OIL: Correlation And Election Risk

We’ve said it before and we’ll say it again: a Romney win is bullish for the US dollar. Dollar up, commodities down; that puts pressure on crude oil and will drive it lower accordingly. The inverse correlation between the US dollar and Brent crude oil has strengthened to -0.82 over the last 15 days versus +0.27 over the last 60 days. On the long-term scale of things, the relationship has legs. It all comes down to who takes the White House at the end of today.


OIL: Correlation And Election Risk  - OILUSD


Client Talking Points


Election day is finally upon us! There’s a lot of data out there and it’s essentially a dead heat between Obama and Romney. Rasmussen has Romney up a point on Obama while Battleground polls have both men tied. Our proprietary Hedgeye Election Indicator puts Obama’s chances of reelection at 62.5%, which is up 10 basis points week-over-week. While that bodes well for Obama, it’s not a landslide by any means. 


Remember the implications for this election: dollar up with Romney, dollar down with Obama and more Bernanke too. The outcome of this particular election will materially change the market. If Obama were to win, we’d likely short the US dollar and go long gold and vice versa if Romney wins. And with Hurricane Sandy having messed up the Northeast, it’ll be interesting to see how many people are able to get out and vote today.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“@KeithMcCullough amazing how different obama's economic policies are from clinton's. and they are in the same party” -@HedgeyeSnakeye


“I never did give them hell. I just told the truth, and they thought it was hell.” -Harry S. Truman


Final Rasmussen Poll: Romney 49% / Obama 48%


Takeaway: We expect continuing softness in the broader category and continuing underperformance at Olive Garden and Red Lobster.

We remain bearish on Darden Restaurants. Yesterday, Keith added it to the short side of our Real-Time Positions. 


The poor same-restaurant sales trends at Olive Garden and Red Lobster are pressing the company towards an impasse. The concepts account for roughly 75% of the company's consolidated revenues. We believe that the company is on an unsustainable path.  Specifically, the company is burning cash and the stock can no longer be all things to all investors.  A rich dividend, aggressive growth profile, and sturdy balance sheet have attracted investors of all different styles to buy Darden’s stock over the past few years.  One, or more, of these attributes is likely to fall away as maintaining all three becomes unsustainable.  A proactive reorganization, including a cessation or slowing of unit growth, would be preferable to the more likely reactive lowering of margins or slashing of the dividend that we think is becoming inevitable.


Prior to the onslaught of the Hurricane Sandy, casual dining same-restaurant trends were slowing.  We believe that the impact of Sandy on Darden’s results have not yet been baked into consensus.  October looks to be worse than September and November, almost certainly, has gotten off to a difficult start given the company’s exposure to the northeast. 


Expectations, and company guidance, may be negatively revised in the coming weeks as we progress further through Darden’s second fiscal quarter of 2013.

  • Management expects total sales growth in fiscal 2013 of between 9 % and 10%; consensus is 12%

HEDGEYE: We believe that the Street may be aggressive in modeling sales growth 200 bps in excess of management’s guidance


  • Management expects combined same-restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse of approximately 1% to 2%; consensus is looking for 1.46%

HEDGEYE: LongHorn Steakhouse lost momentum on a two-year basis in 1QFY13 and slowing industry trends, along with the impact of Sandy, could pressure the Darden system’s sales growth.  Consensus is expecting continuing sales momentum at RL & OG in 2QFY13 with an acceleration coming in 2HFY13


  • Management expects that diluted net earnings per share growth from continuing operations for 2013 will be 5% to 9%; consensus 8%.

HEDGEYE: Despite consensus expecting a resounding top-line beat in 2QFY13, earnings per share growth is expected to come in 100 bps below the high end of management’s guidance.


The Darden management team has done a commendable job outlining the plan towards a sales recovery as the company navigates FY13.  We believe that the likelihood of the recovery playing out as planned is slim; we expect continuing softness in the broader category and continuing underperformance at Olive Garden and Red Lobster.   We are expecting FY13 guidance to be revised lower when the company announces 2QFY13 results.











Howard Penney

Managing Director


Rory Green



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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  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.”




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

McCullough: U.S. Dollar Strong with Romney Win

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