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Did you miss it? Hedgeye CEO Keith McCullough went live (for free) this morning on The Macro Show. It was a no-punches pulled look into why “this is one of the top-3 stock market bubbles in history.” He opened up the discussion during interactive Q&A with viewers.
PRESIDENTIAL ELECTION OUTLOOK
STATE OF PLAY
Over the next two months, we will be highlighting key states in the presidential election by issuing scorecards, trends, notes, and other relevant information. To start, we take a deep dive into some of the most vital battleground states, the Rust Belt states.
PA has 20 electoral votes, making up 7.4% of the 270 needed to win the general election – that’s a sizable number when it comes down to it.
Between 1900 and 2012, PA voted for the winning presidential candidate 76% of the time, and in that same time frame, supported Republican candidates for president more often than Democratic candidates. However, between 1992 and 2012, PA has favored Democrats in every presidential election.
Hillary Clinton and Donald Trump both won the PA primary by a sizeable margins, but in the general election race, the state is tilting in Clinton’s direction.
OH has 18 electoral votes, making up 6.6% of the 270 needed to win the general election.
Between 1900 and 2012, OH cast votes for the winning presidential candidate 93% of the time, more than any other state in the country. The state has favored Republicans and Democrats equally between 2000 and 2012, with Republican George W. Bush winning in 2000 and 2004 and Democrat Barack Obama winning in 2008 and 2012.
Though the narrowness of past races is reflected this year as well, it's not a given that OH voters will buck their recent trend and choose Clinton as the next president.
MI has 16 electoral votes, making up 6% of the 270 needed to win the general election.
Between 1900 and 2012, Michigan cast votes for the winning presidential candidate 72% of the time, supporting more Republican candidates for presidents than Democrats – though Democrat Barack Obama won the state in 2012
Clinton and running mate, Tim Kaine, have made MI a priority stop on their campaign trail – they presented an economic agenda in a MI manufacturing plant. Clinton’s recent trip and beefed up campaign activity has helped grow her lead by a substantial margin in this Rust Belt state, and she is poised to sustain that lead over the next two months.
Takeaway: Join us for a call with Dr. James Miller, recent Undersecretary of Defense for Policy, on the choices facing the next President.
The next President will face huge defense policy issues as soon as he/she is sworn in on January 20: how to deal with Russia, China and ISIS, the split between defense and non-defense discretionary spending and massive recapitization bills for the nuclear triad as well as conventional forces. Priorities will be established early and choices must be made. Both campaigns have already begun thinking about these decisions. We announce the first of a series of calls prior to the election on this theme.
Join us in an important call with Dr. James Miller, someone who has "been there and done that" and is in the know when dealing with all of these topics. Dr. Miller will illluminate what he considers to be the top three issues and then take questions from listeners.
As Under Secretary of Defense for Policy from May 2012 to January 2014, Dr. Miller served as the principal civilian advisor to the Secretary of Defense on strategy, policy, and operations. He served as Principal Deputy Under Secretary of Defense for Policy, from April 2009 to May 2012. For his accomplishments, he was awarded the Department of Defense’s highest civilian award, the Medal for Distinguished Public Service four times, twice by Secretary Gates, and by Secretaries Panetta and Hagel. He also received the Chairman of the Joint Chiefs of Staff’s Joint Distinguished Civilian Award.
Dr. Miller is President of Adaptive Strategies, LLC, which provides consulting to private sector clients on strategy development and implementation, international engagement, and technology issues. He serves on the Board of Directors for the Atlantic Council, and on the Board of Advisors for the Center for a New American Security and Endgame, Inc. He is a member of the International Institute for Strategic Studies, and the Department of Defense Science Board.
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Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view. Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.
9/11. The precedent has emerged that on September 11 presidential candidates shut down their campaign ads and media appearances in order to showcase America’s unity in face of adversity. Despite a bitterly polarizing campaign season, that new tradition was followed yesterday on the fifteenth anniversary of the event. Both Clinton and Trump showed up the Trade Tower ceremony, watched respectfully, and said nothing to the public. Politics did however intervene when Clinton felt faint, left early, and was put on antibiotics for pneumonia by her doctor. While Trump declined to comment on her early departure, Trump supporters for the last several weeks have been raising questions about Clinton’s overall health.
According to the media consensus on the BLS employment report a week ago, the +151,000 added NFP in August was a good if not great number. Admittedly it’s not up to the monthly average of the last two calendar years, 2014 and 2015, when the NFP growth number averaged +220K per month. But that’s OK, we are told, because it’s inevitable that this body count delta will shrink as employment approaches its natural limit (whatever that is) as a share of the labor force (whatever that is). All told, +151,000 represents “continued progress.” Many economists chimed in that it exceeds the number (around +120K, depending on how you calculate it) required to keep employment constant as a share of the population.
If we look at worker hours rather than workers, however, a different picture emerges. This is because average weekly hours have lately been tumbling. In August, for example, average weekly hours dropped from 34.4 to 34.3 hours per week, or by nearly -0.3%. This transformed a +0.1% employment gain (the 151,000 new bodies) into a -0.2% change in aggregate hours worked. And we’re not just talking about August. Since the December of 2015, while employment has gained by 0.13% per month, aggregate hours have gained by 0.06% per month—less than half the growth rate.
In fact, aggregate hours growth has been zero or negative in three of the last seven months, while employment growth has always been positive.
The gap between these growth trends is precisely accounted for by the steep decline in average weekly hours since the beginning the year. You’d have to go back to 2011 to find a month in which average weekly hours was lower than August’s 34.3. The full decline in average hours since January is -0.87%, which is the equivalent of nearly one million workers assuming unchanged average hours.
Most economists regard worker hours, not workers, as the fundamental unit of labor which drives GDP. So when average hours rapidly change, we need to re-adjust our thinking: Maybe the employment situation is not as “warm”—not even as Goldilocks “warm”—as everyone is telling us.
What’s behind the average-hours drop? Perhaps it’s the rising share of workers in the service and retail sectors, which have long experienced a lower and faster-declining average work week. Also, as I have argued for the last several months, the rise of the “gig economy” is certainly playing a role--everything from permatemping by 20somethings to Uber driving by 60somethings. A growing minority of semi-employed Americans is starting to pop in and out of the economy on shorter work schedules, significantly pulling down the national average. If the employment outlook were really as strong as the media suggest, we should be seeing enough workers putting in longer hours to more than compensate for this decline. But we’re not.
Principal component analysis indicates that average weekly hours is a strong cofactor in explaining the overall labor market strength. The Fed gives it a strong weight among its 19-factor Labor Markets Conditions Index (LMCI). Yes, that’s the index which has been favored and promoted by Fed Chair Janet Yellen—and which, not coincidentally, has been performing poorly this year. (In August, the change in the LMCI again went negative.)
More seriously, average weekly hours shows a fairly reliable business cycle pattern. It generally rises steadily during expansions, peaks at the expansion peak, then falls during recessions. For those of us who have been waiting (thus far in vain) for the typical expansion peak signals—not just in average weekly hours, but also in average wage gains, temp employment, employment ads, and so forth—we are beginning to see some disconcerting evidence that all these peaks may not be ahead of us after all. They may already be behind us. Over the next couple of months, average weekly hours will merit our close attention.
On Wednesday, CEO Tim Cook unveiled Apple’s new product line—and wow, it totally underwhelmed. The biggest new iPhone 7 feature was the removal of a feature (no more audio jack). The other improvements were narrow gauge (a somewhat better battery life and a fancier camera). Oh, and yeah: Apple wants its new iWatch to go head-to-head with FitBit. Good luck with that. Cook is also pushing new growth in services—everything from digital music (where no one is making any money) to education platforms and cloud capacity (ditto).
Here’s the bottom line for Apple. Every one of its major product lines is now showing declining revenues, both sequentially and YOY. It’s flagship iPhone product (accounting for over half of total revenue) has reached saturation in the high-income world and has little chance of strong penetration into the developing and market economies with so many low-priced producers of quality phones (like Samsung, Huawei, and Xiaomi) entering the mix. And all this is in an industry where profit margins (outside Apple) are paper thin or negative and competitors are hungry for market share. What’s more, the telecoms are no longer subsidizing Apple customers by helping them buy their phones.
Sure, Apple is a popular prestige brand that will continue to generate tons of cash for years to come. Its historical ROIC has been stellar (thanks, Steve), making it one of the epic momentum stocks of all time. Millions of people will continue to buy expensive iPhones for the same reason they still buy Microsoft software: path dependence. No one wants to bother to relearn something that’s very complex and that seems to work pretty well. Moreover, Apple does have some positive if speculative opportunities on its horizon, such as using Apple Pay to achieve growing dominance in the credit card/payments sector or leveraging its early starring role in the spread of augmented reality apps (see: Pokemon Go!).
But the bottom line is that Apple’s sales are declining without any certainty of a turnaround in an IT device world in which consumer preferences can shift rapidly and all the fundamentals can shift rapidly with them—market share, profit margin, and economies of scale. Does Apple, under Tim Cook, really have a second act? This is a company—unlike Samsung—that spends less on R&D than on patent lawyers. Does a P/E over 10 really make sense for a firm with a negative PEG ratio? On the FAANG hierarchy of strategic opportunity, I now put Apple in last place. Let me spell it like this, best to worst valuation: ANFGA. The first “A” of course is Amazon.
It may just be the yin and yang flow of campaign energy. Or Trump’s unexpected string of strong and “presidential” speeches (about immigration in Mexico City; to “values voters”; and on national security). Or Clinton’s recent mishaps, most recently her overreaching reference to Trump voters as a “bucket of deplorables.” It may also be due to a more disciplined focus by the Trump campaign, now under Steve Bannon’s leadership, on Clinton’s weaknesses.
Whatever the reason, the opinion tide has shifted back in Trump’s direction. In mid-August, at the lowest point, Trump trailed Clinton by 7 to 8% points in the survey averages. Today, according to the latest indexes from The New York Times and RealClearPolitics, Trump trails by 2 to 3% points.
Back then, the futures market odds were up around 75-25 Clinton. Now they are back to 66-33 Clinton, according to PredictIt. Hypermind, the superforecasters’ future market, now puts the odds at 56-42. The big-name analytical forecasters have also been rejiggling their numbers. Nate Silver’s FiveThirtyEight now says the race is 70-30. And the New York Times, as ever marking the pro-Clinton edge of the odds bracket, says it’s 79-21, which is the first time it has put Trump above 20 in more than a month.
As the national polls tighten, so do the polls in most of the swing states: including Ohio, Florida, Pennsylvania, Virginia, and North Carolina. While state-watching is entertaining, it is unlikely to generate further insights on the outcome since (as I’ve pointed out before) the odds of electing a President who loses the popular vote are so historically remote. Nate Silvers adds that, should this happen in 2016, it may be more likely to go Trump’s way. This is because Trump, compared to other recent GOP candidates, actually has smaller margins in the deep red states that will almost certainly go for the GOP in any case. Holding the national results constant, this means Trump may get more support in the midwestern battle states he so desperately needs to win.
To be sure, Trump is still behind. But now that he’s within striking distance, the upcoming candidate debates loom very large in importance. According to a new Washington Post-ABC News poll, his odds may be further helped by the relatively large share of voters (30%) who remain undecided—and by the higher share of Trump supporters who say they are “absolutely certain” to vote. In this respect, at least, the race may resemble the Brexit vote.
Big Alcohol Goes Healthy. The nation’s foremost breweries and distilleries are going on a health kick. In May, Boston Beer (maker of Samuel Adams) released Truly Spiked & Sparkling, made using fermented cane sugar and natural flavors. MillerCoors has invested in two of its own natural drinks—Easy Tea and Zumbida Mango. Meanwhile, Diageo will soon unveil its 90-calorie, gluten-free Smirnoff Spiked Sparkling Seltzer line. These firms are prioritizing not only low-calorie, natural offerings, but also transparency: Member companies of industry trade group Beer Institute—which include MillerCoors and Anheuser-Busch InBev—will soon list detailed nutritional information on product labels. The movement is designed to appeal to today’s consumers, especially Millennials, who make health a part of their day-to-day lifestyle. As AB InBev marketing executive Valerie Toothman points out, “There’s a reason you see people in yoga pants all over New York City…It’s this idea that a kind of health and well-being is the new premium.”
Ugly is in Stock. Cosmetically challenged produce is in: Starting this week, Walmart will begin selling weather-dented apples at 300 of its Florida locations. The move is hardly a one-off. Back in April, the retailer started marketing “Spuglies” (a brand of misshapen potatoes) in select Texas stores, while its U.K. chain began selling “wonky veg” boxes filled with 11 pounds of misshapen vegetables earlier this year. Other grocers have also gotten onboard: In April, Whole Foods began a pilot program to sell visually unappealing fruits and vegetables in many Northern California stores. In one respect, the trend is an effort to curb food waste: Blemish-related losses can hit as high as 30 percent for items like apples. But the move also spans beyond the produce aisle. As we’ve written before (see: “Ugly is the New Beautiful”), everyone from restaurant chains to beauty companies has been touting the unpolished nature of products designed to appeal to authenticity-driven shoppers.
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