The Republicans’ Three-Way Split

Daniel McCarthy has a pithy summary of the state of the Republican race:

THREE FACTIONS. THREE STARS. THINK ABOUT IT, MAN.The GOP is split not two ways, but three: between populists who mix right-wing and moderate positions, in defiance both of political correctness and conservative orthodoxy; and conservative activists who want a reliable ideologue—Cruz—regardless of his lack of charm; and finally a narrow elite of suburban Republicans, high-dollar donors and conservative verbalists who pride themselves on their own sophistication. Trump is the candidate of the populists, Cruz that of the conservative activists, and Rubio that of an embarrassed elite that wishes to be both right-wing and progressive at the same time.

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Why We Should Honor Ray Tomlinson, Inventor of Email, But Will Probably Forget Him Anyway

I didn’t know who Ray Tomlinson was until he died over the weekend at age 71. I’m betting you didn’t know either, even though he helped to radically transform the everyday world nearly as much as anyone I can think of.

Tomlinson is “widely credited with inventing email as we know it,” eulogizes Jon Fingas at Endgadget. In the early 1970s, he created the first mail system on the first iteration of the Internet (Arpanet) and created the format of user-name, the @ symbol, and host-name that remains standard across the planet. Fingas:

Tomlinson received his share of formal recognition. He’s a cornerstone of the Internet Hall of Fame, and he received everything from a Webby Award to a Prince of Asturias Laureate. However, he almost doesn’t need those. Much like fellow internet pioneers Tim Berners-Lee or Vint Cerf, you’re encountering his legacy virtually every time you hop online. And barring a sea change in communication, it’s likely that the effect of his work will be felt for decades to come.

More here.

Do you even remember the first emails you sent? For me, it would have been sometime in 1990, at SUNY-Buffalo (which like most university systems, had a totally awful interface and set of naming protocals), and within a couple of the vast majority of my written communications were done via email. In the mid-1990s, when I started telecommuting to Reason in Los Angeles from Huntsville, Texas I got an HP All-in-One printer/fax/copier because we still traded printed galleys for proofing tasks. Do you know who invented the fax, another technology that revolutionized all sorts of things (and now has largely been relegated to the dustbin of history)?

Commercial fax operations only kicked into high gear in the mid-1960s, after Xerox got into the game (one more blue-chip stock impervious to market forces that is a sliver of its former self, just like Kodak, Sears, IBM, and others). But the fax is credited to Alexander Bain, circa 1843, which is kind of staggering.

We incorporate successful technology seamlessly into our lives and apart from folks such as Edison (and maybe Tesla), we quickly forget about its creators. Sometimes those inventors linger on in the public imagination in weird ways, kind of like orphaned radio transmissions beaming around the universe. Speaking of radio, I can remember my parents, who were born in the 1920s, occasionally referring to the “Marconi,” by which they meant the radio, an homage to the inventor of wireless transmissions. And my father, well into the 1970s, would sometimes call the telephone (an old thousand-pound rotary dial number leased from Bell of course) as the “Don Ameche”: The actor had played Alexander Graham Bell in a 1939 biopic and Ameche’s name became slang for the phone.

So it goes. Our world is built on the sacrifices and successes of those who come before, whom we rarely honor properly (or for very long). We make sure that we know the great generals of the past and the kings and queens of Europe and the ancient world whose legacy is typically more about conquest and plunder than about actually creating a richer, better world.

We’d do better to remember the Ray Tomlinsons of the world (remember: he’s the guy who came up with email) and not simply because we should give credit where credit is due.

As Peter Thiel  noted trenchantly in his 2014 book Zero to One, we wrongly assume techological progress as a given. That’s an attitude, he argues, that gives rise to lassitude when it comes to pushing for the next great breakthrough that might radically improve all of our lives. “[Where] the ancients,” he wrote, “saw all of history as a never-ending alternation between prosperity and ruin, only recently have people dared to hope that we might permanently escape misfortune.”

But that doesn’t happen on its own. It happens because of specific people with specific mind-sets in specific contexts. Knowing their histories isn’t just a guide to where we’ve come from but where we might head next.

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Young Republicans Mourn Rand Paul, Trash Trump, and Pledge to ‘Make America Dope Again’ at CPAC 2016

“I just got a selfie with Rick Santorum!” squeals a young woman to her friend as I pass them in crowded corridor at the Gaylord National Resort and Convention Center. It’s the opening morning of this year’s Conservative Political Action Conference (CPAC), an annual event for right-leaning leaders, activists, and media, as well as rank-and-file Republicans. And unlike most GOP gatherings, this one tends to be heavily populated with young people, especially conservative college students—in previous years, at least 40 percent of CPAC attendees were students and more than half of all attendees were between the ages of 18 and 29.

Overall, the vibe at this year’s conference—which included a well-attended Republican debate watching party on the ballroom big-screen Thursday night—was decidedly anti-Trump. Whether it was Sen. Marco Rubio teasing Trump during the debate or panel speakers obliquely criticizing the party frontrunner, taking shots at the Donald drew ample affirmation from CPAC crowds, who had much more love for Rubio and Texas Sen. Ted Cruz. The young people of CPAC seemed to share these sentiments, with perhaps even less love for Trump, plus a heartening dose of support for Libertarian Party (LP) candidates and mourning for the failed candidacy of Kentucky Sen. Rand Paul.

Caroline Craig, a 21-year-old student at East Carolina University (ECU), says her school has a significant student-conservative population, but “it’s really mixed” which presidential candidates they like. “A lot of people at ECU tended to be Rand Paul supporters” and “were very, very sad when he dropped out,” she tells me on the closing afternoon of the conference. There are some Trump supporters in ECU’s conservative quarters, “but they tend to be more the fraternity boys.”

Make America Dope Again

Craig is one of around two dozen young women walking around the conference in matching red elephant-print skirts, generally paired with high-heels and bright lipstick. They are part of an organization called Future Female Leaders of America (FFL), which seems to have a dual mission of being an online hub for young conservative women and hawking FFL merchandise. The FFL website describes its mission as helping to “inspire young women to become more politically aware and informed.” 

Nearby FFL at CPAC is Turning Point USA, a college conservative group that dominates the middle of the expo floor with an energetic horde of male and female representatives dressed in red polos and khaki pants. On the opening day of CPAC, the group blasts pop and hip-hop music and dances enthusiastically, students brandishing “Big Government Sucks” signs and hoisting large cardboard cutouts of the GOP presidential candidates above them like foam glow sticks at a bad club. It might sound cringe-inducing, but they actually bring a nice dose of spunk and youthful energy to the otherwise same-old, same-old CPAC scene—the Heritage Foundation, the NRA, the tables featuring pictures of flags and fetuses and bald eagles.

“The only thoughts I had during CPAC had to do with how awesome it is that so many young conservatives were there to make America dope again,” tweeted student Danielle Butcher during the conference (she also called for Rand Paul to please come back). Another young attendee referred to CPAC on Twitter as “coachella for conservatives.”

“I was not prepared for so many people to be in one area, and so many big names to be in one area,” says Marie Pecher, a first-time CPAC attendee from the University of Pittsburgh, when I talk to her in front of the FFL booth on Saturday. On her campus, Pecher says there was a lot of support ofr Paul and New Jersey Gov. Chris Christie. But “as more candidates jump out, a lot of [conservative students] are jumping on the Cruz and Rubio train, as opposed to Trump.” 

The Missing Candidates

Trump was slated to speak at CPAC Saturday morning but canceled on Friday, the same day Ben Carson announced that he was suspending his campaign. In the straw poll called at the end of the conference,Texas Sen. Ted Cruz won with 40 percent of attendee votes, followed by Rubio with 30 percent, Trump with just 15 percent, and Ohio Gov. John Kasich with 8 percent.

Pecher missed seeing Cruz speak at CPAC but had seen Rubio’s talk that morning and Kasich the day before. “I really think that the ‘Marcomentum’ has definitely come to CPAC,” she says. During Kasich’s speech, “he had a lot of support but it wasn’t like Rubio. There was a lot of standing ovations for Rubio, much more high energy for Rubio than for Kasich.”

Among students I talked with at CPAC, ​​that was the most anyone said about the Ohio governor. They were similarly silent about recently resigned candidates Jeb Bush, Ben Carson, Carly Fiorina, and Rick Santorum. But quite a few mentioned regrets—either personal or predominant among their conservative student friends—that Sen. Paul had dropped out of the presidential race.

University of Minnesota Duluth (UMD) sophomore Kalley Erickson says there’s mostly been mixed support for Cruz, Rubio, and Trump among young CPAC attendees she talked with, although “people are still talking about Rand” and are disappointed he’s no longer running for president. “I’m sad that he’s out too,” says Erickson, who serves as vice chair of her school’s College Republicans club.

Paul visited UMD in November “and he was pretty popular.” But during Paul’s talk, “his approach, his presence, the way he talked… he seemed angry,” she says. While Paul wasn’t exactly mean, “he just seemed a little… scary.”

“I’ve never seen him smile,” adds Erickson. “He didn’t even smile in the picture I took with him.”

Prickliness and a short temper were accusations lobbed at Paul throughout his campaign, most notably during debates. It was a source of sore disappointment for those who hoped Rand would share the charisma and ability to generate enthusiasm that his dad, former Sen. Ron Paul, did. 

Where the Libertarians Are

Ian Taylor is a student and vice chair of finances for the College Republicans club at Dordt College. In straw polls taken by the group, “it’s different than national polls,” says Taylor. “For instance, Donald Trump usually comes in single digits. We had a big students for Rand group, where he would come in double digits over Donald Trump.” A lot of those Paul supporters are now supporting Cruz, he tells me, “and then some of them have switched over to more libertarian candidates like Gary Johnson.”

I run into a Johnson enthusiast a few minutes later, alongside a peer who hopes that Johnson doesn’t get the 2016 LP nomination. Justin M., a student at Manhattan College and founder of the website Liberty Hangout, supports libertarian presidential hopeful Austin Petersen. “I think his heart is really in it,” which you can see through Peterson’s “social media presence,” he says. Like Donald Trump, Petersen is “anti-establishment,” but unlike Trump “he’s pro-liberty.”

Petersen launched and runs the website The Libertarian Republican and is a past employee of the Libertarian National Committee and Andrew Napolino’s Fox Business show, FreedomWatch. Though Petersen has never held office before, the 35-year-old is challenging Johnson—the former governor of New Mexico and the LP’s 2012 presidential candidate—for the party’s nomination this year.

“When Ausin entered the race, no one thought he had a fighting chance. Now he’s number two in the polls,” says Justin, presumably referring to an online poll conducted during the International Students for Liberty conference in late February. Johnson came in third in that poll, while first place went to Ted Cruz.

Justin and his friend, Roberto Chamorro, are anxious to go find controversial Canadian blogger Stefan Molyneux, whom they have heard rumors is somewhere nearby.

Chamorro, a student at Maryland’s Montgomery College, says he considered himself a Republican until last year, when he “started becoming a libertarian.” As such, Chamorro appreciates Paul’s efforts in Congress around things like the NSA, but he was put off by Paul’s “flip flopping” on certain issues and perceived politicking. Chamorro’s presidential support now lies with Gary Johnson, whom Chamorro thinks is “more Republican” than any of the other candidates.

“Look at his record as the governor of New Mexico,” he says. “He vetoed so many bills, including raising taxes and such.”  

Unfortunately, that’s translated to little support for Johnson within the Republican mainstream. At CPAC, an opening-morning speech from Johnson draws only tepid applause and garnered Twitter comments like “this Gary Johnson speech is rather bizarre” and “what the actual hell?”

#NeverTrump

According to Politico reporter Kyle Cheney, “some libertarian backers of Sen. Rand Paul’s now-defunct presidential candidacy suggested [at CPAC] that Trump’s subtle dovishness—his rejection of regime change in Libya, Iraq and Syria”—was behind his appeal with young people. “I think he’s an authoritarian definitely, very far right,” 21-year-old CPAC attendee Josh Paladino told Cheney. “But for some reason his foreign policy has that streak of non-intervention.”

But reporters from the The Washington Times and The Huffington Post found little love for Trump among millennials at the conference. And Washington Post reporter (and former Reason staffer) Dave Weigel reported from CPAC that “Trump sympathizers, and Trump fans, were outnumbered but not invisible” and “skewed older than the College Republican fans of Rubio or Cruz.” 

Arie Hoekstra, a student and College Republicans club officer at Iowa’s Dordt College, saw Cruz and Rubio speak at CPAC and both had a lot of crowd support. He says he was disappointed “not to see Trump here to get a comparison of the three.”

Millennial support for Trump has been mixed so far in the real world. In the first four states to hold their primaries or caucuses, Trump won millennials in just one, New Hampshire. In Nevada and South Carolina, he led with all age groups except millennials, whom he lost to Rubio, and in Iowa, Cruz dominated among millennials voters, followed by Cruz and then Trump. On Super Tuesday, Trump won voters under 30 in six states, according to Red Alert Politics

Matthew Mailloux, who heads Students for Rubio at La Salle University, told Red Alert that voting for Trump may be “the cool thing to do” in certain youth circles, but among “the truly principled millennials who are involved in politics and who pay attention to the news” you will see “very, very low support for Trump.”

Alas, outside of CPAC, “the truly principled millennials who are involved in politics and who pay attention to the news” seem vastly outnumbered by those who appreciate the “authenticity” of Trump or—much more likely—of Demorcatic presidential candidate Bernie Sanders. Sanders has routinely earned large swaths of the potential youth vote (at least the potential white youth vote) in state and national polls. As one elephant-skirt-clad FFL member puts it, “Bernie Sanders has just taken control” of the student electorate in 2016. To this, another FFL member says, “More power to ’em. At least they’re politically active.” 

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Non-GAAP Earnings Are About To Plunge The Most Since 2009; As For GAAP Don’ Even Ask…

Now that Q4 EPS is almost in the history books with 494 S&P500 companies reporting, we can look at the numbers: blended 4Q EPS is $29.49 (-2.9% y/y) with GAAP EPS of $19.92. As DB admits, a 67% GAAP-to-non GAAP ratio is well below the normal ~90% ex. recessions, exacerbated by asset impairments and restructuring costs especially at Energy.

This is how DB shows this almost unprecedented divergence between GAAP and non-GAAP:

 

This is merely a recreation of charts we first showed one week ago, when we commented on the widest spread between GAAP and non-GAAP since the financial crisis:

 

The chart below shows where the GAAP to non-GAAP divergence is most acute.

 

Ok, we get it: on a GAAP basis it is not a recession any more, it is a depression, just as that Houston CEO letter explained.

But what if we only look at adjusted, gimmicky non-GAAP? Even when looked at purely “pro forma”, things are bad. Recall that in the middle of 2015 when the full severity of the oil collapse was finally becoming apparent, the sellside was absolutely certain that the clouds would blow away by 2016, and as a result as recently as December 31, consensus expected Q1 EPS to post a modest 0.3% rise. That is not going to happen. Instead, as aof this moment, Q1 EPS is expected to collapse by a near record 8.0%, which would be the biggest annual decline since Q3 2009.

To all those saying “it’s all just energy”, we would say “yes… and 6 other sectors” as shown in the chart below. In fact, as of this moment, the only industries which are expected to post an EPS increase in Q1 are Telecom, Consumer Discretionary and Healthcare.

As Factset summarizes:

The estimated earnings decline for Q1 2016 is -8.0%. If this is the final earnings decline for the quarter, it will mark
the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008
through Q3 2009. It will also mark the largest year-over-year decline in earnings since Q3 2009 (-15.7%).
Three
sectors are projected to report year-over-year growth in earnings, led by the Telecom Services and Consumer
Discretionary sectors. Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy,
Materials, and Industrials sectors.

So four consecutive quarters of declining earnings, or two earnings recessions back to back: recall what JPM said last night: “periods of consecutive EPS contractions are often followed by
(or coincide with) economic recessions (~80% of the time over the past
~120 years).” What about periods of two consecutive earnings recessions?

Don’t answer that, because it gets worse:

During the first two months of Q1 2016, analysts lowered earnings estimates for companies in the S&P 500 for the
quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index)
dropped by 8.4% (to $26.69 from $29.13) during this period. How significant is an 8.4% decline in the bottom-up EPS
estimate during the first two months of a quarter? 

 

During the past ten years, (40 quarters), the average decline
in the bottom-up EPS estimate during the first two months of a quarter has been 3.6%. Thus, the decline in the
bottom-up EPS estimate recorded during the first two months of the first quarter was larger than the 1-year, 5-year,
and 10-year averages.

 

In fact, this was the largest percentage decline in the bottom-up EPS estimate over the first two months of a quarter
since Q1 2009 (-24.0%).

As the WSJ summarizes it “Wall Street’s earnings estimates for S&P 500 companies are falling at the fastest pace since the height of the financial crisis.”

As for the guidance, it is is just as abysmal:

Guidance: Negative EPS Guidance (79%) for Q1 above Average
At this point in time, 115 companies in the index have issued EPS guidance for Q1 2016. Of these 115 companies,
91 have issued negative EPS guidance and 24 have issued positive EPS guidance. Thus, the percentage of
companies issuing negative EPS guidance to date for the first quarter is 79% (91 out of 115). This percentage is
above the 5-year average of 72%.

In other words, we are about to have our 4th consecutive annual decline in S&P earnings. And here we make a bold prediction: while Wall Street traditionally expects a sharp hockeystick into outer quarters, which explains why consensus expects a 1.8% increase in ful year earnings (down from 4.3% at the start of the year), we on the other hand are clling Q2, Q3 and Q4: the next three quarters are all about to post EPS declines, leading to an unprecedented 8 consecutive quarters in declining S&P500 EPS. Actually precedented: the last time it happened was during the Great Depression.

Only this time it’s not even a recession, because when you “exclude energy”, add a near record number of non-GAAP addbacks, and hockeystick the result, everything is quite ok.


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Even “Flim-Flam Accounting” Can’t Hide This Profitless Recession

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Since stock markets are ultimately underpinned by corporate profits, let's ask: What factors could crush profits in 2016?

The basic idea of a balance sheet recession (attributed to Richard Koo) has been well-publicized: when the liability (debt) side of household and business ledgers reach danger heights, stakeholders respond by reducing debt and increasing savings rather than increasing spending and debt.

The result is a slowdown, a balance sheet recession.

What do we call a recession triggered by a collapse in profits? Corporate profits have soared to unprecedented heights in the "recovery" of 2009-2015: it's certainly been more than a recovery in terms of corporate profits:

What's left to push profits even higher? The mainstream answer is: just more of the same: more global growth, more expansion in emerging markets (EM), renewed monetary and fiscal stimulus in the developed markets (DM), and the tailwind of lower energy costs.

The possibility that the era of unprecedented profits might have been an aberration and is now drawing to a close does not register in the mainstream financial media. If we look at the red line I drew on the chart, it's easy to see the incredibly abnormal rise in corporate profits in the era of rapid globalization and financialization, both driven by cheap-money policies of central banks.

Note that profits literally exploded once central banks opened the credit spigots, and lending standards were loosened to the point there were no real standards (2002 onward).

This globalized flood of nearly-free money pushed asset valuations to absurd heights everywhere. These insanely high asset valuations supported additional debt, which then fueled higher asset prices, a virtuous cycle of expanding debt pushing asset prices higher, when then enabled more debt, and so on.

The problem with bubble valuations is revealed when participants must sell to pay down debt. When the debt-monkey can't be dislodged from the debtor's back, assets must be sold. And in the thin, rarefied air of most markets, any real selling quickly crashes valuations, which were predicated on more buyers, not more sellers.

The initial wave of selling assets to pay down debt has already crushed emerging markets. Relatively modest selling in developed markets pushed many markets into Bear territory (down 20% or more).

Since stock markets are ultimately underpinned by corporate profits, let's ask: What factors could crush profits in 2016?

1. stronger U.S. dollar: as many of us foresaw, the stronger USD has pummeled U.S. corporate profits, much of which are earned overseas in other currencies:

The USD Bull in the Global China Shop (February 4, 2015)

Anyone who thinks the USD will give up its gains is dreaming:

Why the Dollar May Remain Strong For Longer Than We Think (September 17, 2014)

2. Emerging markets consumption is weakening. Crush a nation's currency and stock market, and spending atrophies. When spending sags, so do profits.

3. Oil exporters are reducing their spending. Tightening belts means fewer imported luxury goods and fewer profits for exporters who feasted off oil-exporting wealth for years.

4. China. Imports to China are cratering. Profits will crater, too.

5. Diminishing returns on cost-cutting. All the low hanging fruit has been plucked; shipping manufacturing overseas–done. Reducing head-count: done. Buying software to increase productivity: done. What's left: slash payroll (again), cancel company 401K contributions, etc.–in a word, devastate employment.

6. Diminishing returns on lower interest rates. Refinancing old debt at super-low rates boosted profits wonderfully the first time around, now, not so much: rates have been low for so long, there's no juice left in that lemon.

7. Energy savings have been banked. Airlines have feasted on record profits resulting from plummeting fuel costs, but the big gains have already been banked. If oil drops below $30/barrel, a few dollars can be picked up, but they won't match the gains reaped when oil fell from $100 to $30/barrel.

8. Risk-on borrowing is drying up. The global booms from 2002 – 2008 and 2009- 2015 were both driven by trillions of dollars of new (borrowed) money being dumped into risk-on assets–real estate development, stocks, junk bonds, shadow banking loans, etc.

This tide is now receding.

9. Much of the profit was accounting gimmickry. Jim Quinn recently dismantled the illusory nature of corporate "profits," drawing upon John Hussman's analysis: Corporate Profits Vaporizing: (excellent job, John and Jim):

Elevated corporate profits since 2009 have largely reflected mirror image deficits in the household and government sectors, as households have taken on debt to maintain consumption despite historically low wages as a share of GDP, and government transfer payments have expanded to fill the gap, with 46 million Americans now on food stamps – a five-fold increase in expenditures since 2000.

Essentially, corporations are selling the same volume of output, but paying a smaller share in wages, with deficits in the household and government sectors bridging the gap. As households and government have shoveled themselves further into the hole, corporate profits have climbed higher on the adjacent pile of earth. Deficits of one sector emerge as the surplus of another.

If you think all this is a solid foundation for ever-higher profits, by all means go buy stocks with all four feet. But don't be surprised if the rest of the market disagrees at some point–for example, when even flim-flam accounting can't hide the fact that profits are in a free-fall back to "normal" levels 60% below current levels.


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Sanders and Clinton Both Against Fracking: Flint Democratic Debate

FlintDemDebateDuring the Democratic debate in Flint, Michigan between former Secretary of State Hillary Clinton and Vermont Senator Bernie Sanders both weighed in against hydraulic fracturing combined with horizontal drilling to produce oil and natural gas. Never mind that the fracking revolution has essentially doubled U.S. daily oil production from a recent low of 5 million barrels in 2008 to nearly 10 million barrels now. The same technology has also greatly increased daily domestic natural gas production from 44 billion cubic feet in 2005 to 76 billion cubic feet now. Rising U.S. oil and gas production has been partially responsible for the recent steep fall in the prices for both. In fact, production of both has increased so much that the U.S. is actually exporting crude oil and natural gas.

When asked about fracking Secretary Clinton answered:

I don’t support it when any locality or any state is against it, number one. I don’t support it when the release of methane or contamination of water is present. I don’t support it — number three — unless we can require that anybody who fracks has to tell us exactly what chemicals they are using.

So by the time we get through all of my conditions, I do not think there will be many places in America where fracking will continue to take place. And I think that’s the best approach, because right now, there places where fracking is going on that are not sufficiently regulated.

FrackingSmallImageSo first, we’ve got to regulate everything that is currently underway, and we have to have a system in place that prevents further fracking unless conditions like the ones that I just mentioned are met.

Sanders responded:

My answer is a lot shorter. No, I do not support fracking. … And I talk to scientists who tell me that fracking is doing terrible things to water systems all over this country.

First, contrary to assertions by both Clinton and Sanders, a preliminary report from the Environmental Protection Agency last year noted that the agency’s scientists “did not find evidence” that fracking has “led to widespread, systemic impacts on drinking water resources in the United States.” Second, most states already require that drilling companies reveal what chemicals they are using to frack wells and list them on the FracFocus Chemical Disclosure Registry.

Third, the ongoing switch from coal to natural gas (methane) to generate electricity is largely responsible, according to the EPA, for the recent reduction in U.S. greenhouse gas emissions from 7.4 billion tons in 2005 to 6.9 billion tons in 2014. (On the other hand, some recent research suggests that U.S. methane emissions into the atmosphere have also increased, but burning natural gas has offset the global warming effects of any such increase.)

Clinton and Sanders either (A) don’t know the actual results of research on fracking or (B) they are simply pandering to the environmentalist wing of their party. I pick (B).

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Trump, Cruz, Clinton Super Saturday Winners, North Korea Threatens ‘Indiscriminate’ Nuclear Strikes, Nancy Reagan Dies: A.M. Links

  • On Super Saturday Donald Trump won in Kentucky and Louisiana, while Ted Cruz won in Kansas and Maine. Afterward, Trump called on Marco Rubio, who won in Puerto Rico on Sunday, to drop out of the race. Meanwhile Hillary Clinton and Bernie Sanders met for a Democratic debate in Flint.
  • Former Chicago Bears coach Mike Ditka said in a radio interview that Barack Obama was the worst president ever, and that he would probably vote for Donald Trump.
  • ISIS claimed responsibility for a suicide bombing south of Baghdad that killed at least 47.
  • North Korea threatened “indiscriminate” nuclear strikes against the United States and South Korea after the two countries launched joint military drills.
  • Whole Foods pulled pre-peeled oranges off their shelves after outrage on Twitter. Supporters of the product pointed out it made it easier for the disabled and elderly to consume oranges.
  • Maintenance workers in China found the corpse of a woman in a residential elevator they had shut down over a glitch a month earlier, and will face charges of involuntary manslaughter.
  • Nancy Reagan has died.
  • Season 3 of Rick and Morty will debut later this year and run for 14 episodes.

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Young Republicans Mourn Rand Paul, Trash Trump, and Pledge to ‘Make America Dope Again’ at CPAC 2016

“I just got a selfie with Rick Santorum!” squeals a young woman to her friend as I pass them in crowded corridor at the Gaylord National Resort and Convention Center. It’s the opening morning of this year’s Conservative Political Action Conference (CPAC), an annual event for right-leaning leaders, activists, and media, as well as rank-and-file Republicans. And unlike most GOP gatherings, this one tends to be heavily populated with young people, especially conservative college students—in previous years, at least 40 percent of CPAC attendees were students and more than half of all attendees were between the ages of 18 and 29.

Overall, the vibe at this year’s conference—which included a well-attended Republican debate watching party on the ballroom big-screen Thursday night—was decidedly anti-Trump. Whether it was Sen. Marco Rubio teasing Trump during the debate or panel speakers obliquely criticizing the party frontrunner, taking shots at the Donald drew ample affirmation from CPAC crowds, who had much more love for Rubio and Texas Sen. Ted Cruz. The young people of CPAC seemed to share these sentiments, with perhaps even less love for Trump, plus a heartening dose of support for Libertarian Party (LP) candidates and mourning for the failed candidacy of Kentucky Sen. Rand Paul.

Caroline Craig, a 21-year-old student at East Carolina University (ECU), says her school has a significant student-conservative population, but “it’s really mixed” which presidential candidates they like. “A lot of people at ECU tended to be Rand Paul supporters” and “were very, very sad when he dropped out,” she tells me on the closing afternoon of the conference. There are some Trump supporters in ECU’s conservative quarters, “but they tend to be more the fraternity boys.”

Make America Dope Again

Craig is one of around two dozen young women walking around the conference in matching red elephant-print skirts, generally paired with high-heels and bright lipstick. They are part of an organization called Future Female Leaders of America (FFL), which seems to have a dual mission of being an online hub for young conservative women and hawking FFL merchandise. The FFL website describes its mission as helping to “inspire young women to become more politically aware and informed.” 

Nearby FFL at CPAC is Turning Point USA, a college conservative group that dominates the middle of the expo floor with an energetic horde of male and female representatives dressed in red polos and khaki pants. On the opening day of CPAC, the group blasts pop and hip-hop music and dances enthusiastically, students brandishing “Big Government Sucks” signs and hoisting large cardboard cutouts of the GOP presidential candidates above them like foam glow sticks at a bad club. It might sound cringe-inducing, but they actually bring a nice dose of spunk and youthful energy to the otherwise same-old, same-old CPAC scene—the Heritage Foundation, the NRA, the tables featuring pictures of flags and fetuses and bald eagles.

“The only thoughts I had during CPAC had to do with how awesome it is that so many young conservatives were there to make America dope again,” tweeted student Danielle Butcher during the conference (she also called for Rand Paul to please come back). Another young attendee referred to CPAC on Twitter as “coachella for conservatives.”

“I was not prepared for so many people to be in one area, and so many big names to be in one area,” says Marie Pecher, a first-time CPAC attendee from the University of Pittsburgh, when I talk to her in front of the FFL booth on Saturday. On her campus, Pecher says there was a lot of support ofr Paul and New Jersey Gov. Chris Christie. But “as more candidates jump out, a lot of [conservative students] are jumping on the Cruz and Rubio train, as opposed to Trump.” 

The Missing Candidates

Trump was slated to speak at CPAC Saturday morning but canceled on Friday, the same day Ben Carson announced that he was suspending his campaign. In the straw poll called at the end of the conference,Texas Sen. Ted Cruz won with 40 percent of attendee votes, followed by Rubio with 30 percent, Trump with just 15 percent, and Ohio Gov. John Kasich with 8 percent.

Pecher missed seeing Cruz speak at CPAC but had seen Rubio’s talk that morning and Kasich the day before. “I really think that the ‘Marcomentum’ has definitely come to CPAC,” she says. During Kasich’s speech, “he had a lot of support but it wasn’t like Rubio. There was a lot of standing ovations for Rubio, much more high energy for Rubio than for Kasich.”

Among students I talked with at CPAC, ​​that was the most anyone said about the Ohio governor. They were similarly silent about recently resigned candidates Jeb Bush, Ben Carson, Carly Fiorina, and Rick Santorum. But several mentioned regrets—either personal or predominant among their conservative student friends—that Sen. Paul had dropped out of the presidential race.

University of Minnesota Duluth (UMD) sophomore Kalley Erickson says there’s mostly been mixed support for Cruz, Rubio, and Trump among young CPAC attendees she talked with, although “people are still talking about Rand” and are disappointed he’s left the race. “I’m sad that he’s out too,” says Erickson, who serves as vice chair of her school’s College Republicans club.

Paul visited UMD in November “and he was pretty popular.” But during Paul’s talk, “his approach, his presence, the way he talked… he seemed angry,” she says. While Paul wasn’t exactly mean, “he just seemed a little… scary.”

“I’ve never seen him smile,” adds Erickson. “He didn’t even smile in the picture I took with him.”

Prickliness and a short temper were accusations lobbed at Paul throughout his campaign, most notably during debates. It was a source of sore disappointment for those who hoped Rand would share the charisma and ability to generate enthusiasm that his dad, former Sen. Ron Paul, did. 

Where the Libertarians Are

Ian Taylor is a student and vice chair of finances for the College Republicans club at Dordt College. In straw polls taken by the group, “it’d different than national polls,” says Taylor. “For instance, Donald Trump usually comes in single digits. We had a big students for Rand group, where he would come in double digits over Donald Trump.” A lot of those Paul supporters are now supporting Cruz, he tells me, “and then some of them have switched over to more libertarian candidates like Gary Johnson.”

I run into a Johnson enthusiast a few minutes later, alongside a peer who hopes that Johnson doesn’t get the 2016 LP nomination. Justin M., a student at Manhattan College and founder of the website Liberty Hangout, supports libertarian presidential hopeful Austin Petersen. “I think his heart is really in it,” which you can see through Peterson’s “social media presence,” he says. Like Donald Trump, Petersen is “anti-establishment,” but unlike Trump “he’s pro-liberty.”

Petersen launched and runs the website The Libertarian Republican and is a past employee of the Libertarian National Committee and Andrew Napolino’s Fox Business show, FreedomWatch. Though Petersen has never held office before, the 35-year-old is challenging Johnson—the former governor of New Mexico and the LP’s 2012 presidential candidate—for the party’s nomination this year.

“When Ausin entered the race, no one thought he had a fighting chance. Now he’s number two in the polls,” says Justin, presumably referring to an online poll conducted during the International Students for Liberty conference in late February. Johnson came in third in that poll, while first place went to Ted Cruz.

Justin and his friend, Roberto Chamorro, are anxious to go find Canadian blogger Stefan Molyneux, whom they have heard rumors is somewhere nearby.

Chamorro, a student at Maryland’s Montgomery College, says he considered himself a Republican until last year, when he “started becoming a libertarian.” As such, Chamorro appreciates Paul’s efforts in Congress around things like the NSA, but he was put off by Paul’s “flip flopping” on certain issues and perceived politicking. Chamorro’s presidential support now lies with Gary Johnson, whom Chamorro thinks is “more Republican” than any of the other candidates.

“Look at his record as the governor of New Mexico,” he says. “He vetoed so many bills, including raising taxes and such.”  

Unfortunately, that’s translated to little support for Johnson within the Republican mainstream. At CPAC, an opening-morning speech from Johnson draws only tepid applause and garnered Twitter comments like “this Gary Johnson speech is rather bizarre” and “what the actual hell?”

#NeverTrump

According to Politico reporter Kyle Cheney, “some libertarian backers of Sen. Rand Paul’s now-defunct presidential candidacy suggested [at CPAC] that Trump’s subtle dovishness—his rejection of regime change in Libya, Iraq and Syria”—was behind his appeal with young people. “I think he’s an authoritarian definitely, very far right,” 21-year-old CPAC attendee Josh Paladino told Cheney. “But for some reason his foreign policy has that streak of non-intervention.”

But reporters from the The Washington Times and The Huffington Post found little love for Trump among millennials at the conference. And Washington Post reporter (and former Reason staffer) Dave Weigel reported from CPAC that “Trump sympathizers, and Trump fans, were outnumbered but not invisible” and “skewed older than the College Republican fans of Rubio or Cruz.” 

Arie Hoekstra, a student and College Republicans club officer at Iowa’s Dordt College, saw Cruz and Rubio speak at CPAC and both had a lot of crowd support. He says he was disappointed “not to see Trump here to get a comparison of the three.”

Millennial support for Trump has been mixed so far. In the first four states to hold their primaries or caucuses, Trump won millennials in just one, New Hampshire. In Nevada and South Carolina, he led with all age groups except millennials, whom he lost to Rubio, and in Iowa, Cruz dominated among millennials voters, followed by Cruz and then Trump. On Super Tuesday, Trump won voters under 30 in six states, according to Red Alert Politics

Matthew Mailloux, who heads Students for Rubio at La Salle University, told Red Alert that voting for Trump may be “the cool thing to do” in certain youth circles, but among “the truly principled millennials who are involved in politics and who pay attention to the news” you will see “very, very low support for Trump.”

Alas, outside of CPAC, “the truly principled millennials who are involved in politics and who pay attention to the news” seems vastly outnumbered by those who appreciate the “authenticity” of Trump or—much more likely—of Demorcatic presidential candidate Bernie Sanders. Sanders has routinely earned large swaths of the potential youth vote (at least the potential white youth vote) in state and national polls. As one elephant-skirt-clad FFL member puts it, “Bernie Sanders has just taken control” of the student electorate this year. 

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“The Iron Ore Market Has Gone Berserk” – What Drove Iron’s Biggest Surge Ever

'Efficient' markets at their very best once again. Following a 19% spike overnight, analysts and traders alike are stunned by "the departure from fundamentals" as "the iron ore and steel markets have gone berserk." On the heels of home price surges, sent soaring after government suggestions that they will support growth, "investors are expecting further monetary easing by the Chinese government to boost steel demand," but as Bloomberg notes there has been no "corresponding increase in physical orders."

Seriously…

 

As Bloomberg reports, Monday’s surge was accompanied by a rally in producer stocks. Australia’s Fortescue Metals Group Ltd. jumped 24 percent in Sydney trading, where Rio Tinto Group and BHP Billiton Ltd. also climbed. Rio, the second-biggest mining company, rebounded from an earlier decline in London trading and was up 0.4 percent by 12:15 p.m. local time.

“There may be some short-covering in the futures markets today,” said Xu Huimin, an analyst at Huatai Great Wall Futures Co. in Shanghai, referring to investors closing bets on declines.

 

“The crazy surge in futures prices has surprised traders and steel mills, as they haven’t seen a corresponding increase in physical orders.”

 

“The recent boom of the real estate market and price has positive influence on the steel price,” Michael Zhu, president of Hong Kong-based trader Millennia Resources Ltd. and former global sales director of Vale SA, said by e-mail. The “market believes the demand for steel will be increased with the recovery of real-estate market.”

However, while at the annual National People’s Congress at the weekend, the authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5 percent to 7 percent; they also vowed to help cut overcapacity in steel, potentially curbing demand for iron ore.

“We expect the current rally to be short-lived,” analysts Christian Lelong and Amber Cai said in a note predicting further growth in iron ore supply in the quarters ahead.

 

“The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around.”

Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday, forecasting a drop back to $35 a ton in the final quarter. This year’s rally has been driven by rising steel prices in China, a reversal of the normal relationship seen between the raw material and the manufactured product, Goldman said.


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JPMorgan: “We Think That One Should Start To Re-Enter The Shorts”

On Thursday, after 7 years of having an overweight or at least neutral stance on equities, JPM “for the first time this cycle” went underweight stocks. This is what JPM’s Jan Loeys said:

Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers.

 

Our 12-month-out US recession odds have risen to 1/3, while equity-implied odds have instead fallen to near 1/5. But even with no recession this year or next, we see US earnings rising only slowly by low single digits and see little to boost multiples. The eventual recession should bring US stocks down some 30%, creating a strong downward risk skew to returns over the next few years.

It added the following:

  • We go Underweight Equities for the first time in this cycle.
  • Equity bearish forces include poor macro valuation vs. our recession risk for this year; negative fundamental momentum; and limited profit and return upside relative to the downside we see from the eventual recession.
  • The limited upside we see on stocks under our no-recession modal forecast is driven by still dismal productivity growth and the inability/unwillingness of monetary and fiscal policy makers to stimulate growth.

And just in case it is unclear what “Underweight” means, overnight JPM’s Chief US equity strategist, Mislav Matejka explained: “We have on 15th Feb called for a tradeable market rebound. Now, following the 13% SX5E and 10% SPX upmove, we think that one should start to re-enter the shorts.

Here are the reasons why JPM is now selling:

Technicals are now closer to overbought than to oversold territory. VIX is at ytd lows – a degree of complacency might be creeping in again. Global P/E is up on the year. PMIs remain under pressure everywhere, with services converging with manufacturing. The Chinese labour component of PMI is the lowest since Jan ’09. Q1 results are likely to be weak again. DXY is not falling, Fed is back in the picture, politics could be very messy – German regional elections on March 13th are important to watch. Finally, we are soon entering poor seasonals, where April-May and onwards saw an increased volatility in the past few years. We take advantage of the bounce to reduce equity weight to an outright UW, in a balanced portfolio. This is the first time since ’07 that we are UW stocks, and follows our 30th Nov cut to our structural equity OW stance. We note that US median ND/E ratio is at 20-year highs, as are Buybacks/EBIT ratios. Eurozone is at an earlier stage of the cycle, but it is unlikely to decouple. UK stays the top regional pick globally, despite Brexit risk. Utilities and Telecoms remain the top global sector OWs. Stay with Defensives and FCF basket”

It goes without saying that if this recommendation If this was Goldman or Gartman, we would of course recommend mortgaging one’s mother and buying deep OTM calls on the S&P.

However, with JPM’s equity team which boasts such actually correct forecasters are Marko Kolanovic, we would be far more careful to fade anything coming out of the Park Avenue bank; in fact, JPM just may be right, especially after Kolanovic’s revelations last night about what the fate of the short squeeze may be, to wit:

What is the fate of this market rally? In terms of technical flows, more inflows would come if 3M and 12M momentum turn positive, which would happen at ~2025 and ~2075, respectively (the precise level depends on the timing of potential moves). If volatility stays subdued, volatility-managed strategies could also increase equity exposure. However, equity momentum is also vulnerable to the downside and a move lower could be accelerated by 6M and 1M momentum unraveling at ~1950 and ~1900, respectively. From the perspective of systematic strategies, downside and upside risks are balanced. However, equity fundamentals remain a headwind. In our recent strategy note, we showed that historically, periods of consecutive quarterly EPS contractions are often followed by (or coincide with) economic recessions (~80% of the time over the past ~120 years). EPS recoveries that follow 2 consecutive EPS contractions (~20% of times) were typically triggered by some form of stimulus (fiscal, monetary or exogenous). We expect market volatility to stay elevated and investors to remain focused on macro developments such as the Fed’s rates path, developments in China, and releases of US Macro data. Elevated volatility and EPS downside revisions will provide a headwind for the S&P 500 to move significantly higher (via multiple expansion). While investors need to have equity exposure, we think there are better opportunities in Value stocks, International and EM equities (as compared to broad S&P 500 exposure)

Now if only Goldman would also go short the S&P500 then the confusion about what is really going on would be eliminated instantly.


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