processes so that we can win more than we lose.
Back to the Global Macro Grind…
The aforementioned quotes come from another excellent chapter in Nate Silver’s The Signal And The Noise, “All I Care About is W’s and L’s.” Silver has credibility because he built (and sold) a projection system for baseball called PECOTA. The chapter’s title is a quote from the “not physically gifted” Dustin Pedroia of the Boston Red Sox – a player that PECOTA screened as a stud when scouts disagreed.
That’s where you really win in this game – when you make a bet on a stock, commodity, bond, etc. that sits outside of consensus. This doesn’t just happen. Scouting for ideas requires a fast and flexible process. If you are doing it legally, it’s a grind. “Billy Beane, the protagonist of Moneyball, sees relentless information gathering as the secret to good scouting.” (page 99)
As you build your team, machines, and processes, it actually gets harder as you achieve success. People who cut corners and cheat don’t want you to win. They’ll do whatever it takes to take you down. So, you have to be resilient. As Silver reminds us, the real lesson of Moneyball is that Beane “was very threatening to people in the game; it seemed to imply that their jobs and livelihoods were at stake.”
Here’s what our multi-factor, multi-duration, research and risk management process is telling me this morning:
I’ll stop there. These are both quantitative signals and noise (they both matter). And stopping on lucky 13 on the anniversary of 1987’s Black Monday is just me being cute. So is the storytelling that “everyone is bearish and you have to buy stocks because they are up YTD.” After a -23% down day on October 19th of 1987, the market still “closed up YTD” too.
On the research side (very different than the quantitative side of what we do, but critically complimentary), here’s what’s new this morning:
Slapping all 16 of those pieces of Hedgeye Scouting Information onto my notebook this morning doesn’t make me particularly bullish on anything other than buying US Dollars and bonds. Why pretend to be smarter than the market when the market can tell me when not to swing at outside pitches?
One by one, they’re picking off the bad guys in this business. Using steroids to juice returns is no longer cool. As Nate Silver writes at the end of chapter 3, “in the most competitive industries, like sports, the best forecasters must constantly innovate…. The key is to develop tools and habits so that you are more often looking for ideas and information in the right places.” (page 106)
It’s October. The good news is it’s a cleaner game than it was 5 years ago and they don’t have Candy or replacement umps. Batter up!
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, GOOG, and the SP500 are now $1731-1751, $111.71-113.54, $79.02-79.82, $1.29-1.31, 1.74-1.82%, $687-731, and 1444-1468, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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