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The Reelection

Client Talking Points

The Reelection

Looks like our Hedgeye Election Indicator (HEI) was correct. Our final reading on Monday put President Obama’s chances of reelection at 62.5%. Sure enough, Obama narrowly won the election last night much to the chagrin of the Romney camp. People have lots of questions about what the future now holds and rightfully so. How will the fiscal cliff situation play out? Will Republicans in the House hold the economy hostage over the debt ceiling? What will happen to Geithner and Bernanke? Over the next six months, we’ll have more clarity on the aforementioned situations.

Obama's Market

Obama continuing on as President for another four years will materially affect certain markets. For instance, we believed that a Romney win would have been bullish for the US dollar and bearish for commodities. He also vowed to replace Ben Bernanke as chairman of the Federal Reserve. Now we wait and see if Bernanke will stay put and whether or not the President has any intention of strengthening our currency. People are fed up with higher gas prices (especially after Hurricane Sandy) and food prices. Can the President quell the public outcry or will he stay the course he’s laid out over the last four years? We shall see.

Asset Allocation

CASH 58% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
TCB

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.

PCAR

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 enjoys a strong position in a structurally advantaged industry and an attractive valuation.

HCA

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

TWEET OF THE DAY

“if we go over fiscal cliff--everyone in stream gets [a] pony” -@fearlicious

 

QUOTE OF THE DAY

“Money is better than poverty, if only for financial reasons.” -Woody Allen

STAT OF THE DAY

Electoral Vote Count: Obama: 303 / Romney: 206



Much Ado About Nothing

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.”

-William Shakespeare

 

Depending on your political affiliation this morning, last night was either a Shakespearean tragedy or a Shakespearean comedy.  Republicans are obviously sad and Democrats are clearly quite happy.  But, did anyone really win? The President was re-elected with a very small margin and Congress remains in gridlock with a Republican House and Democratic Senate. 

 

We went into this election launching our Hedgeye Election Indicator (HEI), which attempted to assign a probability to the President getting re-elected based on real time market prices.  In our Q4 themes presentation, we then flagged that all the consensus polls were pointing against Romney.  The key discrepancies we saw to this consensus were the potential for a relatively higher turnout for Republicans and an economy that, based on historical standards, should not have led to a re-election for the incumbent.  In the end, neither Republican turnout nor the economy mattered as much as we expected.

 

When the political scientists write the story of this election, it will likely come down to a few failures by the Republicans.  First, they didn’t make the economic case strongly or clearly enough against Obama.  Second, a number of demographic groups turned sharply against the GOP, namely women. 

 

Obama, on the other hand, did a few things very effectively.  His re-election team consistently painted Romney as unfit to be President and the characterization largely stuck -- or at least stuck enough to matter on Election Day.  More importantly, Obama implemented a number of policies that aided him. Indirectly loose monetary policy aided the stock market and inflated some asset classes, which as we show in the Chart of the Day of the Hedgeye Election Indicator aided his re-election chances.  The second key policy was the auto bailout, which mattered disproportionately in the key battleground states.

 

But now the election is behind us.  To the victors go the spoils, or at least the gloating tweets and Facebook status updates, and to the stock market operators comes another day of playing the game in front of us.  Some questions to consider as a result of this election are as follows:

 

1)      How will the Fiscal Cliff ultimately play out? The timing on this step up in taxes and step down in government spending is January and no resolution is imminent.

 

2)       Will the Republicans hold the economy hostage over the debt ceiling again? Based on our analysis, the U.S. is slated to hit the debt ceiling again in early 2013.  With less of a mandate for Obama, it’s unlikely the Republicans in Congress acquiesce on this.

 

3)      Who will replace Treasury Secretary Tim Geithner?  We’ve made our stance clear on Geithner, we aren’t big fans.  But based on the proverbial writing on the wall, he is on his way out and who takes his spot is very much an open ended question. 

 

4)      What will Obama’s economic policy look like in 2013 and beyond?  Regardless of your partisan affiliation, you must admit this was and is a very tepid recovery.  Early in his first term, the President will have pressure to do more to stimulate.  How will he juxtapose this with the need to cut government spending?

 

5)      Is this Chairman Bernanke’s last term? On some level this is irrelevant in the short term as his term doesn’t end until January 2014, so we should expect to see absurdly loose monetary policy until at least then.  As always though, markets will price in a new Fed Chairman before it happens, so determining Bernanke’s replacement will be key to thinking about the future of monetary policy.

 

We will be digging into these questions and more this morning at 11:00am with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund.  By his own admission, Barofsky is a life-long Democrat and as a former senior official in the Treasury Department will have some keen insight into the future of policy in the Obama administration.  We will be circulating dial-in information to our Macro subscribers this morning and if you are not a Macro subscriber but would like to trial the product, ping .

 

One of our favorite quotes from Barofsky, who wrote “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street”, is the following:

 

“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.”

 

Regardless of the specific policy path, it is hard not to agree with that quote.

 

In terms of your portfolios, the biggest immediate term factor to focus on is the U.S. dollar.  As long as Chairman Bernanke is leading the Federal Reserve, monetary policy will remain implicitly dovish.  This is and remains bearish for the U.S. dollar.  Conversely, this is positive for those asset classes that are inversely correlated to the dollar.  Chief among these is gold, which currently has a high 90-day inverse correlation to the dollar. 

 

Dollar down  and commodities up, sound familiar? As Yogi Berra famously said, “It’s déjà vu all over again.”  Unfortunately for corporations and the stock markets, dollar down means increased input costs and earnings headwinds. 

 

As my colleague Darius Dale highlighted yesterday, 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. Similar to the political landscape, we would expect more of the same in terms of our Q4 theme of #EarningSlowing.

 

Our immediate-term risk range for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.46-111.44, $3.46-3.53, $80.24-80.85, $1.27-1.29, 1.67-1.75%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Much Ado About Nothing - Chart of the Day

 

Much Ado About Nothing - Virtual Portfolio


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%

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 sales@hedgeye.com 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#

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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