269 – 269

This note was originally published at 8am on October 24, 2012 for Hedgeye subscribers.

“A tie is like kissing your sister.”

-J.C. Humes


How about if America woke up on November 7th and “269 – 269” was the headline on the front of major newspapers? The implication would be that the Electoral College was effectively tied.  This is actually a somewhat plausible scenario in 2012.  It could occur with Obama winning all of Kerry’s states from 2004 and adding New Mexico and Ohio.  Currently, both New Mexico and Ohio, albeit marginally, are in the Obama camp.


In the event of an Electoral College tie, the decision gets handed to the House of Representatives.  Given that the Republicans hold a majority in the House, Romney would then become the next President.   Just as many moderates think that the Tea Party has hijacked the Republican Party, they would now be arguably the key reason that the Republicans gained the Presidency.  After all, if it weren’t for the Tea Party insurgency (for lack of a better word) in the midterms, the Republicans would likely not currently control the House.


Regardless of whether you believe my 269 scenario, it is beyond argument that this race is getting too close to call.  The averages of the major national polls are basically within 0.5 points, favorability ratings of the candidates are basically tied, and neither candidate has a definite edge in the Electoral College. 


There are some credible outliers related to predicting the outcome of the election.  One of these is Professor Ken Bickers from the University of Colorado. He has done an analysis that looks at state level economics as a predictor for the Electoral College.  Currently, his analysis suggests that Romney and Ryan may win up to 330 seats.


We will be joined by Professor Bickers today at 1pm today for a conference call to discuss his analysis.  For institutional macro subscribers, the materials and dial-in will be circulated this morning.  If you are not an institutional macro subscriber, ping to inquire about access.


Politics matters as it relates to future economic policy, so we have been and will continue to focus closely on this election.  In fact, we would postulate that some of the stock market weakness over the last few days, though largely driven by #EarningsSlowing, is being amplified by increasing uncertainty in political outcomes in the United States. 


Globally, the bigger concern continues to be tepid economic growth.  This morning HSBC’s flash PMI for China came in at 49.1 versus expectations of 47.9.  Even if marginally better than expected, the number remains below 50.  In Europe the numbers were bleaker as the Eurozone Flash PMI came in at 45.3 versus an estimate of 46.5.  The German IFO business climate indicator also disappointed marginally coming in at 100.0 versus expectations of 101.6.  Not surprisingly, the Euro is weak and Spanish yields are backing up this morning, as result.


It is a major policy day today in the United States with an announcement coming from the Federal Reserve.  The FOMC rate decision will be held at 12:30pm today with a Bernanke press conference at 2:15pm. Even though the stock market basically peaked on the day of the last Fed announcement, it is unlikely that even Chairman Bernanke adds more fuel to the fire at this point.  Although if the Fed were to signal they are going to take the money printing press up a gear, that would be the ultimate October surprise.  It may even be bigger news than the October surprise that Donald Trump is purportedly going to reveal on Twitter today. 


Our friends at Bespoke Investment Group actually did an interesting analysis looking at the return of the stock market on the days of Fed announcements in this period of zero interest rate policy.  According to their analysis, the SP500 showed a positive return on 21 out of 31 of those days with an average gain of +0.71. 


Even as history is a guidepost, we would suggest that investors are getting much better at front running the Fed.  This is actually born out in the numbers as in the last year the return on a Fed day is closer to +0.30.  Yes, this is still a positive return, but only marginally so.  Today the setup seems more poised to disappoint as Chairman Bernanke will likely not have much new positive news on the economy, and is also unlikely to further ease.  But, we’ve been surprised by the Fed before . . .


The broader issue with the Fed’s long-term zero interest rate policy is that extreme levels at which certain asset classes are getting priced.  One example is the high yield market.  As one high yield investor emailed me yesterday:


“Our basic premise is that there is massive technical support in the search for yield for the broader HY and leverage loan market driving yields to historically tight levels.  There is such appetite in the loan market that terms are reverting back to 2007 peak levels…new issue spreads are being compressed and covenants are being pulled (45% of new issue is now ‘cov-lite’ vs. 10% last year).  To a large extent this has been driven by the return of the clo…back from the dead…or at least from 2007.  CLO issuance will be $40bn this year, which is more than the last 4yrs combined.”


Now we aren’t ready to make a big call on high yield market just yet, but the red flags raised above are well worth pointing out.  After all, it’s not a tie if you are long high yield at the top.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1699-1741, $107.48-110.71, $79.58-80.16, $1.29-1.31, 1.71-1.82%, and 1409-1426, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


269 – 269 - Chart of the Day


269 – 269 - Virtual Portfolio

Trade Of The Day: WTW

Today, we shorted Weight Watchers International (WTW) at $55.82 a share at 11:55 AM EDT in our Real Time Alerts. With the stock trending lower over the past week, we saw an opportunity to short it on green. The company recently lowered guidance and put the blame on Superstorm Sandy as well as investment costs. We think there's more to the story as the stock fails to trade above its TAIL risk line.


Trade Of The Day: WTW - image001


Neil Barofsky: What Will The President Do Now?

Neil Barofsky: What Will The President Do Now? - A


"We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of [our] financial system."
                  -Neil Barofsky 



The Hedgeye Macro Team lead by, CEO Keith McCullough, and DOR Daryl Jones, will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held Wednesday, November 7th at 11:00am EST, following the Presidential Election to determine the future path of fiscal, monetary and economic policy. 


Barofsky is extremely familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in February 2012. He has become known for his relentless criticism of Treasury officials, often highlighting Tim Geithner as a particular problem. Barofsky officiated as an aggressive and outspoken overseer monitoring for waste and fraud. During his time as with the U.S. Treasury more than $550 million in fraud losses were avoided and $150 million fraudulent earnings were recovered for taxpayers. Given his experience and knowledge of the treasury it will be invaluable to hear his brutally honest thoughts on the outcome of the election and his insider's perspective on how it will economically effect our country moving forward.



Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below. Contact   if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#


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Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail

Takeaway: Energy: Fuel shortage won't last long. Industrials: Near great Express & Courier entry point. Retail: Discounted goods and lower earnings.


Hedgeye Internal Dialogue



ENERGY: Refined Product Shortage Will Not Last Long


Takeaway: The refining, distribution, and marketing of refined product in the greater NYC metro area is clearly the segment of the energy industry most impacted by Sandy. We suspect that this “shortage” will not last much longer.


The area was ill-prepared for such a disaster. Gasoline and distillate inventories in the Atlantic Districts and New England were at the lowest level in five years heading into the storm.  There are a few key reasons for this:

  1. Refined product demand remains weak across the entire U.S.  When demand is weak, there is less chance of a “demand shock,” therefore less need to hold product in inventory.
  2. Futures curves are backwardated (higher prices today than in the future), dis-incentivizing storage.
  3. Refined product production is low in the Northeast because of poor refining margins (high Brent price, weak demand for products, excess capacity).  Indeed, several Northeast refineries have closed or are running at reduced rates due to profitability issues over the last two years.

The pre-Sandy inventory figures were 48MM bbls of gasoline and 39MM bbls of diesel in the Northeast.  Compare this to 3.1 MM bbls/d of demand for gasoline (15.5 days of supply) and 1.2 MM bbls/d of demand for diesel (32.5 days of supply).


The waive of the Jones Act (only U.S. flagged ships can move refined product from U.S. port to U.S. port) allows ships to take product inventory from the U.S. Gulf Coast and move it up to the New York area.  At least two companies are in the process of doing that. 


There is little risk of a gasoline shortage, in our view.  With 15 days of inventory, refineries already coming back online and increased shipments from the Gulf via pipeline and tanker, there will be enough gasoline to support demand in the Northeast market. 


The issue is that so many gas stations were without power last week (more than 50%), that the ones that had power were jammed and ran out of fuel.  Now, nearly 100% of stations have power, and the ones that never lost power are waiting on the new supplies.  That should come quickly.  We suspect that this “shortage” will not last much longer.


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 1


INDUSTRIALS: Airfreight/Express & Courier Services Entry Point


Takeaway: We believe we are looking at a really good entry point for airfreight/express & courier services – particularly FDX.


There have been 4 huge headwinds:

  1. Inventories have been building
  2. Global trade has fallen over the past couple of quarters
  3. Capacity in airfreight has just started to tighten after years of slack
  4. Containership prices have increased relative to airfreight since 1Q after years of lost pricing.

Those have depressed margins and understated profitability and may be turning. A port disruption would be icing on that last point’s cake on relative pricing.


An estimate shows that each day of transit costs 0.6% - 2.3% of the cargo’s value in what is essentially a transport tax (lost selling days, spoilage, lost design time etc).  This is an interesting data point, even if it’s only a few days of lost cargo activity, it still matters.  Therefore, weeks of disruption could matter significantly.  Since air cargo is basically always only at +/-50% capacity utilization, there could be some switching of more critical cargo into that transport channel.  It certainly has the capacity and reliability.


People claim that improved service levels have driven air cargo to boats, we think it’s mostly that the price differential blew out.  The opposite was true around 2004, when everyone figured air cargo was a huge growth business.  That was relative pricing, too and largely unrelated to service.  The price swings are huge over time.  See the chart below from our pending Express & Courier Services Black Book (for access to this call email ).


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 2


RETAIL: Sandy Destruction; Longer Term Impact


Takeaway: Reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).


If anyone out there thinks that Sandy will not have a meaningful impact beyond a couple of weeks worth of disruption in consumer purchasing behavior, then think again. The chart below shows the absolute containerized imports into the US for apparel and footwear products over the past two years.


Number of Twenty-Foot Equivalent Units (TEUs) Imported Into The U.S.

Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 3A


The data is through November 2, and the drop is startling. 


The reality is that we cannot simply expect the ships to dock, unload their wares, and then the retailers are off to the races.

  • The Longshoremen (already near the full capacity their strict work rules allow) will have to unload the excess containers, and then the (largely unionized) drayage drivers will need to take to either the railyard or to the hub and spoke system for an LTL trucking company (also likely unionized)
  • Then the goods get unpacked, repackaged, and shipped off around the country
  • It wouldn't be a problem if we were operating previously at less than 50% productivity, because then all we'd need to do is get people to work harder
  • But productivity is closer to 80%, which leaves little room catching up on lost work

A simple one or two week delay in shipment could snowball into a 3-4 week delay in when product hits the shelves. This is an extremely critical period logistically for the holiday shopping season. Sandy had very bad timing.


This is when 'just in time' inventory management comes back to bite U.S. businesses. Retailers will do a great job of playing the blame game on the storm. But the reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).




NKE: Fundamentals Turning Now

Takeaway: We think that the most significant factor that has been impacting $NKE's valuation and sentiment will turn on the margin this quarter.

Nike’s stock price is all about growth in Futures, right? We’d argue that the answer is ‘Not Necessarily’, and in this instance, we think Gross Margin matters much more.

Clearly, futures matter. We’d be foolish to suggest otherwise. Chart 1 shows the stock against the change in Global Futures. Not bad. Until recently, that is.

NKE: Fundamentals Turning Now - nk1


Chart 2. Once Nike’s Gross margin started to break down, the importance of futures was taken down a notch. It was ‘all about inventories and margins.’

NKE: Fundamentals Turning Now - nke22


Chart 3. Inventories, however, have turned a corner, and are again converging with Gross Margins. The company has nudged that perhaps they are up towards the back half. But we think they could be positive in the coming quarter.

NKE: Fundamentals Turning Now - nke3


For a stock that is so universally hated right now (note worst sell-side Buy Ratio in a decade), we’ve gotta think that it can only be a positive for the stock if we’re right that this factor is turning. (Chart 4)

NKE: Fundamentals Turning Now - nke4

Energy and Elections

WTI crude oil had a nice run from late 2008 until mid-2011. Since then, the price of oil has been all over the place. Really, it comes down to tonight's election results and whether Mitt Romney wins. If he does, that's bullish for the US dollar and bearish for oil. The opposite rings true if Obama is reelected.


Energy and Elections - oil

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