This note was originally published
at 8am on October 12, 2012 for Hedgeye subscribers.
“Against the assault of laughter, nothing can stand.”
If there was one key takeaway from the Vice Presidential debate last night it was simply this: Biden laughed. I took an unscientific poll on Twitter and people seem to be split on the actual winner. Republicans lean towards Ryan and Democrats lean towards Biden. I think my colleague Keith McCullough probably summed it up best this morning when he wrote to me:
“USA lost credibility as Ryan didn’t deliver in taking Biden’s old politics to task. Ryan looked like a rookie and Biden looked like a snake.”
But you know Keith, he’s not really known to have an opinion on things …
From a quantitative perspective, the Intrade Presidential contract is basically trading at the same level as it was going into the debate. According to Intrade, Obama has a 63% chance of retaining the Presidency and Romney is at 37%. So there you have it, despite Biden’s best attempt at a Mark Twain laughter assault, the Px90 juiced whippersnapper Ryan held his own.
The next two debates will be held between Romney and Obama. The first one is a town hall format and will be on Tuesday, October 16th and the final debate will be held on October 22nd, with a focus on foreign policy. Given Obama’s weak performance in the first debate, these will be more closely watched than historical debates. The likelihood is that Obama will perform much better and they too will become non-events.
Even if the debate fireworks are behind us, the election itself is only heating up. According to the national polls, this race is basically tied. Based on the average of the last four key national polls, Romney is ahead on average by +0.7 points. Interestingly, Rasmussen, who has been the most accurate pollster in the last two election cycles, actually now has Obama back ahead. Undoubtedly the tightness of this race is no laughing matter for those with a party affiliation.
We will be joined with Neil Barofsky on November 7th, the morning after the election, to discuss the potential policy impact. Neil was the former Special United States Treasury Department Inspector General that was appointed to oversee the Troubled Asset Relief Program, or TARP. From an investment perspective, the election is critical because it lays the foundation for future fiscal and monetary policy. In this respect, we think Neil will be the ideal person to discuss post election policy as he knows many of the key players. If you are not currently an institutional subscriber and would like to become one to get access to the call, email firstname.lastname@example.org.
In the chart of the day, we’ve highlighted U.S. Federal government spending as a percentage of GDP going back to 1947. The takeaway, which many of you know, is that federal spending has been going up and to the right for almost seven decades. As we’ve been told by some key Republican insiders, this will be Romney’s primary focus if he is elected. That is, he will look to dramatically shrink the size of the government.
From an economic and investment perspective this could, perversely, be a real negative for economic growth in the short run. Ultimately though, putting capital back in the hands of capitalists and getting the U.S. fiscal house in order should be positive for the U.S. dollar and economic growth in the long run. Canada in the mid-90s is a prime example of a modern economy that took its pain, but then rebounded in a meaningful way.
Another positive related to the election is that when it is over, at least it will relieve the uncertainty among decision makers. This uncertainty is manifested in many ways with a key way being an unwillingness of executives to invest in their businesses.
My colleague Hesham Shaaban forwarded me an article this morning that encapsulated this point well. According to this article from Bloomberg, the number of companies saying “profits will trail estimates compares to those who are saying they will exceed them climbed to 4.3:1”. In a nutshell, when 4 out of every 5 companies in America think the future will be worse than the past, you can not expect hiring to accelerate.
#Earningsslowing is one of our three themes this quarter and clearly is already starting to play out. At a point, of course, this all gets priced in, but we would just recommend treading carefully in that regard until the end of earnings season as there is stock specific risk associated with the fact that earnings in corporate America are peak-ish.
Speaking of stock specific risk, our retail team will be hosting a conference call on Carter’s, Inc (CRI) this coming Monday. This won’t be your typical old Wall Street initiation call. In fact, this is going to be one of those new Wall Street 2.0 calls where we are actually going to tell you that Carter’s is a stock that you should short, or at the very least lighten up on. Imagine that, a Wall Street research firm making a short call. I mean, who does that?
Speaking of short ideas, a key one is the little retailer called J.C. Penney (JCP). Needless to say, even though JCP seem to be getting back into the coupon business by sending $10 coupons to customers as gifts, we still think this is a name to avoid. On the contrary, our financials team indicated yesterday they thought J.P. Morgan (JPM) would beat numbers this morning and, lo and behold, JPM beat by $0.18. It seems the fat cat bankers on Wall Street are laughing, as well!
Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1761-1792, $112.66-115.71, $79.26-80.07, $1.28-1.30, 1.64-1.71%, and 1426-1446, respectively.
Enjoy your weekend.
Keep your head up and stick on the ice,
Daryl G. Jones