This note was originally published at 8am this morning, September 3, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
On Tuesday, Keith comes back from vacation. I’ll be honest, setting aside the fact that Keith and I have been friends for upwards of 15 years and I like having him around, wearing his jersey in the mornings is not easy. I’m all about hard work, but, seriously, you try preparing for a 20-minute conference and writing a strategy note all by 8:30 am every day. I’m starting to understand why some of his morning notes make him sound a bit a grumpy, this isn’t easy!
If you didn’t know, corner banging is a sailing term. It basically means to sail all the way to one side of a race course in search of a strategic advantage. If you bang the corner, you either win big, or you lose big. That’s it. For those of you who have been reading our notes for the last couple years, it is likely quite clear that we are not corner bangers. If we’ve said it once, we’ve said it many times: we are Risk Managers. In fact, the term is so common around our office, we even added it to the name of our company, Hedgeye Risk Management.
Managing risk isn’t about being short or just having a high allocation of capital to cash, but rather preparing and contemplating events that could happen and impact our portfolios. As we look forward over the next couple of months, one specific event that jump out in our minds is the midterm elections. There is potential that the Republicans, who are expected to do well, which could have an impact on whether the Bush tax cuts are extended. It is our belief that the idea of the Bush tax cuts being extended is not currently priced into the market.
The Bush tax cuts are meaningful. To highlight this point, in the bullet points below we compare what would happen to certain tax rates if the Bush tax cuts are not extended:
- Short term capital gains would go from 35% to 39.6%;
- Long term capital gains would go from 15% to 20%;
- Qualified divided taxes would go from 15% to 39.6%;
- Non-qualified dividend taxes would go from 25% to 39.6%; and
- Wage taxes in the top bracket would go from 35% to 39.6%.
On a very basic level, an increase in divided taxes should decrease the value of those companies that pay dividends, all else being equal.
On September 7th at 230pm, Keith and I will be hosting a call with Karl Rove to discuss the midterms with the title, “Could The Midterm Election Be A Major Stock Market Catalyst?” Karl, as many of you know, is known as “the Architect” for putting together the successful Gubernatorial and Presidential campaigns for George W. Bush. Now let’s be clear, we get that Mr. Rove is a Republican and that many of you may be athwartship (a sailing term that means at right angles) politically with Karl, but this is not a political call. This is about sitting down with one of the premier political analysts in the country and having a Big Boy Talk with him. The point is to try and determine whether the midterms will indeed be a catalyst. If you are a current subscriber or would like to trial our service and participate in the call, please email us at email@example.com.
As former long time Speaker of the House famously said: “All politics is local.” Typically this is indeed true, so while we can presume to know what is going on from our perches in Manhattan, Boston, New Haven, or wherever we may be, bringing in a man who has studied elections in this country on a county by county level is sure to help make sure our sails are directed toward the wind. Currently, the Republicans clearly have the wind behind their sails.
To begin with, President Obama’s approval ratings are quite low. According to the Real Clear politics poll average, 46.4% of those polled approve of the job President Obama is doing and 47.8% of those polled disapprove. So, in aggregate, less than half of the country approves President Obama and more disapprove than approve. Interestingly, in the Rasmussen Daily Tracking poll (which we have highlighted below with a picture of Hedgeye’s own sailor, Zach “The Hammer” Brown), President Obama has improved over the last month or so. His current approval index is -13 (which is the difference between Strongly Approve and Strongly Disapprove), which is an improvement off his all time low on May 26th, 2010 of -22. Despite this improvement, the point is President Obama’s approval rating is low, which won’t bode well for the Democrats.
The other important point to consider is that there is substantial dissatisfaction with politicians these days. In fact, congressional approval is as low as it’s ever been, so the concept of incumbency advantage is likely going to be less impactful than typical this election. As I wrote back in May:
“As many studies note, incumbents typically win re-election 90% of the time. These early data points are noteworthy and mark the beginning of perhaps a serious shift by voters away from incumbency. This idea is also supported in recent polls. Specifically, a recent ABC News-Washington Post poll indicated that nearly six in 10 respondents they’re not likely to vote for their current representatives to Congress.”
A backlash against incumbents naturally hurts the Democrats because they hold more seats.
As we survey the Electoral Ocean in front of us this is what the polls looks like in terms of the shift of power according to the poll averages at Real Clear Politics:
- Republicans to pick up 8 seats in the Senate but the Democrats will retain control at 51 to 49;
- Republicans will win 206 seats in the House, the Democrats will win 194 seats and 35 seats are a tossup currently; and
- The Republicans will pick up 8 governor seats to hold a 32 to 18 seat advantage.
The potential for major Republican victory in the fall is realistic, and we need every advantage we can get to ensure we fully understand the probabilities. Keith and I hope you will join us on Tuesday.
As you head into the long weekend with your friends and family, I’ll leave you with one more quote from Mark Twain:
“Denial ain’t just a river in Egypt.”
Enjoy the weekend.
Yours in risk management,
Daryl G. Jones