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Game Day

“The Democracy will cease to exist when you take away from those who are willing to work and give to those who are not.”

-Thomas Jefferson

 

Game day is here.  In what will likely go down as the most expensive campaign season in history, it has all come down to today.  For partisans on both sides, the quote above from Thomas Jefferson is what this election has been about: should the government do less or more? Based on the current national polls, it is not clear either side really won that argument.

 

As I wrote yesterday in a note, the consensus view of the expert pollster is that President Obama has this election won.  He currently leads, albeit very slightly, in the national polls and he has a slightly higher edge in the swing state polls which should give him the Electoral College votes he needs to win.  This is all reflected in the probability markets as websites like Intrade have Obama at an almost 68% probability of winning.

 

Now, if I were content in believing the national polls, I could probably stop the note here and get on to something more interesting, like telling you that you should dial into our call with Neil Barofsky, the former Inspector General of TARP,  tomorrow morning (if you don’t have the dial-in information ping sales@hedgeye.com).  The key pushback on the story the polls are telling us is that almost all economic models suggest that President Obama should not get re-elected.  These models, like polls, also have a very strong track record predicting Presidential election results.

 

In addition, the polls generally appear to show a much higher sample of Democrats by ID than would be expected in a race this close.  This doesn’t mean the polls are wrong, of course, it may well mean there is a reason more people are indentifying as Democrats than ever before.  Currently, it is a margin of +7 for Democrats in the recent national polls that I reviewed.  It could also be a systemic error, which may give Romney the ultimate edge.

 

Regardless, by tomorrow we will know who is right and wrong in terms or predicting the outcome of the election.  We will also know who is going to be the President for the next four years.  Or will we? This year more than other, there is also a strong case for an outcome that is undecided on Election Day. 

 

Specifically, in Ohio voters that have requested ballots to vote early, can also go to the polls on Election Day and vote.  In this scenario, the Ohio voters would be given provisional ballots that could not be counted for ten days until it was determined that voter had not voted twice.  In Ohio, a recount is triggered if the vote is within 0.5% and then the recount would have to wait ten days for the provisional ballots to be legitimized.

 

In the Chart of the Day we take a look at how the market performed in the days following the 2000 tied election.  It wasn’t pretty to say the least.  There was a meaningful drawdown for most of November to the tune of some -8% in the SP500.  As my colleague Keith McCullough noted on CNBC last night, it was a market that felt like hell.  Indecision is never good for equity markets.

 

Undoubtedly, many of you will be watching the returns very closely this evening.  There are a few things that you want to focus on to get a sense for the eventual outcome of the election.  These are as follows:

 

1)      Turnout - If turnout is bigger than expected, it likely favors Obama.  If it is lower than expected, it likely favors Romney.  Potential rain in both North Carolina and Florida may help Romney.  In 2008, more than 131 million people voted.  This equated to 62.9% of eligible voters casting ballots, if the turnout percentage looks to be coming in lower it will be an edge for Romney.

 

2)      Exit polls – There are certain demographics that Romney does much better with, namely whites and males.  If the exit polls show a high turnout among these groups, this will be a positive for Romney.  The inverse is true for Obama.  A high turnout of women and ethnic minorities favors Obama.

 

3)      Virginia – The polls in Virginia close at 7pm eastern.  The path to Ohio even mattering and an eventual victory for Romney goes through Virginia.  If Romney does not win Virginia, he most certainly will not win the Presidency.

 

4)      Ohio - As I’ve written before, no Republican nominee has ever won the Presidency without winning Ohio.  While there is a path to the Presidency for Romney without Ohio, it is very unlikely.  The key counties to watch in Ohio are Hamilton (Obama won in 2004, but normally goes Republican), Wood and Ottawa.  The last two are the swing votes within the swing state and have gone with the Presidential winner every year since 1992.  North Carolina closes at 730pm, just like Ohio, and is must win for Romney.

 

5)      8pm – Three states close at 8pm, including New Hampshire and Florida.  If Romney looks to have won North Carolina, Virginia and Ohio, he will likely have also won Florida, but still needs more Electoral College votes. New Hampshire has four and would put him over the top.

 

6)      9pm – If Romney is still alive at 9pm, then we are on to 14 states, including crucial battlegrounds Colorado and Wisconsin.  Democrats have won Wisconsin for six straight elections.  If Romney can keep Wisconsin close or flip it, he will likely be the next President.

 

In closing, I will leave you with a quote from Thoreau:

 

“All voting is a sort of gaming, like checkers or back gammon, with a slight moral tinge to it, a playing with right and wrong, with moral questions; and betting naturally accompanies it. The character of the voters is not staked. I cast my vote, perchance, as I think right; but I am not vitally concerned that that right should prevail. I am willing to leave it to the majority.”

 

Indeed.

 

Our immediate-term risk range for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.03-110.12, $3.45-3.53, $80.19-80.84, $1.27-1.29, 1.67-1.75%, and 1, respectively.

 

Keep your head up, stick on the ice and put your ballot in the box,

 

Daryl G. Jones

Director of Research

 

Game Day - Chart of the Day

 

Game Day - Virtual Portfolio



Earnings Deluge

This note was originally published at 8am on October 23, 2012 for Hedgeye subscribers.

“This tends to leave us less prepared when the deluge hits.”

-Nate Silver

 

If you think about all of the corrections (2-8%), draw-downs (9-19%), and crashes (20-30%) stocks and commodities have had in the last 5 years, how many of your favorite economists nailed calling all of them?

 

Almost anyone who is overpaid on the sell-side can tell you a story about why something is going up – but why do they have such are hard time articulating real-time risk on the way down?

 

Forecasting growth (slowing in Q1/Q2 of 2012) and earnings (slowing Q3/Q4) in 2012 wasn’t easy. But it’s even more difficult to comprehend how people who missed calling both are now telling you this is the “trough” and stocks are “cheap.”

 

Back to the Global Macro Grind

 

“Forecasting something as large and complex as the American economy is a very challenging task. The gap between how well these forecasts actually do and how well they are perceived to do is substantial. Some economic forecasters wouldn’t want you to know that.” (The Signal And The Noise, page 177)

 

How $50-100 Billion in market cap companies like Caterpillar (CAT) and Intel (INTC) miss these very obvious turns in both the global growth and the corporate earnings cycle at this point shocks me.

 

Does anyone get paid to have learned anything from the cycle turning in late 2007? The Fed can’t smooth the corporate EPS cycle.

 

In our top Global Macro Theme for Q4 (#EarningsSlowing – ask sales@Hedgeye.com for the slide deck if you haven’t reviewed it), we contextualize the following:

  1. What coming off the last 5 peaks in corporate margins in the last 100 years looks like (stocks look “cheap” at the peaks)
  2. Why the risk to expectations is more in Q4 and 2013 than what’s staring CFO’s in the face in Q312
  3. Why stocks aren’t cheap if you’re using the right growth, margin, and earnings assumptions

That’s just the long-cycle data. It’s not “tail risk.” Corporate margins peaking as sales growth slows is a very high probability situation that you are seeing come across the tape with each and every Q312 earnings report. This should not be surprising you.

 

What surprises me is how disconnected the reality of this moment in the cycle has been relative to where the stock market has levitated. If you want to talk legitimate TAIL risk, that spread risk is it.

 

I often get asked what would change my view. My answer is usually a question – on what, the economy or the stock market? These have been two very different things in 2012 and all of a sudden they are colliding.

 

“Apres moi, le deluge”

 

That’s what King Louis the XV said to his mistress, meaning, en francais – ‘after me, the flood.’ And oh did he nail that one! And that’s the point of hitting the end of a long-standing narrative – everything bullish about stocks, oil, and gold at 14 VIX tends to end, fast.

 

Are the perma-bulls still serious about what they were saying in March (right as #GrowthSlowing took hold)?

  1. US GDP Growth +3-4% (US GDP = down 69% from Q411’s 4.10% to 1.26% reported most recently)
  2. Earnings are “great” (they were at the Q1 2012 top; but Q312 has been the worst in 3 years)
  3. Stocks are “cheap” (sure, if you use the wrong numbers)

Given the data, I doubt it. That would be a joke. And clients aren’t laughing. From Denver to Kansas City, Boston, Maine, and San Francisco (this morning), I have been on the road speaking with clients for the last month. They are getting very concerned about Q4 of 2012 through Q2 of 2013 – and they should be. They’ve seen this movie before.

 

The real reason stocks and commodities were straight up since June was the Fed. Since the Bernanke Top (September 14, 2012), the SP500 has had a 3% correction. What would make it a 9-19% draw-down from that “buy everything high”? Re-read the last 600 words, then factor in an Obama win, and then add a US Debt Ceiling being bonked in January, right before we hit the #FiscalCliff.

 

And remember, after stocks were up “double-digits YTD” in October of 2007, le “deluge” had a heck of a time finding its trough.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1699-1741, $108.22-110.84, $79.06-80.16, $1.29-1.31, 1.71-1.82%, and 1419-1442, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Earnings Deluge - Chart of the Day

 

Earnings Deluge - Virtual Portfolio


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The President's Chance Of Reelection

With the election taking place tomorrow, we're proud to deliver the final results of the Hedgeye Election Indicator for the week ending November 5. President Obama's chances of being reelected ticked up 10 basis points week-over-week to put his chances at 62.5%. Much better than a coin flip and some of the recent polls out there that put Romney ahead, but certainly not a landslide.

 

Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.

 

Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.

 

President Obama’s reelection chances reached a peak of 64.5% on September 24, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.

 

The President's Chance Of Reelection - HEI

 


EXPERT CALL: GAMING EXPANSION IN SOUTH KOREA?

What's Next For Gaming Legislation in South Korea?    

 

 

Date: Thursday, November 8th 

Time: 8:30am EST  

To gain access email  

 

 

Steve Park, Senior Consultant of Gaming Asia-Pacific Company

 

The Hedgeye Gaming, Lodging and Leisure Team lead by, Todd Jordan will be hosting an Expert Conference Call with Steve Park, Senior Consultant of Gaming Asia-Pacific Company. The call will be held Thursday, November 8th at 8:30am EST and will discuss potential gaming expansion in South Korea.

 

Key Topics Will Include:    

  • Current state of the gaming industry in S. Korea  
  • Draft legislation for further gaming liberalization
  • Timeline & process 
  • Potential players  
  • Scope of the market
  • Touch on surrounding marketing looking at gaming legislation 

The dial-in information will be sent in a forthcoming note.

 

About Steve Park

  • Partner and senior consultant at Gaming Asia-Pacific, a firm providing business and regulatory consulting for international clients wishing to enter the South Korean and Japanese markets
  • Serves as a consultant to the Korea Tourism Organization Advisory Board, advises the integrated resorts committee on political and media affairs
  • Provides advice and assistance to the New Frontier Party to develop the government partys legislative agenda and strategies
  • Previously as a policy advisor in the National Assembly, Park served in the Public Administration & Security Committee reviewing tourism projects by all 16 regional governments   
  • Also served as a campaign consultant and reporter in the U.S for the Republican Party and the Washington Times

A QUICK PEAK UNDERNEATH THE HOOD OF THE US EQUITY MARKET

Takeaway: While the current earnings season has been cause for worry, pollyannaish estimates remain the key headwind to the stock market from here.

SUMMARY BULLETS:

 

  • Roughly 80% though earnings season, it’s clear to see that 3Q12 has shaped up exactly as we had laid out in our #EarningsSlowing theme: very bad.
  • Consensus remains out to lunch with their forward revenue, operating margin and EPS growth estimates. When you combine the negative trend in corporate guidance with the potentially-precarious Global Macro setup (potential US recession; no Chinese stimulus; Europe continues to contract), it’s easy to anticipate a scenario whereby those estimates have to be revised down hard and fast at some point over the intermediate term.
  • Aggressive estimates for operating margin expansion puts a great deal of pressure on corporate management teams to accelerate material cost-cutting initiatives like we’ve seen at UBS, DOW, AMD, RIO, FDX and CMI (to name a few). While that may appear good for a single company’s earnings outlook in the short term, the reality is that when corporations are engaged in cost-cutting en masse, GDP growth tends to slow materially; this perpetuates top line weakness across the corporate sector in a reflexive manner.

 

For the 3Q12 earnings season to-date, 59.8% of S&P 500 companies have missed on the top line and 28.7% have missed on the bottom line (388 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. Average SPX constituent EPS growth is flat on a YoY basis and average sales growth is down -1.4% YoY. We have not seen weakness like this since mid-to-late 2009.

 

From a forward-looking perspective, 74 companies have issued 4Q12 EPS guidance and 56 of those cases have been below the mean EPS estimate (vs. 18 above). Per Factset, the 76% negative guidance ratio is well above the long-term average of 61%, though roughly in-line with the 78% recorded at this time during the previous quarter.

 

We know consensus is typically poor at forecasting inflections in macro, but it’s shocking to us that consensus continues to aggressively ignore the warnings issued at the micro level. As the chart below highlights, the sell-side continues to expect a v-bottom and a demonstrable acceleration of revenue and EPS growth over the NTM.

 

A QUICK PEAK UNDERNEATH THE HOOD OF THE US EQUITY MARKET - EARNINGS SEASON 2.0

 

When you combine the negative trend in corporate guidance with the potentially-precarious Global Macro setup (potential US recession; no Chinese stimulus; Europe continues to contract), it’s easy to anticipate a scenario whereby those estimates have to be revised down hard and fast at some point over the intermediate term. We can’t see how that is a positive catalyst for the stock market, but we’ve been surprised before.

 

Digging into the weeds a bit, we see that consensus continues to burden corporate management teams with incredibly aggressive margin expansion assumptions. Over the NTM, SPX constituent operating margins are projected to expand by an average of +101bps YoY per quarter on a median basis. That compares with +5bps of median YoY expansion in 3Q12 and an average of -2bps YoY over the LTM.

 

A QUICK PEAK UNDERNEATH THE HOOD OF THE US EQUITY MARKET - SPX Margins

 

Judging by the latter trend, it would appear that much of the earnings “juice” has been squeezed from corporate operations. Moreover, consensus forecasts NTM median SPX constituent revenue growth of +3.8% YoY on average, per quarter, which does not bode well for meeting their aggressive operating margin assumptions.

 

A QUICK PEAK UNDERNEATH THE HOOD OF THE US EQUITY MARKET - SPX Revenues

 

That setup puts a great deal of pressure on corporate management teams to accelerate material cost-cutting initiatives like we’ve seen at UBS, DOW, AMD, RIO, FDX and CMI (to name a few). While that may appear good for a single company’s earnings outlook in the short term, the reality is that when corporations are engaged in cost-cutting en masse, GDP growth tends to slow materially; this perpetuates top line weakness across the corporate sector in a reflexive manner. Refer to our OCT 10 note titled, “#EARNINGS SLOWING UPDATE: IS CORPORATE COST-CUTTING COMING BACK WITH A VENGEANCE?” for more details.

 

Broadly speaking, praying for stock buybacks is not a risk management process.

 

Darius Dale

Senior Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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