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Clinton vs. Trump = Establishment vs. Insurgent?

Below is a brief excerpt from Hedgeye Potomac 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 sales@hedgeye.com.

INSURGENT V. ESTABLISHMENT

Clinton vs. Trump = Establishment vs. Insurgent? - trump and clinton

 

We expect this election season to continue its unconventional trend far into the fall. Donald Trump's ascendancy has blurred the political lines - running to the left of Hillary Clinton on some issues and to the right on others. Now that John Kasich has dropped out and with Bernie Sanders mathematically eliminated, a Clinton v. Trump match up should not be viewed as a classic Democrat v. Republican race - instead there are strong undercurrents of an establishment v. insurgent clash with swaths of the electoral map and swing voters potentially in play.

 

We are already seeing evidence of Republicans "standing with her," but we also expect to see blue collar Sanders supporters giving Trump a look given his message on trade and national security.

CLINTON'S CONUNDRUM

Go back six or seven months and ask yourself if you ever thought you'd see the Republicans narrow their field of 17 candidates to one before the Democrat's field of three...This puts Hillary Clinton in the position of fighting a two-front war against Bernie Sanders on the left, and Trump for the most part, well, the right. This is not quite what she expected and planned for - especially now that Trump and the tattered Republican Party can regroup and concentrate exclusively on attacking her for the next six months.

 

It also forces Sanders to do some soul searching - although he is likely to do well in some upcoming states - will he continue to fight in a race where he is mathematically eliminated from winning and potentially damaging his party's chances in the general election?

WHAT WILL WARREN DO?

Clinton vs. Trump = Establishment vs. Insurgent? - warren

 

Democratic Senator Elizabeth Warren has been one of the most vocal proponents of the #neverTrump movement all the while sitting on the sidelines without endorsing a candidate. On the heels of the news of Trump becoming the presumptive nominee, Warren went on a Twitter tirade saying that she will "fight her heart out" to make sure Trump isn't elected. If she is going to have an impact where (and when) it's most needed, sources say she'll need to step up and endorse Clinton sooner than later quashing any support for Sanders and helping unify the Democratic Party against Trump.


Hedgeye Guest Contributor | Thornton: Will the Fed Raise Rates Before the Election?

Editor's Note: Below is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. 

 

A brief note on our contributor policy. While this column does not necessarily reflect the opinion of Hedgeye, suffice to say, more often than not we concur with our contributors. In the piece below, Thornton writes of current Fed policymakers, "I hope that the next president, whomever that may be, has the foresight to change the guard."

 

Hedgeye Guest Contributor | Thornton: Will the Fed Raise Rates Before the Election?  - Fed Chairmen cartoon 02.03.2016

 

“Facts are stubborn things”

-John Adams

 

CNN Money posted this headline on April 27: Will the Fed raise rates before the elections?

 

The correct response, of course, is: Who cares?

 

The reality is that no one should because a 25 basis point move is irrelevant for economic activity. One would only care if one believes that raising the target for the funds rate is a signal that the Fed will shrink its balance sheet back to the point where bank excess reserves are once again trivial—about $2 billion. But, of course, the Fed is not poised to do that anytime soon. Instead, the Fed will continue to make tiny, 25 basis point, adjustments to its funds rate target.

 

More troubling, markets will continue to believe that the Fed (the European Central Bank, and other central banks) have considerable control over interest rates beyond the essentially meaningless federal funds rate. If this were not the case, CNN Money would never post such a headline.


As I pointed on in a previous Common Sense Economics Perspective, the Fed’s ability to affect interest rates stems, in part, from the fact that price discovery in the credit market is difficult. Hence, lenders are looking for an anchor for their lending rates. The belief that the Fed can control interest rates provides such an anchor. Indeed, this belief has allowed the Fed to control the federal funds rate very tightly simply by announcing its target for the rate—no actions were required.

 

I am sympathetic with my economist friends who find it difficult to believe that the Fed has been able to control the funds rate simply by announcing the target and, in so doing, has distorted interest rates on a variety of assets: Can the Fed have such power simply because market believes that it has it?

 

The evidence I have found elsewhere, plus the previously mentioned difficulty of price discovery in the credit market strongly suggests the answer is, yes! Specifically, I show that the Fed controlled the funds rate with open mouth operations, not open market operations, and that, in so doing, distorted Treasury yields along the yield curve out to five years.

 

Hence, I am not surprised that the Fed’s 7-year zero interest rate policy, and its quantitative easing, forward guidance, and Operation Twist policies have had even a larger detrimental effect on interest rates in the broader credit market. The distortion of interest rates is detrimental because it causes credit to be allocated differently than it would have been otherwise. Policymakers should interfere with the allocation of credit if, and only if, they can allocate credit better than the market can. I don’t believe that this is ever the case.


The bottom line is this: Any economist worthy of the name knows that the Fed can only have a significant effect on interest rates if the market believes that it can. Hence, interest rates could return to more normal levels if the Fed would simply admit that this is true. Of course, this cannot happen under current Fed leadership because it is too heavily invested in the policies of the last 7+-years.

 

This can only happen with a changing of the guard. I hope that the next president, whomever that may be, has the foresight to change the guard.


Initial Claims | Energy Is Still Bleeding

Takeaway: The latest labor market data shows the highest rate of W/W claims growth YTD coupled with a +155% M/M rise in energy job cuts for April.

Initial Claims | Energy Is Still Bleeding - Claims1

 

This morning's labor data shows two notable upticks. Seasonally adjusted initial claims rose +17k week over week to 274k, which is the largest week-over-week increase so far in 2016. Additionally, the first chart below shows that Challenger Job Cuts in the energy sector rose +155% in April to 20k after falling to 8k in March. Moreover, the ADP survey out Wednesday showed a weaker-than-expected +156k jobs added in April vs. consensus of 193k and the prior print of 194k (downwardly revised from 200k).

 

Initial Claims | Energy Is Still Bleeding - Claims17

 

The Data

Prior to revision, initial jobless claims rose 17k to 274k from 257k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 258k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.2%

 

Initial Claims | Energy Is Still Bleeding - Claims2

 

Initial Claims | Energy Is Still Bleeding - Claims3

 

Initial Claims | Energy Is Still Bleeding - Claims4

 

Initial Claims | Energy Is Still Bleeding - Claims5

 

Initial Claims | Energy Is Still Bleeding - Claims6

 

Initial Claims | Energy Is Still Bleeding - Claims7

 

Initial Claims | Energy Is Still Bleeding - Claims8

 

Initial Claims | Energy Is Still Bleeding - Claims9

 

Initial Claims | Energy Is Still Bleeding - Claims10

 

Initial Claims | Energy Is Still Bleeding - Claims11

 

Initial Claims | Energy Is Still Bleeding - Claims19

Yield Spreads

The 2-10 spread was unchanged WoW at 104 bps. 2Q16TD, the 2-10 spread is averaging 104 bps, which is lower by -4 bps relative to 1Q15.

 

Initial Claims | Energy Is Still Bleeding - Claims15

 

Initial Claims | Energy Is Still Bleeding - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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Earnings Season: U-G-L-Y (You Ain't Got No Alibi, You Ugly)

Takeaway: A total of 374 of 500 S&P 500 companies have reported Q1 results with aggregate sales and earnings growth down -2.7% and -8.8% respectively.

Earnings Season: U-G-L-Y (You Ain't Got No Alibi, You Ugly) - earnings cartoon 01.27.2015

 

It's been an ugly earnings season.

 

Some important callouts this morning:

  • A grand total of 374 of 500 S&P 500 companies have reported Q1 2016 results, with aggregate sales and earnings growth down -2.7% and -8.8% respectively;
  • So far... 7 of 10 sectors have reported negative earnings growth;
  • Earnings growth for our favorite sector short call, Financials (XLF), are down -13.8% with sales -4.0%;
  • Energy (XLE) earnings growth crushed, down -99.5%, with -30.7% sales growth;

 

Here's what it looks like right now.

Earnings Season: U-G-L-Y (You Ain't Got No Alibi, You Ugly) - earnings 5 5


Daily Market Data Dump: Thursday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Thursday - world equity markets 5 5

 

Daily Market Data Dump: Thursday - sector performance 5 5

 

Daily Market Data Dump: Thursday - market volume 5 5

 

Daily Market Data Dump: Thursday - rates and spreads 5 5


Things That Matter To Us Today: CH 11 Cycle and UA

Takeaway: Retail bankruptcies highest since 2009. This UA/China knockoff that getting so much press is a right of passage. We're not worried bout it.

BANKRUPTCY CYCLE PLOWS AHEAD

In case you were hiding under a rock, Aeropostale finally did a favor for both the teen shopping crowd and the investment community alike when it filed Chapter 11 this week. There are two major takeaways from where we sit…

  1. First off, let this serve as a reminder as to how long these apparel retailers can sustain a state of sub-mediocrity without going under. While not super high margin businesses, the only real capital needs are in inventory -- as capex is generally low, and property values are almost all off-balance sheet. In other words, by the time a company looks like it is headed to file, it might actually have another full economic cycle left in it.  That's Aeropostale.
  2. Secondly, this event marks the sixth major retail bankruptcy of the year -- putting the year-to-date count ahead of the full-year Ch 11 tally ahead of the full year count for each of the past six years. If we annualize the current run-rate, we'll be on track to see more bankruptcy events than any year in two generations -- including the Great Recession. In fairness, as someone astutely pointed out to us last month, Chapter 11 filings are historically weighted toward the start of the fiscal year. That, in fact, is true. But we're still likely to see a few more by the end of the year. Regardless of any nuances, the most notable point to us is that we're seeing such a significant uptick in business failures when we're so late in this economic cycle. 

Things That Matter To Us Today: CH 11 Cycle and UA - 5 5 2016 chart1

Things That Matter To Us Today: CH 11 Cycle and UA - 5 5 2016 chart2

 

UA - Imitation is the Sincerest Form of Flattery

The press is blowing out this whole 'Uncle Martian' debacle as being debilitating for UnderArmour in China. It's definitely serious. But every other brand has 'been there done that'. It's almost turned into a right of passage in this business for some lowly Chinese knock-off specialist to carbon copy intellectual property (Name, Logo, Likeness) for premium US and European brands.  Just look at the juxtaposition of the pictures below.

Things That Matter To Us Today: CH 11 Cycle and UA - 5 5 2016 chart3

Our latest note on UA, titled UA | Huh? Can be found at the following link CLICK HERE

 

GIL - Gildan Activewear Announces Agreement to Acquire Alstyle Apparel, LLC, the Apparel Division of Ennis, Inc.

(http://www1.gildan.com/corporate/downloads/ALSTYLE%20PR%20FINAL_EN.pdf)

 

ANF - Abercrombie & Fitch COO Jonathan Ramsden stepping down after 7 years with the company

(http://phx.corporate-ir.net/phoenix.zhtml?c=61701&p=irol-newsArticle&ID=2165492)

 

COST - Monthly Comps

Things That Matter To Us Today: CH 11 Cycle and UA - 5 5 2016 Cost

 

KSS - Kohl’s is first retailer to integrate Apple Pay with its reward program -- service currently available in 250 stores

(http://www.retailingtoday.com/article/kohls-first-retailer-integrate-apple-pay-its-reward-program)

 

Higher duty exemptions 

(http://www.wsj.com/articles/new-u-s-rules-make-foreign-goods-better-deal-for-online-shoppers-1462411116)

 


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