Washington D.C. moves to center stage…

January 17, 2017

Time for the new White House and Congress to put pen to paper. While the equity markets have sustained their high levels, intra-day volatility in currencies, bonds and equities have surged as those markets attempt to react to every rumor and tweet out of Washington and Trump Tower. While many investors think that they know the direction of this new government, we don’t have a gauge on the magnitude of Fiscal Stimulus, Border Taxes, Corporate Income Taxes, Obamacare ‘Repeal and Replace,’ and across-the-board Government Deregulation that will be put into place. So much uncertainty—which will create opportunity for some and pain for others in the short term. The road ahead will be bumpy, so try and look for the big themes that you can grab onto and own through, what will no doubt be a rough ride over the next few months.

Good charts showing the recent lift in Forex and Bond market volatility…

Stocks definitely act volatile on an intra-day basis, but are still lacking meaningful day-to-day moves as sell-offs get bought and rallies get sold.

(KKRinsights)

Food for thought on the daily chop…

“No one makes money in the chop,” said the CIO. “People make money on big moves.” Trump held his press carnival, markets swung wildly. “The Yen was at 117 two days ago. Now it’s 114. Tomorrow it may trade 117. Will anyone make money?” A few will, most won’t. “Nearly 100% of trading returns last year were made between November 8th and December 15th.” The dollar rallied 13% versus the Yen in that time. Ten-year treasury yields jumped 80bps. The Russell 2000 jumped 18%. Markets trended in uninterrupted fashion; a perspiration-free ride for the well-positioned. “Those kinds of big moves are mandatory for hedge funds to make real money.” A few people profited from Japanese interest rates last year. Some nimble punters made money on Brexit. Trump provided the third real opportunity. “You can’t make money in this business slicing nickels, you need to find $1,000 bills. Because prudent risk management precludes you from running positions at 100% of your fund assets, which means that even if you catch a 10% move, maybe you make 2% or 3% returns.” When you get really lucky, a Trump trade comes along, you’ve got the right positions, they correlate highly and you collect a few 2-3% profits at the same time. “So the only question that really matters in this business is this: What’s the next big move?” he explained. “It’s probably a continuation of the Trump trade,” he said, pausing, considering the pain of 2016. “Last January, people were convinced the renminbi would blow up.” But it promptly rallied +3%, stopping most people out. If you held tough, or re-engaged the trade, you made a fortune. The renminbi fell -8% from those highs. “The thing is, consensus trades have a nasty habit of working, just not exactly when you want them to.”

(Eric Peters/Wknd Notes)

 

No need to look far for reasons for the daily chop with seismic valuation shifts from industry to industry on every tweet and interview…

President-elect Donald Trump told companies they will have to shift manufacturing to the U.S. in order to do business here, in a series of comments indicating a tough posture toward U.S. trade partners.

“Car companies and others, if they want to do business in our country, have to start making things here again. WIN!,” Mr. Trump wrote on Twitter on Sunday. The comments came as Mr. Trump reiterated in an interview with a German newspaper that his administration would levy a 35% import tax on autos built in Mexico for export to the U.S.

In comments published by German tabloid Bild, Mr. Trump singled out German premium car makers BMW AG and Mercedes-Benz, saying automotive trade between the U.S. and Germany was a “one-way street.”

“When you walk down Fifth Avenue, everybody has a Mercedes-Benz parked in front of his house,” Mr. Trump said, according to a Wall Street Journal translation of Mr. Trump’s comments that appeared in German in Bild. Addressing the Germans, he was quoted as saying: “You were very unfair to the U.S.A. It isn’t mutual. How many Chevrolets do you see in Germany? Not many, maybe none, you don’t see anything at all over there. It’s a one-way street.”

(WSJ)

 

Regardless of where its autos are made, GM took up its 2017 estimates last week for the expected “Trump bump” to its topline…

General Motors has predicted profits to increase for 2017 on the back of a “Trump bump” in the US car market and increased sales in China.

The company, which owns the Chevrolet and Cadillac brands, and Opel and Vauxhall in Europe and the UK, said earnings per share for the current year would be $6.00-$6.50. It had previously said 2016 earnings per share — due to be announced this month — would be between $5.50-$6.00…

GM shares rose 5 per cent on the news to $37.96.

Carmakers were pleasantly surprised by the US market in 2016, with stronger than expected sales in the final two months of the year, after equity markets rose on the back of Donald Trump’s election as president.

Dan Ammann, president of GM, said: “It’s too soon to draw any firm conclusions obviously but December was a strong month capping off a pretty strong year, and early data on consumer confidence is favourable, equity markets are favourable, in all it looks like a favourable backdrop.”

(Financial Times)

 

Of course you really don’t want to own auto manufacturers when you can make multiples of it in the service models…

As can be seen below, by 2021 ARK expects the equity market value of global OEMs to be roughly one third the value of the MaaS market, and by 2025, roughly one sixth. Part of the explanation for this growing gap will be the substantially higher vehicle utilization that shared autonomous taxis will enable. We think the average MaaS vehicle will service more customer-miles, depressing auto unit sales and constraining OEM growth. That said, OEMs could insinuate themselves into the MaaS market. In theory, an investor could buy all of the OEMs around the world today for roughly $1 trillion, and if just one were to take majority share in the autonomous taxi space, the return on investment would be 4X in five years. The likely alternative, of course, is that technology players like Google or Uber capture the majority of the service value.

(Ark-Invest)

Once the Service model is attractive enough, most people would never consider the expense and waste of owning their own car…

Back to changes in Washington D.C.: Here is the Ned Davis Research Group take on what could happen to earnings when corporate income taxes are cut…

And the Leuthold Group would remind you that domestic oriented (think smaller caps) will get more of a benefit…

As one would expect, most investors are most worried about Washington D.C. actions…

Investors are also likely over positioned into the U.S. dollar…

(@Callum_Thomas)

The U.K. has its own issues which has created a great opportunity to go visit for a Spring Break or Summer vacation…

I even see $300 flights from Denver so what are you waiting for?

The rising U.S. Dollar, potential Trump actions and rising global inflation has led to a significant drawdown for bond investors…

(@bespokeinvest)

And bond losses are leading to bond fund outflows…

(WSJ’s Daily Shot)

A couple of the more interesting earnings tidbits that came out last week…

“It has been at least three years since we’ve seen anything resembling this…This stabilization has been pretty broad…machine and equipment folks, primary metals, metal fabrication. All of those are seeing an improvement over the last couple of months. I think some of that is driven by oil and gas” — MSC Industrial CEO Erik Gershwind (Industrial Distributor)

“The industry continues to face cost pressures due to a shortage of labor within a subcontractor base. For 2016, our cost to build increased about 4.8% versus the prior year, roughly $5,000 per house. And we were able to cover most of these cost increases with higher prices” — KB HomeCEO Jeff Mezger (Homebuilder)

(Avondale)

 

Earnings will ramp up this week. Lots of Financials…

(@bespokeinvest)

The most talked about economic datapoint was the Small Business Optimism series…

Also interesting was the continued surge in Chinese inflation data…

If you are looking for the opposite of strength, look no farther than your local department store or shopping mall…

Someone will need to come up with more uses for those large square foot buildings with escalators…

I would expect ESPN to roll out many more drone racing leagues given the rapidly expanding contest locations.

Speaking of real estate, Denver has a hot economy. Apartment rent price increases were just recently unstoppable. But supply has finally caught up with demand…

Metro Denver’s housing market could diverge in a big way this year, with apartment rent increases slowing to a crawl or even reversing, while home prices continue to race higher.

Signs of cooling are strongest on the multifamily side, where a large number of high-end units are expected to hit the market this year.

ApartmentList estimates Colorado apartment rents rose 1.8 percent year-over-year in December, while metro Denver apartment rents are up 0.8 percent, both down from annual rent increases in the 4 percent range in July.

Axiometrics estimates that metro Denver apartment rents were rising at an annual pace of 1.7 percent in the fourth quarter, down sharply from the 6.4 percent pace they moved into 2016 with.

Abodo, in its annual rent report, puts metro Denver in the category of declining markets, recording a 6.7 percent drop in one-bedroom apartment rents in January compared with a year earlier, the seventh steepest decline among the cities it tracked.

(Denver Post)

Miami, New Orleans and Manhattan real estate owners should consider swapping into higher elevations…

At least move all of your electrical and systems to the roof from the basement.

68% of today’s cancers are now curable. It is because of a legion of research rebels that we have come so far. If you want to know how we have gone from zero to two-thirds in 50 years, read this book. An incredible story that will leave you hungry to rid the last 32%…

The true story of the war on cancer from one of its generals

Cancer touches everybody’s life in one way or another. But most of us know very little about how the disease works, why we treat it the way we do, and the personalities whose dedication got us where we are today. For fifty years, Dr. Vincent T. DeVita Jr. has been one of those key players: He has held just about every major position in the field, and he developed the first successful chemotherapy treatment for Hodgkin’s lymphoma. As one of oncology’s leading figures, DeVita knows what cancer looks like from the lab bench and the bedside. The Death of Cancer is his illuminating and deeply personal look at the science and the history of one of the world’s most formidable diseases. In his hands, even the most complex medical concepts are comprehensible.

Cowritten with his daughter, the science writer Elizabeth DeVita-Raeburn, The Death of Cancer is also a personal tale about the false starts and major breakthroughs, the strong-willed oncologists who clashed with conservative administrators (and one another), and the courageous patients whose willingness to test cutting-edge research helped those oncologists find potential treatments.

With historical depth and authenticity, DeVita reveals the true story of the fight against cancer. The Death of Cancer is an ambitious, vital book about a life-and-death subject that touches us all.

(Amazon)

 

And Lastly…

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