In a New York Moscow state of mind…

March 6, 2017

The Kremlin: Sessions' Russian ambassador scandal causing division in White House

It should have been the best week of the Presidency for New York’s favorite son. After staying on script at his address to a joint session of Congress, you could sense that the narrative was shifting from “he is trying to do too much” to “how great it would be if he can get just one half of his agenda done.” Unfortunately, the following day, all of the positive momentum was swept away by a Siberian chinook wind which moved Attorney General Sessions to the top story in every news outlet and led to raised voices in the Oval Office on Friday. Away from politics, Janet Yellen and her many Fed Governors clearly told the world that they would be raising the Fed Funds rate in March. Meanwhile, economic data continued to dictate ongoing health in the U.S. economy. Short-term interest rates broke out while the U.S. dollar joined the moves higher. Snap went public at $17 and soared to $29+ on Friday. And KKR announced that they raised nearly $14b in buyout funds for a new North American fund. So, it was a good week unless you were hoping for some Borscht soup at the Mar-a-Lago resort this weekend because it definitely was not on the menu.

Again, the insiders thought that they nailed it after Tuesday’s speech…

“We should have had a good week. We should have had a good weekend. But once again, back to Russia,” a senior White House official said, expressing the frustration simmering in the West Wing after the news that week that Sessions failed to disclose during his confirmation process that he met with the Russian ambassador twice during the campaign. Sessions at the time was a senator on the Armed Services Committee and was helping the Trump campaign.

(ABC News)


Closely being watched by the market is the ongoing border tax negotiations. Sounds like the White House is still very split…

A major split among senior White House officials over whether to effectively create a new tax on imported goods has stalled the broader tax overhaul effort on Capitol Hill, with Republicans looking to the Trump administration for leadership on an issue that has drawn fierce resistance, according to several officials with direct knowledge of the matter.

White House chief strategist Stephen K. Bannon, senior adviser Stephen Miller and National Trade Council director Peter Navarro have all voiced internal support for the creation of a border adjustment tax or something like it. They believe it would incentivize companies to keep jobs in the United States and raise the cost of items that are imported.

But Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn have raised concerns, the officials said, speaking on the condition of anonymity because the deliberations are private. They are backed by a number of Senate Republicans who have told the White House they would block any bill that creates a new tax on imports.

The divide has the potential to scuttle one of President Trump’s top domestic agenda items — tax reform, which he views as key to boosting the economy and prompting employers to create more jobs in the United States.

(Washington Post)


Many investors spent the weekend studying this chart from Goldman Sachs outlining how the policy time frame may be slipping…

“In our view, the slow process on ACA repeal signals that tax reform is likely to take longer than initially expected and that the final tax legislation that Congress enacts is likely to be less radical,” Phillips and his team wrote in a note published on Friday, echoing comments made last month.

Infrastructure spending is “still on the agenda, but for now remains an afterthought,” the economists added. “Our expectation is that new infrastructure funding will be enacted this year or next, but that it is likely to take the form of tax incentives that might be included in tax reform legislation.”


Graph: A Long Year Ahead

More important than politics last week was the clear signal from the Fed that rates will be moving higher in March…

At our meeting later this month, the [Federal Open Market] Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal-funds rate would likely be appropriate,” Ms. Yellen said in remarks prepared for delivery at the Executives’ Club of Chicago.

An improving economy, firming inflation, and the possibility of more spending and less taxing by the Trump administration appear to have made Fed officials comfortable with nudging rates higher at their next policy meeting March 14-15.

“The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2% objective,” Ms. Yellen said.



The market confirmed the Fed’s view by taking the odds of a Fed Funds rate hike to > 90%…

“There has only been 1 meeting (Sept 1994) in the past 179 meetings where hike has been >50% priced and Fed has not delivered” (State Street)

Chart: Chance of Mar 14-15 FOMC Rate Hike

(Global Market Drivers)

The two-year Treasury yield broke out to highs which actually bodes well for risk assets right now…

SPX Index and US Generic Govt 2-Year Yield

(Renaissance Marco Research)

If you want to bet on higher interest rates and inflation, study up on your Financial stocks…

History suggests that cyclical sectors including Financials and Energy typically outperform during periods of rising rates and inflation (Exhibit 2). Among S&P 500 industries, Banks and Diversified Financials display the highest positive correlation with both rising rates and inflation. We recommend investors overweight the Financials sector based on our expectation that the Fed will hike three times in 2017 and 10-year Treasury yields will rise to 3%. The potential for deregulation is another tailwind, as is the prospect of greater business activity implied by recent economic data.

(Goldman Sachs)

Financials and Energy Quadrant

Bank stocks have run tightly with the 10-year bond yield…

US Banks Price Relative vs. Bond Yields

(JP Morgan)

Meanwhile, one of the legendary Bond fund gurus is telling you to be careful of your fixed income paper…

Dan Fuss, vice chairman of Loomis Sayles and one of the world’s longest-serving fund managers, said on Monday he is more cautious on bonds than at any time since the 1970s, as political uncertainties cloud an otherwise solid economic outlook.

Fuss, 83, told Reuters in an interview said in the past couple of years, his flagship “Loomis Sayles Bond Fund” has halved the average maturity of its holdings to 6-1/2 years, from 13 years, to limit risks stemming from such uncertainties.

“Have we ever been this cautious before? Not recently,” said Fuss, who started his career in bond investment in 1958.



While bonds are hitting the wall, not so for interest in private equity buyout funds…

KKR & Co. amassed $13.9 billion for its latest private equity fund, the most ever raised for a buyout pool focused on North America…

The firm gathered the maximum $12.5 billion agreed to with investors and added $1.4 billion from its balance sheet and employees, according to a statement Monday from New York-based KKR. The fund, its 12th focused on the region, will target traditional buyouts as well as minority stakes, growth investments and toe-hold positions in public companies, KKR said.

The firm’s North American private equity team, led by Alex Navab, last gathered $9 billion from 2011 to 2014 for its 11th fund. That pool was generating an 18 percent annualized return after fees and was valued at 1.4 times cost as of Dec. 31, according to a KKR regulatory filing.



For the week, stocks and economic-sensitive assets led while bonds and gold lagged…

Stock Chart- Week of 24 Feb 2017

(Stock Charts)

When I see a big pop in SPY inflows, it tells me that institutional investors are rushing into the market…

Either they are under invested or quickly moving to cover short exposure by getting long the index. They could use the futures market but many funds don’t like to use futures and will buy the SPY as a proxy until they can replace it with individual stocks or less liquid sector ETFs. The last two times there was $7.5b+ flow into the SPY ETF, the market also gave you a signal that it was caught short. Maybe this one will see a similar result…

The S&P 500 Index posted its best day in almost four months Wednesday, climbing 1.4 percent to a record close following President Donald Trump’s speech before Congress. But that’s nothing compared to the biggest exchange-traded fund tracking the index. Investors poured more than $8.2 billion into the $250 billion SPDR S&P 500 Fund, data from Bloomberg show, making it the ETF’s biggest daily inflow since December 2014.


Graph: S&P 500 Sees Biggest Daily Inflow in Two Years

Consumers are spending less even though they feel more optimistic. More time spent on Netflix and Facebook and less time wandering the aisles of Target?

Adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases fell 0.3 percent after a 0.3 percent increase the previous month. The Commerce Department said it was the largest drop since September 2009, when the measure declined 1 percent.


Graph: Inflation-Adjusted Consumer Spending

Interesting that while available housing inventory is falling to 20-year lows in many cities, auto inventories are headed the other direction?

3-Month Moving Average of Industry Inventory


For Denver, the available housing inventory just hit a 32-year low…

Metro Denver had a record low number of homes for sale at the end of February, but a surge in sales can’t be blamed for the empty shelves.

There were 3,878 residential properties available for sale at the end of February, the lowest monthly total in records going back to 1985. The inventory was 2.14 percent below the previous bottom reached in February 2016, according to a report Friday from the Denver Metro Association of Realtors.

“It is incredibly low,” said Steve Danyliw, a Denver real estate agent and chairman of DMAR’s Market Trends Committee, which compiles the monthly housing market update.

The new low came despite a 19.25 percent year-over-year surge in the condo inventory last month. That wasn’t enough to overcome a 7.6 percent drop in the inventory of single-family homes available for sale.

(Denver Post)


The Healthcare sector continues to be bought and is now the best performing sector for 2017…

XLV Health Care Select Sector

(Stock Charts)

Probably a good bet that college tuition increases will re-accelerate toward double digit levels next year…

The University of Colorado System has actively tried to increase international student enrollment within the last five years and the Boulder campus has experienced a steady increase, spokesman Ken McConnellogue said. But this year’s international applications overall are down.

“When we see a decline of students enrolling, yes it has economic impact,” he said. “Yes, those international students pay at the high end of the scale and we certainly feel it.”

International students pay more than three times as much tuition compared to in-state residents. In the fall of the 2016-17 academic year, the CU System had 4,409 international students enrolled. An increase of 100 international students at CU Boulder is predicted for the 2017-18 budget projections, but whether or not these predictions are met remains to be seen, McConnellogue said.

(Denver Post)


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