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Capital Brief: An Unconventional Convention & Ditching To "Watch Dumpster Fires"

Takeaway: Unconventional Convention; Rules Ruckus; Rallying Republicans;

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: An Unconventional Convention & Ditching To "Watch Dumpster Fires" - JT   Potomac under 1 mb

 

“I have noticed that nothing I never said ever did me any harm.”

-Calvin Coolidge

UNCONVENTIONAL CONVENTION

The highly anticipated Republican convention kicked off last night with a solid celebrity B-list group of speakers and headlined by none other than Donald Trump’s wife, Melania - whose well-received maiden speech is now mired in controversy given stark similarities to Michelle Obama’s 2008 Democratic convention speech.

 

But this convention was supposed to be different – we all expected that - and instead of the usual emphasis on celebrities, the focus would then be centered on politicians who typically serve to give testimonials to the nominee and represent a passing of the torch for the party, but that is in short supply in Cleveland. Despite the, well, uneven start (more below), expect Donald Trump to grab the torch on his own and run with it.

RULES RUCKUS

The #NeverTrump crowd’s last-ditch effort to invite discord and derail Trump’s nomination was squashed after their attempt to force a roll call vote on the convention rules failed. The group submitted signatures from a majority of delegates in more than the required seven states to force a recorded vote from all 2,472 delegates. However, a number of delegates under pressure from the party reportedly removed their names, allowing the rules package to pass by a chaotic voice vote.

 

#NeverTrump hoped to unbind pledged delegates from voting according to their state’s primary or caucus result and allow them to vote independently. Despite its failure, the spectacle of #NeverTrump’s last stand exposed the lack of unity in the Republican party, embarrassing Trump and diverting media attention away from his message and primetime speeches.

RALLYING REPUBLICANS?

The ten billion dollar question heading into this week’s events is: can the party survive the convention and emerge unified and enthusiastic while scores of Republicans refrain from endorsing (or even mentioning) the nominee? Speaking to the Wisconsin delegation, Speaker Paul Ryan intimated that the party still needed to come together without mentioning Trump’s name once and while TX Senator Ted Cruz is set to participate in the festivities, we understand he will not endorse.

 

Top that off with OH Governor John Kasich’s very public dissing of Trump and the convention in his own backyard - which happens to be a battleground state. In fact, the only former Republican presidential nominee to attend is former Senator Bob Dole – the nominee from 1996. We haven’t mentioned the litany of excuses Members of Congress are using to stay away - from hiking the Grand Canyon to cutting the grass or even taking their kids to watch dumpster fires.


Iran Nuclear Deal Emerging as a Potential Election Risk For Energy Markets

Takeaway: Trump pledges to undo the Iran nuclear deal. Reimposing US sanctions will put Iran's 750K b/d of new crude exports to world markets at risk.

Editor's Note: Below is a brief excerpt from an institutional research note written this morning by Hedgeye Potomac Senior Energy Policy Analyst Joe McMonigle. Joe is in Cleveland at the Republican National Convention. 

 

Iran Nuclear Deal Emerging as a Potential Election Risk For Energy Markets - z o9

 

As Republicans gather this week in Cleveland, there will be considerable talk about energy issues – support for hydraulic fracturing, coal, natural gas, LNG and overall US energy independence. While Donald Trump has not provided many specifics on his energy plans, there is a solid consensus that his administration would be favorable to fossil fuel energy sectors with very little downside risk for investors.

 

However, there is an emerging election risk to energy markets and that is Trump’s pledge to nullify the Iran nuclear deal.

 

It would be especially disruptive to oil markets as Iranian crude exports have regained significant market share in recent months.

 

The International Energy Agency (IEA) said last week that Iran’s crude production rose to 3.66 million barrels a day in June and 750,000 barrels a day since January when international nuclear sanctions were lifted.

 

Re-imposing US sanctions could put much of this new Iranian crude exports on the market at risk.

 

For more information on our institutional research email sales@hedgeye.com.


The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab email

 

Editor's Note: Wabtec (WAB) is currently on our Industrials analyst Jay Van Sciver's Best Ideas List as a short. He is hosting a call today to update his thesis and preview their upcoming quarterly report. Send an email to sales@hedgeye.com for access or for additional information about our institutional research.

KEY DISCUSSION POINTS:

 

  • A Look At Freight Decremental Sustainability: WAB's report and guidance will test the sustainability of 1Q 2016's Freight segment decremental margin, which the 10-Q indicates was driven by lower Material costs. These favorable decremental margin expectations are now imbedded in 2H 2016 consensus estimates, and we expect the recent snap back in steel prices to have a significant 2H16 impact. While Materials costs went unmentioned in both the press release and earnings call, the company has apparently subsequently claimed mix as a factor; we do not find that claim credible. 
  • Consideration of Faiveley Deal Structure, Remedies: Investors should receive an update on the Faiveley acquisition, a deal we think management wanted to close by mid-year amid Freight segment pressure. Management has previously left no ambiguity that they expected to close the deal, but the information from regulators indicate to us that divestitures or other remedies will be required to close. Given the dearth of appropriate buyers for divested assets and not-so-minimal business overlap between WAB and LEY FP, comments should be interesting. The Faiveley merger remains a long thesis element for several large WAB holders.
  • Our Take On Management: We have observed thesis drift among WAB longs. While initially embracing freight aftermarket and regulation-driven demand, the focus shifted to international Transit growth and Faiveley. Now, discussions typically end with how this management team will execute through the downturn. If management is not able to deliver, further thesis drift may lack a new port.

 

What Levers Are Next? This management will not ride the downturn quietly, in our view. Wabtec still has substantial balance sheet capacity, and we would expect disappointing headlines to be offset with positive ones. Results last quarter should have seen pressure, but management was able to pull a Materials cost rabbit out of the hat. We will consider some options and the associated risks.

 

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab call

 

**Email sales@hedgeye.com for access.


Daily Trading Ranges

20 Proprietary Risk Ranges

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Earnings Season Update: The Soft Bigotry of Low Expectations

Takeaway: So far, 43 of 500 companies have reported an aggregate year-over-year EPS decline of -7.1%.

Earnings Season Update: The Soft Bigotry of Low Expectations - earnings q2

 

Everyone beats Wall Street's beaten down earnings expectations. But what really matters is the year-over-year change.

 

"So far, 43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%," Hedgeye CEO Keith McCullough wrote earlier today. "Financials EPS are currently -8.3% y/y and allegedly they all “beat”; I’d still sell them on bounces from here."


Daily Market Data Dump: Tuesday

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, rates and bond spreads, key currency crosses, and commodities. 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: Tuesday - equity markets 7 19

 

Daily Market Data Dump: Tuesday - sector performance 7 19

 

Daily Market Data Dump: Tuesday - volume 7 19

 

Daily Market Data Dump: Tuesday - rates and spreads 7 19

 

Daily Market Data Dump: Tuesday - currencies 7 19

 

Daily Market Data Dump: Tuesday - commodities 7 19


The Troubling Truth Behind The Rally To All-Time Highs

Takeaway: Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume was down -20% versus its 1-month average.

The Troubling Truth Behind The Rally To All-Time Highs - volume cartoon

 

The no-volume rally to all-time highs in the S&P 500 is disconcerting to say the least. Why?

 

No Volume = No Conviction

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:

 

"Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively versus its 1-month and 1-year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008)"

 


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