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The Electoral Storm

“If you play with the power, the lights go out.”

-Yale Hockey adage

 

For many on the eastern seaboard this morning, the power being out is no joke.  By some estimates that I’ve seen the total number without power exceeds some 8 million people.  I can certainly attest that much of the Hedgeye team that lives in New York City or along the Connecticut shoreline is without power this morning.  In fact, our CEO Keith McCullough just sent me a picture from his driveway and he and his family are completely blocked in due to fallen trees in their driveway.

 

I think the best thing you can say when a storm like this occurs is that it could have been worse.  From what I can tell, the government, who we are sometimes apt to criticize, did an excellent job getting in front of Sandy and sending out appropriate warnings.  That said, New Jersey Governor Christie unfortunately may have made a major political mistake in cancelling Halloween.  He has clearly now completely lost the 12 and under demographic.

 

From a global macro perspective, the key question relating to Sandy is what, if any, impact it will have on the election.  It seems in the short term, the storm has caused President Obama to pull back on his campaign schedule, while the Romney / Ryan team is staying at it in Ohio and Wisconsin today.  At this juncture of the election, it’s not clear if another couple of campaign stops really matter.

 

In terms of real time impact from the storm, Intrade barely budged over night, which suggests neither candidate will really get a meaningful bounce from anything Sandy related.  So we go back to a Presidential race that is increasingly becoming too close to call.  On a national poll level, Romney remains with the ever so slight edge, but his major issue remains Ohio.

 

If we take the average of the last 10 polls in Ohio, Obama has an advantage of +1.9.  Even as one-off polls can be wildly inaccurate, historically the averages of polls have been a pretty good indicator of outcomes.  So, even if the undecided voters swing meaningfully to Romney at this point, Obama appears to have enough of an edge in polls to win Ohio.  As a result, Romney’s chance of an Electoral College victory appears almost impossible.  The question, of course, is can we believe the Ohio polls?

 

That last statement is certainly not me trying to be a conspiracy theorist, but rather just to highlight some clear discrepancies amongst the Ohio polls.  As I wrote to one of our subscribers yesterday, if we dig deeper into the Ohio polls, we get some color on what could be the major wild card of this election, which is that there is some serious skew in the polls. I’ll give you a couple of examples related to Ohio:

  • In a recent poll from Gravis marketing, it has Obama with a +1 point lead on Romney, but the sample has 40% Democrats, 32% Republicans and 28% Independents;
  • In another recent poll from Public Policy Polling, the poll has Obama with a +4 lead, but the sample is 43% Democrats, 35% Republicans and 21% Independents; and
  • Finally, a recent Ohio Newspaper Poll has the raced tied, but the sample was 47% Democrats, 44% Republican and 10% Independents.

Clearly, turnout is the major wild card in Ohio and a factor the polls are not modeling with any consistency.

 

The other wild card is the economy.  We did a call with Professor Ken Bickers from Colorado who has accurately modeled Presidential election outcomes going back to 1980 based on state level economic data.  His analysis shows that Romney should win in a veritable landslide of 330 Electoral College votes.  We’ve posted a link to the presentation below if you did not get a chance to see it live:

 

http://www.youtube.com/watch?v=PzzFuAE14cY&feature=youtu.be&noredirect=1

 

Similar to dealing with Sandy, the best thing for most of us will be when this election is behind us.  It is time for American politicians to start working together again, just as all Americans do in times of national need.  To that end, I’d like to leave you with a quote from both President Obama and Governor Romney.

 

The American culture promotes personal responsibility, the dignity of work, the value of education, the merit of service, devotion to a purpose greater than self, and at the foundation, the pre-eminence of family.
                -Governor Mitt Romney

 

“And I will do everything that I can as long as I am President of the United States to remind American people that we are one nation under God, and we may call that God different names but we remain one nation.”

                -President Barack Obama

 

All the best to you and your families in the coming days.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

In terms of logistics from our end, we still are planning to host or best ideas call this Thursday at 1:30pm.  We will be re-circulating dial in information and materials ahead of the call, so stay tuned for that. 

 

The Electoral Storm - bb. el

 

The Electoral Storm - bb portfolio


To Growth

This note was originally published at 8am on October 16, 2012 for Hedgeye subscribers.

“Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

-Ronald Reagan

 

Former Hedgeye Intern Brennan Turner recently started a company called FarmLead.  He has an ambitious goal which is to create the largest online grain trading platform in the recently deregulated Canadian wheat market.  Every day Turner sends out a morning recap of the action in the global grain markets from his office in the north Canadian outpost of Saskatoon.  Like a true entrepreneur he is focused on growth, and so ends each morning commentary with the salutation: “To growth”.

 

In recent weeks, we’ve had some government economic data reported in the United States that has suggested growth may be on its way back.  I’m not a conspiracy theorist, but under closer examination the data is probably more suspect than reliable.  The specific examples I’m thinking of include:

  • Advanced monthly retail sales – According to preliminary estimates, retail sales were up +5.4% for the month.  This is meaningfully above the 20-year average and an acceleration over the prior month.  The caveat is that this is a seasonally adjusted number.  In fact, the seasonal adjustment was $22 billion.  For comparison, the seasonal adjustment in 2012 was $12 billion.  So the biggest growth component of retail sales was the Commerce Department’s seasonal adjustment which was up a staggering 83% year-over-year.
  • Jobless claims – Last week jobless claims appeared to show meaningful improvement and fell 28,000 to 339,000.  At face value, this is a meaningful week-over-week improvement.  The caveat of this number was of course that one “large” state was excluded, which diminishes the improvement.
  • Jobs report – Jack Welch probably made the most noise around the jobs report two weeks ago when he tweeted, “Unbelievable jobs numbers … these Chicago guys will do anything … can’t debate so change numbers.”  The reality of the jobs report is that the headline number of 7.8% was a misleading statistic, although it likely wasn’t conjured up in the Obama campaign office.  The key reason that the unemployment rate is dropping is because labor force participation is literally at 20-year low of 64%.

Not surprisingly there was some furor over Welch’s tweet and as a result he wrote an op-ed in the Wall Street Journal the next day clarifying his statement.  A point that is worth highlighting from his op-ed is the following:

 

“Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.”

 

Similar to the retail sales numbers, the seasonality reported in the jobs numbers this year appears to be seeing an accelerated adjustment.  Once again, this isn’t a conspiracy theory statement, but rather a red flag as it relates to reading too much into some of the recently reported U.S. economic data.  Unlike one of our competitors who took up their Q3 GDP estimate yesterday on the back of growth in seasonality adjustments, we are not there yet.

 

Tonight we are likely to get a lot of discussion about future economic growth in the United States as President Obama meets Governor Romney tonight for the second Presidential debate.   The lead in quote from Ronald Reagan was not an attempt at a political statement, but rather an allusion to tonight in which it is likely both candidates refer to predecessors that they hope to emulate to stimulate growth.

 

According to the average of the most recent six major national polls, this race is basically a dead heat at 47.3 to 47.3.  Some of the polls, like the most recent Washington Post Poll that has Obama up three points, still appear to have some Democratic skew (Democratic ID of 35% versus Republican ID of 26%), but in general this race is definitely in the category of too close to call.  Tonight, Obama has a chance to re-establish himself, but even so the damage is likely done from the first debate and we will likely stay tight into election-day.

 

As is typical for modern Presidential politics, this race is once again going to come down to the battleground states.  On this front, we will be joined next week on October 24th by Professor Ken Bickers from the University of Colorado, who has done a historical analysis of state-by-state economic indicators as a method of predicting Electoral College results.  His work has predicted every Presidential election accurately since 1980.  The dial-in will be circulated to our Macro clients in advance, but if you aren’t a macro client and are interested in gaining access to this call please email sales@hedgeye.com.

 

Flipping to Europe briefly, Spain has obviously been in the news over the last couple days.  It appears that the Spaniards will be requesting some form of aid, which is increasingly likely to be a credit line as opposed to a full blown bailout.  The Spanish 10-year, while still below 6.0%, did accelerate over night from 5.72% to 5.83%.  As always, though, the root of Europe’s issues are in expectations as much as anything and as it relates to potential Spanish intervention an unnamed Spanish Finance Ministry official said the following:

 

“He suggested that the day following a request, interest rates on Spanish debt could fall by 150 bps, while the Spanish stock market could surge 15%.”

 

We’d probably take the other side of that.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1739-1769, $112.67-116.29, $79.24-80.06, $1.28-1.30, 1.64-1.72%, and 1419-1444, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

To Growth - Chart of the Day

 

To Growth - Virtual Portfolio


THE TOPPING PROCESS IS UNDERWAY IN INDIA

Takeaway: India’s stock market appears to be undergoing a topping process ahead of a likely deterioration in economic fundamentals.

SUMMARY BULLETS:

 

  • The introduction of these recent POLICY initiatives – which are indeed positive on the margin and supportive of positive headline risk that tend to drive inflows higher – do very little to correct India’s TREND and TAIL duration GROWTH concerns; nor do they adequately address rampant domestic INFLATION that the RBI has called out on multiple occasions.
  • In fact, as recently as today (ahead of their OCT 30 policy meeting), the RBI was out reminding investors that India has not come close to turning the corner on INFLATION.
  • All told, amid continued political infighting and ahead of another potential embarrassment for the Congress Party in state elections in Gujara and Himachal Pradesh, we see limited scope for further upside surprises to Indian POLICY from here.
  • With respect to the intermediate term, much of the good news has likely been priced in – potentially setting Indian equity investors up for demonstrable disappointment.

 

On SEP 20, we published a note titled, “IS IT TIME TO GET OUT OF INDIAN EQUITIES” which introduced our bearish fundamental bias on Indian equities w/ respect to the intermediate term. The key takeaways from the note were as follows:

 

  • We are now fundamentally bearish on Indian equities with respect to the intermediate-term TREND duration and view the current price setup in the SENSEX as asymmetrically stretched relative to India’s economic fundamentals.  
  • From a GROWTH and INFLATION perspective, India’s economic outlook looks quite poor when applying a forward-looking (3-6 months) analytical lens. Moreover, India’s POLICY outlook is rapidly deteriorating and we believe this risk is not being appropriately discounted by the market – no doubt a side-effect of the global yield chasing born out of QE3.
  • From a long-term perspective, we think the Indian economy represents a classic turnaround opportunity, as policymakers there have quite a few POLICY levers that they can pull that would be positive for sustainable organic economic GROWTH. In the interim, however, there will have to be some short-term economic pain as it relates to quashing structural INFLATIONary pressures and reigning in the fiscal deficit. Unfortunately for anyone currently buying what we view as a cyclical top in Indian equities, the India of today is not the “India of tomorrow” just yet.

 

As it stands today, we continue to think that India’s POLICY outlook is rapidly deteriorating and that investors allocating funds to Indian equities up here are doing so at the risk of getting long a cyclical top in the Indian stock market. The SENSEX, which had ripped +15% in more-or-less straight line from its late-MAY lows to SEP 20, has now stalled out (up +1.6% from our note) and is now broken on our immediate-term TRADE duration. We see downside risk to the TREND line roughly -3% lower; if that doesn’t hold, we could see a retest of the aforementioned MAY lows (a correction of -14.4% from current prices).

 

THE TOPPING PROCESS IS UNDERWAY IN INDIA - 1

 

As we signaled in our directionally-bullish JUN 4 note titled, “BACKING OFF OF INDIA – AT LEAST FOR NOW”, our call for SENSEX/INR-supportive inflows ahead of favorable POLICY adjustments did, in fact, come to fruition. In recent weeks, Prime Minister Monmohan Singh (w/ the aid of new Finance Minister Finance Minister Palaniappan Chidambaram) have overcome staunch political opposition and a critical coalition defection to deliver a handful of decent-sized economic reforms, including:

 

  • Lowering diesel subsidies by raising fuel prices;
  • Allowing overseas supermarket chains to open stores;
  • Easing investment restrictions in the electricity generation and broadcasting markets;
  • Allowing foreign airlines to own minority stakes in local carriers;
  • Lowering the withholding tax paid by Indian corporations that borrow funds in international debt capital markets; and
  • Introducing a fiscal plan to gradually reduce the budget deficit from an estimated 5.3% of GDP in FY13 to 3% by the fiscal year ending MAR ’17.

 

The introduction of these recent POLICY initiatives – which are indeed positive on the margin and supportive of positive headline risk that tend to drive inflows higher – do very little to correct India’s TREND and TAIL duration GROWTH concerns; nor do they adequately address rampant domestic INFLATION that the RBI has called out on multiple occasions. In fact, as recently as today (ahead of their OCT 30 policy meeting), the RBI was out reminding investors that India has not come close to turning the corner on INFLATION:

 

"Monetary policy needs to be cautious in the interim, focusing on inflation while using the available space to support growth to the degree it can. If threats from inflation and the deficits recede, that could yield space down the line for monetary policy to respond to growth concerns."

 

From our vantage point, “threats to the deficit” – on both the fiscal and current account front – have not receded nearly enough for the RBI to justify any further easing measures over the intermediate term. Furthermore, our predictive tracking algorithms suggest Indian economic growth will slow from the rate of change that is to be recorded in 3Q (released NOV 30) through 1Q13E. Inflation, as measured by the benchmark WPI series is also likely to accelerate over that time frame, effectively putting the RBI in a stagflationary box from a monetary policy perspective. That may also prove bearish for the INR on the margin if the RBI opts to continue monetizing sovereign debt and pumping incremental liquidity into the financial system via reverse repos.

 

THE TOPPING PROCESS IS UNDERWAY IN INDIA - INDIA

 

THE TOPPING PROCESS IS UNDERWAY IN INDIA - 3

 

All told, amid continued political infighting and ahead of another potential embarrassment for the Congress Party in state elections in Gujara and Himachal Pradesh, we see limited scope for further upside surprises to Indian POLICY from here. With respect to the intermediate term, much of the good news has likely been priced in – potentially setting Indian equity investors up for demonstrable disappointment. Singh’s coalition government, which has recently lost its governing mandate and now is reliant on smaller regional parties to push through further initiatives, potentially faces a vote of no-confidence over the intermediate term – an event that could lead to outright reversals of some of the recent positive POLICY events.

 

Darius Dale

Senior Analyst


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BREAKING DOWN THE US GDP REPORT

Takeaway: With a pre-election boost in government spending comes heightened odds that US GDP growth slows demonstrably in 4Q12/1Q13.

This note was originally published October 26, 2012 at 11:23 in Macro

SUMMARY BULLETS:

 

  • On an industry-standard C+I+G+NX (C=consumption, I=investment, G=government and NX=net exports) basis, the 3Q12 GDP report was not good. The underlying trends suggest the odds of US recession over the intermediate term are now much higher than they were a 8:29am EST.
  • The unsustainable uptick in government spending ahead of the election portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR.
  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • Furthermore, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.
  • Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like 4Q07.

 

On a SAAR basis, US real GDP growth accelerated to +2% QoQ in 3Q12 from +1.3% in 2Q12; on a YoY basis, US real GDP growth accelerated to +2.3% in 3Q12 from +2.1% in 2Q12.

 

Looking beyond the headline figures, there were some rather interesting occurrences that we think are worth highlighting:

 

  • Driven by a demonstrable acceleration in federal government spending (+9.6% QoQ in 3Q12 from -0.2% in 2Q12) the “G” in the C+I+G+NX equation contributed +71bps (or 36%) to the +2% headline figure. This was the first quarter “G” posted a positive contribution to the headline figure since 2Q10. Like the SEP Unemployment Rate and the OCT UofMich Consumer Confidence Index, the 3Q12 GDP report is just strong enough for President Obama to claim he’s got the US economy back on track just in time for the election.
  • Driven by a -1.3% QoQ decline, business investment (i.e. nonresidential fixed investment) was net drag of -13bps on the headline GDP figure of +2%; this is the first time we’ve seen US businesses retrench since 1Q11, when a -1.3% QoQ contraction then contributed to a net drag of -11bps on the then-headline +0.1% QoQ SAAR figure. Uncertainty over the domestic political situation continues to contribute to slow economic growth. More on this later.
  • Driven largely by drought-induced weakness in farm inventories, inventories overall contributed a -12bps drag on the headline GDP figure of +2%; this is up sequentially from -46bps. Nonfarm inventories contributed +30bps to the headline GDP figure, while farm inventories contributed a -42bps drag.
  • The much-celebrated recovery in the housing market continues to auger positive for domestic real GDP growth, contributing +33bps to the headline figure in 3Q12 (up from a +19bps contribution in 2Q12) on the strength of a +14.4% QoQ growth rate (accelerated from +8.5% QoQ in 2Q12).

 

BREAKING DOWN THE US GDP REPORT - gdp1

 

Given that we’re well into 4Q12 already, we think it’s worth highlighting a few nuggets from the 3Q12 report that may offer clues as to where the rate of domestic GROWTH might end up in the current and proceeding quarters:

 

  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • The unsustainable uptick in government spending ahead of the election – as great as it may be for the Keynesian elite – actually portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR. Imagine if three months from now, US real GDP slowed from +2% QoQ SAAR in 3Q12 to +0.9% QoQ SAAR (or lower) in 4Q12. That is a real risk.

 

BREAKING DOWN THE US GDP REPORT - GDP2

 

Net-net, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.

 

Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like its 2007 counterpart.

 

Our updated US GIP model is included in the chart below.

 

Darius Dale

Senior Analyst

 

BREAKING DOWN THE US GDP REPORT - GDP3


Hurricanes And Gas Prices

In 2011, Hurricane Irene drew the attention of the media and meteorologists as it approached the Northeast coastline. Since very few hurricanes actually make it to the New England coastal area and make impact, it's important to pay attention to the effects these storms have when they do make landfall. When Irene hit New York City in  late August, gas prices shot up temporarily as people rushed to fill up their cars while they could. With Hurricane Sandy, history is likely to repeat itself.

 

Hurricanes And Gas Prices - irene


MACAU SLOWS BUT STILL SHOULD BE A RECORD

On track for new monthly record

 

With the 3rd and 4th week of October now in, we think October will squeak out a gain off of a tough comp and set a record for monthly GGR.  We are projecting flat to up 4% for the month.  Average daily table revenue actually increased 7% YoY the past two weeks.  We continue to believe that double digit YoY growth could resume in November and December for two reasons:  easier comparisons and the Beijing government handover.

 

MACAU SLOWS BUT STILL SHOULD BE A RECORD - macau1

 

The past two weeks were good ones for LVS.  Market share has gone from 19.7% to 20.8%, well above trend.  Assuming normal hold, we expect LVS to remain over 20% and slowly increase its share over the coming year up to 22-24%.  This is likely above consensus of around 20%.  Wynn has had an awful month with market share of only 9.5%, mostly due to low hold we're sure but we do expect the property to be a market share loser until Wynn Cotai opens.  MGM also struggled this month.  MPEL is pretty much in-line with the trend.

 

MACAU SLOWS BUT STILL SHOULD BE A RECORD - macau2


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