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4Q 2012
BUBBLE #3
Q4 2012 MACRO THEMES October 8th, 2012
DISCLAIMER
• Hedgeye Risk Management is not a broker dealer and does not make investment recommendations. This presentation does not constitute an offer to sell, or a solicitation of an offer to buy any security.
• This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice.
• This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information.
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© 2012 Hedgeye Risk Management LLC All rights reserved.
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Q3 2012 MACRO THEMES REVIEW
GROWTH SLOWING’S SLOPE THE CLIFF
OBAMA VS. ROMNEY
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“I skate to where the puck is going to be, not where it has been.”
-Wayne Gretzky
#EARNINGSSLOWING
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NOT NEW NEWS, BUT MARGINS ARE ASYMMETRICALLY STRETCHED RELATIVE TO PRIOR CYCLES
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AS IT RELATES TO CORPORATE EFFICIENCY, MEAN REVERSION RISK IS TO THE DOWNSIDE
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THIS PUTS MORE PRESSURE ON THE TOP LINE TO DRIVE EARNINGS GROWTH
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YET CONSENSUS NATURALLY ASSUMES MARGINS WILL CONTINUE TO EXPAND INDEFINITELY …
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… UNIFORMLY ACROSS ALL SECTORS!
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COMPANIES CAN PRINT WHAT THEY WANT FOR A QUARTER OR TWO, BUT CAN THEY GUIDE TO LOFTY EXPECTATIONS?
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GUIDANCE WILL BE KEY AND “CHEAP” GETS CHEAPER WHEN COMPANIES GUIDE DOWN
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IHS (IHS) – Chairman and CEO Jerre Stead said in late Q3, our non-subscription-based business saw a rapid weakening in key markets as customers put capital decisions on hold in these uncertain environments.
Caterpillar (CAT) – Management hinted that 2012 revenues would “come off” by about $2 billion dollars.
Norfolk Southern (NSC) – Management guided Q3 down on weaker shipments of coal and merchandise.
FedEx (FDX) – Management cites a weak global economy and tepid manufacturing activity around the globe as culprits for the
downbeat results. Staples (SPLS) – Management called the results “dismal and disappointing” with fiscal Q2 earnings down -32% Y/Y on a
downturn in North American sales trends and continuing sluggishness abroad. Hewlett-Packard (HPQ) – Earnings excluding some items for the 2013 fiscal year, which begins next month, will be $3.40 to
$3.60 a share. Analysts on average had estimated profit of $4.16 a share, according to data compiled by Bloomberg.
THE FED HAS NUMBED STOCK MARKET OPERATORS TO SLEEP WITH ITS UNPRECEDENTED POLICIES TO INFLATE…
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…FUELING A CRITICAL DIVERGENCE BETWEEN THE PERFORMANCE OF THE EQUITY MARKET AND THE ECONOMY
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… AS WELL AS A POTENTIAL MISPRICING OF SOLVENCY RISK IN THE CREDIT MARKET
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AT VIX 14, THE BUY SIDE IS NOT BEARISH ENOUGH
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AN ALL-TIME HIGH IN THE U.S. STOCK MARKET (DIVIDENDS REINVESTED) IS A FANTASTIC OPPORTUNITY TO BOOK GAINS
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BUBBLE #3
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GET THE US DOLLAR RIGHT, GET A LOT OF OTHER THINGS RIGHT
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YOU HAVE TO KNOW WHERE YOU ARE IN THE SUPER-CYCLE FROM A STRATEGIC PLANNING PERSPECTIVE
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ESPECIALLY AS IT RELATES TO NAVIGATING GREENSPAN/BERNANKE BUBBLE RISK – THIS IS #3!
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WE ARE NEAR THE END OF A DECADE-LONG COMMODITY BOOM…
Industrial commodities, copper, oil, gold – all up 200% - 500% in 10 years
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…DRIVEN BY EASY MONETARY POLICY…
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…AND CHINA
China’s iron ore demand went from 4% of the world’s total in 1990 to 64% in 2011*; its impact on other commodities was similar
Source: The Economist; Macquarie
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China's Copper Consumption (MM metric tonnes)
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EVERYONE WANTS TO INVEST AT THE BUBBLE’S PEAK
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WE REPEAT: EVERYONE WANTS TO INVEST AT THE BUBBLE’S PEAK
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BEAR IN MIND, COMMODITIES ARE CYCLICAL AND VOLATILE
Slumps tend to last 50-100% longer than the booms
Source: Cashin, P. & McDermott, J., IMF
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BUT WHAT HAPPENS WHEN THE MUSIC STOPS?
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POP!
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KEYNESIAN CLIFF
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AS GOVERNMENTS DO, THE LAST CONGRESS KICKED THE CAN DOWN THE FISCAL ROAD TO 2013
• Since Congress was unable to reach a true deal, a “compromise” was reached via the Budget Control Act of 2011
• The result is that in 2013: – Total government budget revenues (taxes) are expected to
increase 11.3% (no deal on the Bush tax cuts) – Total government spending is expected to decline -1.89%
(sequestration kicks in)
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THE PROJECTED TAX INCREASES FAR OUTWEIGH SPENDING CUTS…
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. . . AND THE TAX INCREASES WILL BE BROAD BASED
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AT THE END OF THE ROAD IS THE KEYNESIAN CLIFF
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THE IMPLICATIONS OF THE CLIFF ARE SLOWING SHORT TERM GROWTH
1. CONSENSUS: Bloomberg consensus GDP growth estimates for 2013 are +2.0%
2. REALITY: The CBO has incorporated all spending cuts and revenue increases and has an estimate of +0.5% GDP growth for 2013
3. PROBABILITY: THE CLIFF COULD REASONABLY EQUATE TO A 1-2% DRAG ON GROWTH IN 2013, RELATIVE TO CONSENSUS EXPECTATIONS
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JUST IN TIME FOR THE KEYNESIAN CLIFF IS ANOTHER DEBT CEILING DEBATE !
36 Based on our estimates, we will technically violate the debt ceiling in December 2012. There are one-time measures that can push it six months.
BUT IT’S AN ELECTION YEAR, IS CHANGE ON THE WAY ?
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Key upcoming events: • Vice Presidential debate (foreign and domestic policy) – Oct. 11th
• Presidential debate (town hall) – Oct 16th • Presidential debate (foreign policy) – Oct 22nd
• Election date – November 6th
THE POLLS HAVE NARROWED SINCE THE DEBATE, THOUGH OBAMA STILL LEADS
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CURRENTLY, THE ELECTORAL MAP STILL LEANS MEANINGFULLY TOWARDS OBAMA
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QE3 HAS BEEN POSITIVE FOR STOCKS AND OBAMA’S ODDS BASED ON THE HEDGEYE ELECTION INDICATOR
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THERE ARE SOME WILDCARDS TO CONSIDER
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1. Voter turnout – Most measures of turnout so far have suggested that Republicans may have up to 6% more turnout, which is meaningful if voter ID stays similar to 2010. (According to a Politco poll today : 84% of Republicans say they are extremely likely to vote and 76% of Dems)
2. Money – To date, spending has been equal, though the RNC has spent a lot
more. (In 2008, Obama outraised McCain 2 – 1 and spent more than 4 – 1 on media.) In coming weeks, with Super PAC aid, the Republicans should have the spending advantage.
3. Obama Approval – The President’s approval has consistently been below 50%. Historically, approval rating has been a good indicator of the share of the two party vote. (Most recent Gallup poll has him at 48.)
CURRENTLY, THERE ARE THREE PROBABLE SCENARIOS
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1. OBAMA IS RE-ELECTED AND CONGRESS REMAINS SPLIT -> Weak dollar
2. OBAMA IS RE-ELECTED AND DEMOCRATS TAKE BACK BOTH
HOUSES -> Weak dollar
3. ROMNEY WINS AND WITH THIS VICTORY REPUBLICANS TAKE CONTROL OF CONGRESS -> Stronger dollar ?
THE CONSENSUS SCENARIO IS NO CHANGE: OBAMA WINS WITH A SPLIT CONGRESS
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THUS, A REASONABLE RESOLUTION OF THE KEYNESIAN CLIFF AND DEBT CEILING ARE UNLIKELY IN 2013
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“The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it.” - P.J. O’Rourke
CURRENT HEDGEYE POSITIONS
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FOR MORE INFORMATION AND A COMPLETE LISTING OF RESEARCH PLEASE VISIT: WWW.HEDGEYE.COM
OR EMAIL: [email protected]
THIS PRESENTATION WAS PREPARED BY: THE HEDGEYE MACRO TEAM
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