Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
Although Donald Trump lost by double digits in WI, his campaign continues to assure supporters that he will hit the magic number. The mother lode of delegates will now be found in the Northeast (where Trump is polling well) and CA where he holds a lead over Ted Cruz - and his appeal to former Gov. Arnold Schwarzenegger's supporters has been well-received. Trump needs to win 62 percent of the remaining delegates - a tough task - but if his northern firewall holds, then again we believe it will all come down to CA.
CRUZ'S BRONX CHEER:
On the heels of his WI victory, Cruz is finding himself unwelcome parts of the Empire State. Polls already have him in third behind John Kasich, and if Trump lands to a sizeable victory here, it would wash away any aura of Cruz gaining ground. Cruz has little wind in his sails following his WI victory, and the positive coverage that would normally follow such a win has been usurped by Trump's huge lead in NY polls and from his "New York values" comments made earlier in the primary. To make matters worse, his scheduled appearance at a Bronx high school was cancelled due to a threatened student walkout and protests. Kids these days.
LEE-DING THE LIST:
Appointing UT Sen. Mike Lee to the SCOTUS is suddenly the hot idea in Washington, and the not-so-subtle promotion of him may coincide with Trump's promised list of possible SCOTUS nominees. Lee is a conservative purist and is idolized by the more ideological wing of the Republican Party - which is currently rallied around Cruz. By invoking Lee's name and placing him on his SCOTUS shortlist, Trump could narrow his rift with conservatives, but we still don't see signs of him emerging as the great Republican unifier.
Wall Street's pie-eyed enthusiasm to "buy stocks now" was made even more palpable yesterday. According to FactSet, the average analyst's bottom-up S&P 500 target price for the year ahead was 2256.59. That implies 10.5% upside from yesterday's close. Meanwhile, analysts have been pulling back their expectations for Q1 S&P 500 earnings and Reuters reports "weak earnings expectations sets [the] stage for stock gains."
First off, just consider the accuracy of that 2256.59 bottom-up S&P 500 target. Here's FactSet:
"The average difference between the bottom-up target price estimate at the end of the month one year ago and the final price for the index at the end of the same month one year later has been +6.8%. In other words, industry analysts on average have overestimated the final price of the index by 6.8% at the end of each month during the previous year."
The reason for the serial over-optimism? Sell side analysts have been perennially bullish. Remember: "Of the 11,584 ratings on S&P 500 companies at the end of the first quarter (March 31), 50.8% were Buy ratings, 43.8% were Hold ratings, and 5.4% were Sell ratings."
This while analysts have, in fact, begun ratcheting back their earnings expectations for Q1 2016. According to FactSet:
"During the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period."
That was the largest drop for a quarter since Q1 2009.
And yet the latest bit of permabull storytelling suggests that falling earnings expectations will send stocks higher, as companies beat those dismal expectations.
That argument doesn't hold water. What this bullish interpretation doesn't account for is that all S&P 500 sectors are bumping up against tough comps in Q1 and Q2 of 2016. For our take on this, watch Hedgeye CEO Keith McCullough in the video below:
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Takeaway: Three months into 2016 and we're already rivaling Great Recession bankruptcy rates. What say you, Sears?
It's so easy to succumb to the 'water torture' of Chapter 11 press releases in retail coming from the likes of Sports Authority, Vestis Retail Group (Eastern Mountain Sports, Bob's, and Sports Chalet), and Pacific Sunwear. But it's important to take a step back. Then another. And another. Then and only then does the big picture come into focus about the broader economic cycle.
Consider this...over the average economic cycle, we see on average 15-25 retail chains go under. Those represent roughly 1% of Retail Sales. Naturally, the filings are not even by year. Sometimes (like when the economy is ripping) there are none. Plenty of profits to go around for even the worst retailers. But some years there's upwards of 15 (Great Recession).
In just a little more than three months, we've already seen 4 parent bankruptcies (6 chains) in US Retail. Annualized, that's about 16, or 0.5% of retail.
After an extremely tough winter selling season for shoes and apparel, it's only natural that we'd see this year push the 2016 tallies to a level close to what we saw in the Great Recession.
Takeaway: Recent macro market moves in the Long Bond contradict the Fed's "all is good" narrative.
Hurray! No recession, no bubbles and the Fed's December rate hike went exactly as planned.
That's the latest delusional takeaway from Fed head Janet Yellen. Last night, Yellen joined her predecessors Ben Bernanke, Alan Greenspan and Paul Volcker in NYC for a panel discussion to parade the U.S. economy's "tremendous progress" since the '07-'09 financial crisis.
Where do we begin?
We've been steadfast in our criticism of the Fed's and Wall Street's serial overoptimism on U.S. economic growth. Here's Hedgeye CEO Keith McCullough, in the video below, explaining what we really think about Fed "data dependence."
Last night, Yellen's storytelling hit an all-time low. Here's analysis from McCullough in a note sent to subscribers earlier this morning:
"Yellen has had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6yr cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD."
Another issue for the Yellen "all is good" narrative is the continually falling Long Bond (i.e. U.S. growth is slowing):
"Another great day for the Long Bond yesterday (best way to be long #GrowthSlowing); 10yr Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; US Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2)."
Fading the Fed's false narratives has been a winning strategy all year.