March Madness

March 13, 2017

March Madness Bracket: Political Parody

How is your bracket doing? Before the ACA Repeal and Replace plan hit the court last week, it already looked like its odds of passage were longer than Mount St. Mary’s chance to win the Men’s NCAA Basketball Tournament on April 3rd. We all know that this is just the first pass in a long negotiation, however, you had to think that the odds were immediately stacked against it when no one wanted to put their name on it. Many supporters started to hedge on its ability to pass immediately while some GOP’ers came out against it right away. As we wait for the Congressional Budget Office (CBO) to score it and calculate what it will do to the budget, we are already counting the individual winners and losers in the market. Without a forced larger pool of insureds, the quality of the pool will decline as younger, healthier people leave coverage. Thus, remaining insureds should have higher prices. For those who leave because they can’t afford insurance, the individual hospitals and health care systems will need to figure out how to pay for the uninsured or absorb the losses. And if you live in a state who expanded Medicare, then you can expect your taxes to rise very quickly to pay for the Federal Government assistance (which will stop in 2019). Lots to think about in this first version, but given all the politicians, voters and special interest groups who are against it, you have to think that the final version will look very different.

Meanwhile, the financial markets are watching this first game closely and continuing to hedge their post-election bets. It makes sense that if the ACA Repeal and Replace gets delayed, or even arrives DOA, then everything else will get pushed back. It seems like the Republican Administration should have started with some easier moves (like Infrastructure and Tax Reform) to help put Americans back to work and clear up business uncertainty. But maybe this was all inside an episode of ‘Game of Thrones’ or ‘House of Cards’ which I forgot and will all work out. But for now, the credit markets are acting worrisome, bank stocks have paused and infrastructure plays are rolling over. Meanwhile, it will be a very busy week of new data and info coming from every part of the globe: elections in the Netherlands, the FOMC meeting, new economic data (CPI, Retail sales), Bank of Japan meeting, Bank of England meeting, some debt ceiling hike talk, the CBO score of ACA Repeal and Replace in addition to the storm scheduled to whack the East coast. Have fun trying to keep one eye on the tape and one eye on the basketball game.

No one is rushing to put their name on this new piece of landmark legislation…

The grounds for the right’s opposition is that the House bill would replace Obamacare with a “new entitlement,” albeit one funded almost entirely through cuts to an old entitlement (Medicaid) and which would provide such meager benefits as to be useless to large numbers of its purported beneficiaries.

What makes this revolt so confounding to the party leadership is that the House bill, while too liberal for the party’s right flank, is also almost certainly too conservative to pass the Senate. Senators Lisa Murkowski, Cory Gardner, Rob Portman, and Shelly Moore Capito signed a letter yesterday opposing the bill’s repeal of the Medicaid expansion. A fifth, Dean Heller, has raised concerns about protecting Medicaid. Susan Collins and Bill Cassidy have proposed a much more moderate replacement bill, which has also been co-sponsored by Capito and Johnny Isakson. Additionally, Lamar Alexander, Jeff Flake, and Lindsey Graham have urged caution and deliberation — all of which run counter to the leadership’s strategy of ramming a bill through as quickly as possible in order to enable the passage of a big tax cut later in the year.

That makes 11 Republican senators who have, in some form or fashion, expressed reservations about the party leadership’s preferred health care strategy. Even assuming the three senators who object to the law from the right — Ted Cruz, Rand Paul, and Mike Lee — can be corralled, Trumpcare seems to be very far from corralling the necessary 50 Senate votes. And this is before the Congressional Budget Office produces its score, which will probably show millions and millions of people losing coverage, and may possibly also show the deficit blowing up.

(NY Mag)


However, the House did legislate these new bike lanes for all GOP Senators who live in states that expanded Medicare…

Bike Lane for U.S. Senators


Even the fiscally responsible have their knives drawn on this one…

Of course, in hindsight, Democrats were perfectly right to want to keep Americans from hearing about what had been done to the health-care system; when voters did find out, they didn’t like it. And that, in turn, offers clues to why the Republicans’ bill is so bad.

There is no sensible thing that you can do to our health-care system that will not offend huge numbers of voters. Thus we got Obamacare, a program which, to a first approximation, 0 percent of Democratic policy analysts would have put forward if asked to design a rational program to extend coverage and improve health-care delivery. It was a gigantic Rube Goldberg contraption, deliberately complicated and opaque to avoid openly angering any important constituency, and arguably, fatally flawed for that same reason.

Now that Republicans have their turn in the spotlight, they’re resorting to all the same tricks: the secrecy, the opacity, the long implementation delays (the better to get a good score from the Congressional Budget Office, and oh, yes, also, get them past the next election before voters meet their program). The inability of either party to make a principled stand for sensible policy is a problem, a very big one. And Republicans sure haven’t fixed it.



This is increasingly alarming…

Corporate loan growth has frozen as companies wait for direction out of D.C. on tax reform, capex changes, interest deductibility, etc.


(WSJ/Daily Shot)

I have always pointed to credit as being one of the most important thermometers for the equity market…

While we have had a flood of new corporate bonds hit the market (about $15b last week), we also saw some significant redemptions from the large junk bond ETFs. This is not a healthy sign and should make the hair on the back of your neck stand up.


Part of the problem with credit is the new, sharp downturn in energy prices…

Crude oil just posted a -9% week for its worst performance since October.


And Energy stocks are following…


Even though Energy stocks are significantly oversold, they still can’t catch a dead cat bounce…

With so many buyers of the past energy dips, it will be interesting to see if buyers show up once more. Lots and lots of private equity behind this group.

Bespoke: Energy Stocks Chart

Why do oil prices keep falling? Because the companies have been too successful in lowering their cost structure…

In panel discussions and keynote speeches, executive after executive tried to outdo rivals in announcing their low break-even prices. Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates that break even for his company’s next generation of projects had fallen from $70-plus to “well below” $30 a barrel.

“The downturn has been long and painful, but has presented the industry with a unique opportunity to strengthen ourselves,” Saetre said.

He wasn’t alone in noting the new efficiencies. From Patrick Pouyanne of Total SA to Darren Woods of Exxon Mobil Corp., almost every executive commented on the lower break-evens. For some new projects tying back to existing facilities, executives said they could avoid losses even at $12 a barrel.


Drilling Frenzy: U.S. Oil Rigs Chart

Several added pressures have led the S&P 500 to have its first lower week in seven weeks…


U.S. stocks are sending oversold readings but we really have not had much of a pullback…



Looks like breadth is increasing as the mega-caps outperform…

Bespoke: Combined Market Cap of 5 Largest Companies in S&P 500

And mega-cap Tech is helping the Tech ETF to some incredibly consistent outperformance…
Hardly a down week all year.


Always interesting to see David Tepper’s comments about the markets…

Market not cheap, but against the backdrop of world growth and easy money…”Can’t be short in that kind of environment.”

“Trade Friction With China” is one big risk that is now off the table.

Tepper, when asked if he is short bonds – “You bet… wake me up at 4%.”

Tepper is long European Equities. “Upside peeps are not recognizing as growth is increasing, ECB has too easy money, and French Election catalyst may ultimately be a positive.”

Says Fed so far behind the curve, if after French election and get tax cuts, Fed will have to move incredibly fast.



It was a jobs week. And the gains were solid…

Blokland Tweet- Nonfarm Payrolls Chart

A warm February meant a pop in housing payrolls…

US Construction Payrolls

(WSJ/Daily Shot)

Wages were kept in check but the past rising trend still sets the table for a Fed hike this week…

Graph: Hourly Earnings Support Gradual Hike Cycle

Good thoughts from Tim Duy ahead of this week’s FOMC meeting…

Looks like the Fed knew what it was doing by signaling a rate hike in recent weeks. The earlier than expected rate hike should correspond to a bump up in this week’s “dots.” Some participants with two dots will switch to three, some with three to four. I expect the median rate hike projection of Fed participants will be four, which I translate into a baseline case this year of three with an option on four. The Fed will want to front load these hikes to stay ahead of the curve, which means March, June, and September if the data allows. Then December if needed. Data as of yet does not suggest a need by itself to step up the pace of hikes even more quickly. Watch the longer-run rate forecast. A rise in the end game dots would have much more hawkish implications than just a small acceleration in the near-term pace of hikes.

(Economists View)


Of course, bond investors don’t like anything that they are seeing…

And tough to see a recession in the 18-month window so keep taking the ‘higher’ on interest rates bet.


The really great news about rising rates is that the U.S. homeowner is prepared this time…

They are locked and loaded in low rate mortgages. Webster’s Dictionary might even need to eliminate the word “refi” from their next edition.

30-Year Mortgage Borrowers and Note Rates

Some interesting earnings tidbits…

“Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 90’s and early 2000’s. Thousands of new doors opened and rents soared; this created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.” —Urban Outfitters CEO Richard Hayne (Retail)

“We look at this going forward that now is absolutely the right time to be patient from a real estate standpoint, with all the real estate that’s going to come up on the market. Penney’s announcing stores that they’re closing, Macy’s announcing stores. Some other people that are rumored to be closing stores or — consolidation in this industry is not over. And this is a time that we’re going to be very patient going forward.” —Dicks Sporting Goods CEO Ed Stack (Retail)

“We don’t believe it’s good for consumers – it’s going to raise prices…we personally don’t buy into the fact that it will be offset by a big rising dollar. We don’t know what’s going to happen with the retaliation out there by other countries, and we’ll see. But as a retailer, we definitely think that it’s bad, and we’re against it.” —Costco CFO Richard Galanti (Retail)

(Avondale AM)


And you thought that your home’s price has done well. Go play with this global calculator…

Chart: Global House Prices

(The Economist)

If a nation wanted to quickly dumb down its population and reduce its future economic growth, eliminating H-1B Visas would be a good first step…

Frank Luntz Tweet:H 1B Workers

What would we lose if immigrants could no longer come to America? Surprisingly, one of the most important things America would lose is the contributions made by their children.

A new study from the National Foundation for American Policy found a remarkable 83% (33 of 40) of the finalists of the 2016 Intel Science Talent Search were the children of immigrants. The competition organized each year by the Society for Science & the Public is the leading science competition for U.S. high school students…

Both family-based and employment-based immigrants were parents of finalists in 2016. In fact, 75% – 30 out of 40 – of the finalists had parents who worked in America on H-1B visas and later became green card holders and U.S. citizens. That compares to seven children who had both parents born in the United States.

To put that in perspective, even though former H-1B visa holders represent less than 1% of the U.S. population, they were four times more likely to have a child as a finalist in the 2016 Intel Science Talent Search than were parents who were both born in the United States…

The evidence indicates that the children of immigrants are increasing their influence on science in America. Sixty percent (24 of 40) of the finalists of the 2004 Intel Science Talent Search had at least one immigrant parent. In 2011, that proportion rose to 70% (28 of 40) who had at least one immigrant. And in 2016, the number rose again to 83% (33 of 40) of the finalists of the Intel Science Talent Search who had at least one immigrant parent.



Incredible data point of the week…

Netflix has hit a new milestone: More U.S. television households now have the streaming service than a digital video recorder, according to a recent study.

About 54% of U.S. adults said they have Netflix in their household — while 53% have a DVR, according to Leichtman Research Group’s annual on-demand study. It’s the first time that households with Netflix (including those that use shared accounts) have surpassed the level of those with a DVR in the history of LRG’s studies. In 2011, according to the research firm, 44% of TV households had a DVR and 28% had Netflix.


And Lastly…
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