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October 2016

The Brexit Version

For many, the rally cry of “remember how wrong the Brexit polls were” might give a sense of false hope

because the real story is different than the myth. The polls were in favor for ‘remain’ from the moment

the referendum question was established until June 12th when ‘leave’ edged ahead. On June 16,

Parliament member and remain advocate Jo Cox was murdered in broad daylight. By then, leave had

already peaked in the polls two days earlier at 47.9%.

The day before the actual vote, ‘remain’ was ahead at 46.2%. There was similar jockeying in betting

pools that swayed back and forth movement after ‘remain’ touched a 69% chance of winning on June

12th.

The point is while polls are not foolproof, if Donald Trump is to win, he might want to heed momentum

of polls and details that plainly speak on topics people need to hear about most. On that note,

however, there is a great story to be learned from the British Exit vote about disenchantment.

Individuals want to control their own destiny, particularly those from proud nations that once

dominated the world, like the United Kingdom, and the nation currently on top of the heap, the United

States.

However, there are signs of buyer’s remorse in England as the Pound Sterling gets pounded to a 31- year

low and economic estimates for the U.K. have recently been lowered.

The regret isn’t massive, but if the vote were taken today, it would more than likely fall short of passing.

Meanwhile, there will be more intense anxiety and backlash from unknown sources but also out of

Brussels and Berlin where vested interest must send a message to other nations considering going it

alone.

Measuring the vote is folly in many ways, it hasn’t happened, and I don’t think there will be a hard exit

next year, either.

Of course when you think the country is moving in the wrong direction, there has to be some allowance

and time to make it better. But voters hear politicians, rather than listen to them, and they hear instant

success.

In America, we are not happy with the direction of the country by any stretch of the imagination (see

Gallup table), which is one of the reasons we are in a pre-revolt political stage.

It’s not just individual freedom and safety that has folks worried but so, too, economic insecurity. This

week a report from Edison Research showed American economic anxiety reaching a new high reading.

The report underscores the bifurcation of the country that has seen more folks move into the upper

class, and those left behind and stuck in the lower close add up to more than 70% of households.

This is reflected in key economic measures.

Personal Financial Situation

Better 37%

Worse 22%

Same 41%

Fear of Losing Job next 12 Months

Lot 30%

Little 26%

Not at All 44%

How Much Fear Not Saving Enough

Lot 40%

Little 34%

Not at All 25%

Americans Agree It’s Rigged

62% say the economy is rigged in favor of certain people.

Most favored:

91% Rich

89% Politicians

Most Unfair:

79% Poor

78% Middle Class

These feeling are feeding the beast and will tilt the nation into mass revolt at some point and we can

only hope its ballots and not bullets. These feelings must also push policy, while there are clearly

different approaches to how to fix or at least mitigate this smoldering resentment.

That’s what this election is all about.

September Comments

With less than a month to go until Americans choose their next Commander-in-chief, the game of

predicting the winner has become ubiquitous; everyone is doing it. The problem is that most folks in the

media “have a horse in the race” making roundtables and panel discussions nothing more than a

sparring of political points.

While polls ebb and flow and keep a degree of uncertainty in place until November 8, there are

economic and stock market indicators that have pretty good track records as harbingers of the White

House vote. In fact, going back to 1984, the performance of the stock market (90 days into the vote) has

been a perfect indicator every election year, with the exception of one.

Going into 1992, George H.W. Bush was riding a highly favorable and popular wave; however, it was

dogged by the recession, breaking his tax pledge and the fading memory of his role in winning the Cold

War. However, the real asterisk on this break from the historical trend was the emergence of Ross Perot

as an impressive independent candidate.

90-Day S&P 500 Market Incumbent Party Indicator

Change Won/Loss

1984 +1.4% Won

1988 +12.4 Won

1992 +4.5% Lost

1996 +20.3% Won

2000 -10.1% Lost

2004 +9.0% Won

2008 -38.5% Lost

2012 +13.4% Won

While there’s no doubt that Perot drew voters from both parties, the fact of the matter is that his run

hurt Bush a lot more, allowing Clinton (who won a plurality of the popular vote) to overwhelmingly win

the electoral college.

Candidate Popular Vote Electoral College

Clinton 44,909,806 370 Bush 39,104,550 168 Perot 19,643,821 0

Thus far, 2016 has been seen by many as a great year for a third party candidate to capture an even

larger slice of the popular vote than Perot did in 1992, but Libertarian candidate Gary Johnson hasn’t

appeared serious enough to capture discontent for both parties.

GDP Indicator

Much is made over the fact that President Obama has delivered the worst economic growth in modern

history. His post-recession rebound has been mostly a flaccid effort aided by trillions in phantom money

printed by the Fed, muscle memory of a nation of doers fighting against the odds, waves of higher taxes,

and the regulatory avalanche.

Yet when it comes to the election, like many things in life, it is often about what have you done for me

lately. The idea that the economy must be booming for the incumbent party to win is largely a myth.

The reality is that the economy must be seen or feel as though it is building steam. How else could you

explain how a 4.1% Gross Domestic Product (GDP) could see the incumbent party lose, while a 2.3% GDP

would propel the incumbent party to victory?

GDP Growth Incumbent Party Indicator

Change Y/Y Change Won/Loss

1984 1983 4.6% 1984 7.3%

Improved Won

1988 1987 3.6% 1988 4.2%

Improved Won

1992 1991 -0.1% 1992 3.6%

Improved Lost

1996 1995 2.7% 1996 3.8%

Improved Won

2000 1999 4.8% 2000 4.1%

Decreased Lost

2004 2003 2.8% 2004 3.8%

Improved Won

2008 2007 1.8% 2008 -0.3%

Decreased Lost

2012 2011 1.6% 2012 2.3%

Improved Won

This means that the (3Q 2016) GDP north of 2.6% might feel like the momentum for real change. I am on

the record predicting 3.5%, although that would be tough to finagle after August’s jobs report.

Fed’s September Surprise

The Federal Reserve has tied itself into a pretzel trying to take credit for the economy on the mend, and

yet refusing to move “extraordinary accommodation” designed to rescue the nation from the depths of

misery. While the Fed argued that its actions were apolitical, it seems the nation must be in the midst of

a major upheaval for action in the months before the nation chooses its next president.

This all comes from the controversy surrounding the deliberate pace of Fed action in the months ahead

of the 1992 election. George H.W. Bush actually blamed the Fed instead of Ross Perot, or even his own

miscues for his inability to be re-elected. He felt the Fed should have addressed the aforementioned

recession with swifter and more aggressive actions.

That criticism has persistently dogged the Fed; since then, the Federal Open Market Committee

(FOMC)has voted to hike rates with less than two months to Election Day and only once in 2004. A stock

market shock would influence the election, but it is not going to happen from a September rate hike,

because the next hike happens in December.

Fed & Election Years

Hikes Cuts Year-End

1992 0 Sep 4 Jul 5 Apr 9

3.00%

1996 0 Jan 31 5.25%

2000 May 16 Mar 21 Feb 2

0 6.50%

2004 Dec 14 Nov 10 Sep 21 Aug 10 Jun 30

0 2.25

2008 0 Dec 16 Oct 29 Oct 8

Apr 30 Mar 18 Jan 30 Jan 22

0 – 0.25%

2012 0 0 0 – 0.25%

Big Government & Big Spending

The road to the White House has captured the imagination of the nation and the world- much like the

2008 election that thrust Barack Obama into the spotlight as more than just the Commander-in-chief,

but as a global celebrity. The winner this November will not be hail as an instant icon, but they will be in

large swathes of the population, as these are the two most unfavorable candidates to ever run for the

office.

The good news is that such a backdrop could result in better stewardship of the office and a greater

commitment to working across the aisle. Instead of interpreting their mandate as a decree to rule

rather than govern, the next president can actually unravel the tangled web that has ground the nation’s

capital to a halt. It might look like the “Gordian knot” to many, but Washington, D.C. is on notice.

There will also be enormous pressure to move the economic needle quickly, and we know that Hillary

Clinton and Donald Trump are prepared to pour billions into infrastructure spending. Ideally, the winner

would wait at least a year to remove bureaucratic barriers and deeply entrenched crony interests. If

there are lessons learned, there will be a major project (think Hoover Dam); it serves as a visual proxy.

If the investment needle is moved by the federal government by spending more money, the big question

is how much it would impact spending by corporate America.

Make no mistake; outside of long overdue spending and investment, many companies would remain

reluctant to invest cash in an unfriendly Clinton administration, although several respected and

successful folks in business see a Hillary Clinton administration following the path of her husband, rather

than the policies of Barack Obama.

Another problem is while we hear about those massive hordes of cash sitting on corporate balance

sheets, rarely are there stories of the massive amount of borrowing that has fueled everything from

business expansions and mergers to buybacks and dividend hikes. Corporate America has $1.65 trillion

on its balance sheets, but owes $1.8 trillion over the next five years.

I still think that big business will unleash big cash, although without lower taxes, it is unlikely to be the

one trillion dollars overdue, which is much needed to make a difference in the GDP and the overall

economic momentum.

Hillary’s Dilemma

Spending government money would be the easiest part of a Hillary candidacy. The hardest part would

be sparking private sector investment.

(How would she handle the Sanders/Warren crowd’s thirst for massive redistribution; it would be a

challenge. Conversely, if Clinton won by a large margin, she might give us such a victory as a mandate to

go after corporate cash, not only abroad, but also cash that’s generated in income statements and cash

sitting on balance sheets.)

Market watchers, especially bears, have noted the sharp decline in corporate profits. This is a trend that

might get worse as indicated by the most recent report on productivity or lack thereof. However,

corporate profits as a percent of the overall GDP are still near levels of America’s Golden Period in the

1950s.

A few years ago, corporate profits reached an all-time high as a percentage of the U.S. GDP, spawning

the emergence of Elizabeth Warren and the Occupy movement. Ironically, both candidates are taking

issue with corporate America’s mandate of making as much money as possible for shareholders.

Beyond Hillary’s not-so-veiled goal of owning corporate balance sheets, Donald Trump has declared war

on companies moving operations to Mexico or China, and has promised to strong-arm jobs back from

those nations, which would mean lower profits. (Price increases on products such as smart phones and

air conditioners would be so limited; the fact is that companies would simply have to live with earning

less.)

Beyond some profit compression, another commonality is that both candidates will also spend a lot of

money. Recently, Donald Trump promised to send more government money into inner cities such as

Detroit; on top of doubling the size of our military and not touching entitlement programs, even the best

supply-side case (of which I am a fan) would not stop deficits and the mounting debt.

Market Winners

Trump or Hillary

Cintas (CTAS), the uniform company, has been the stock of the year. If you think stocks move in

anticipation of future events, then this is actually good news for the U.S. economy and the overall stock

market. Moreover, the stock’s big move underscores my contention that either presidential candidate

will rapidly increase government spending that initially begins with a gargantuan infrastructure plan

(think $750 million or more as this might be the most bipartisan issue on Capitol Hill), but it also opens

the spigots of more spending.

Moreover, if there is an aggressive push force for manufacturing in this nation, then jobs that require

uniforms will see a big surge in demand. Cintas business segments include the following:

Uniform and Apparel Rental

Compliance Training

Fire Protection

Flame Resistant Clothing

Industries covered include the following:

Food services

Automotive

Healthcare

Hospitality

Gaming

Education

In the most recent quarter, uniforms were up 8.3% while ‘other’ businesses climbed 21.9%.

We have modeled this stock trading up to $200 by the end of a first-term for either of the two front-

runners for the White House.

United Rentals (URI)

This stock has been a juggernaut of late, and could be due a retracement, but the next leg higher could

mean that within two years, the shares will trade north of $120 a share. The well-run equipment rental

company would be a big winner with a spike in demand for big government infrastructure spending, but

it also is perfectly positioned to rally on an improved private sector demand.

Donald Trump Stock Winners

Geo Group (GEO) was crushed when the Obama administration announced that it would pull prison

operation contracts from private companies. There is no doubt that the law-and-order candidate would

change this immediately.

CSX Corporation (CSX): this is an investment on improved domestic economy and a reprieve from war on

coal. Those looking for pure-play coal must be cautious because so many are in bankruptcy that it is

difficult to know how to move until the dust has settled. Back in 2010, coal was 31% of CSX revenue and

25% of volume; last year, those numbers tumbled to 15% and 13%, respectively.

Hillary Clinton Stock Winners

First Solar (FSLR) is sure to be a big winner under a Clinton White House, which would not only use the

Bully pulpit, but also pump money that would find its way into local coffers that offer the kind of

incentives that fueled this stock in the past. Her policies and blank checks could propel the stock up

100% over the first-term of a Clinton presidency.

Apple (AAPL) would have a great friend in a Hillary White House, which would mean easier immigration

policies for technology workers and tax breaks for the kind of innovation Apple specializes in. The stock

is stuck in a rut as the company adjusts to no longer being a growth juggernaut. However, perception

plays a role as well.

Charles Payne Founder, CEO, & Principal Analyst

Wall Street Strategies

WWW.WSTREET.COM

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