The Rotation Continues

April 3, 2017

From the 2010 motion picture <em>Inception</em>: Underlying Rotation Left your Portfolio Spinning

(@OnePerfectShot: INCEPTION (2010) DP: Wally Pfister | Dir: Christopher Nolan)

While the equity markets finished with a strong quarterly gain, it was the underlying rotation which left your portfolio spinning. The markets returned to their pre-election tone as growth stocks were bought and value stocks were sold. This trend is likely to continue until the market gains some certainty on future tax reform and infrastructure spend. Ahead of us, we have first quarter earnings hitting the tape, followed by company guidance updates and conference calls. CEOs and CFOs are in a difficult spot here given the future political and policy uncertainty. The confidence surveys and phone polls show that consumers and businesses are in a good mood, but the hard economic data has yet to confirm the similar strength. So I would guess that there will be many long, difficult pauses during the quarterly conference calls as executives try and find a best answer. Looking at the options market and the volatility indexes tells us that insurance is still cheap right now. And, with all the upcoming catalysts hitting the market, it would seem like a good time to have some cheap hedges on. Unless of course you have a direct line to Washington and know which way the room will spin next.

The VIX is low. The number of market drivers is high. Will April be the month that these streams will cross?

A host of market-moving events confront investors as the calendar flips over to April. These include France’s presidential elections and the opening salvos of the UK’s divorce from the EU.

But there is also the prospect of a sustained recovery in global activity, the risk of central bank policy surprises and the question of whether companies deliver better earnings growth.

Above all investors will remain fixated on the Trump trade and whether the administration can work with Congress and deliver on promises of tax cuts and fiscal stimulus that have bolstered US and global equities since November.

(Financial Times)


There is a large difference between the results of the confidence and outlook surveys and the actual raw data…

The difference between what people say about the economy and actual economic performance is a phenomenon that Morgan Stanley economists highlighted in a report this week. Soft sentiment data have surged while the hard economic metrics haven’t budged much.

“The divergence is stunning,” Morgan Stanley wrote to clients this week, noting the spread between hard and soft economic data is at a record. Either confidence will start waning or it will fuel a material uptick in economic output. That is why Friday’s reports deserve a close look.



Survey Says

Speaking of hard economic data, here is a big series that is under pressure…

If businesses were truly confident in a 3% GDP figure, they would be borrowing from all banks.


(WSJ/The Daily Shot)

The FT gets the big interview of the weekend. And President Trump doubles down on teeing up with the Democrats in order to change Healthcare…

But if the White House parties with the Dems on tweaking Obamacare, will the tea drinking Freedom Caucus give him the votes to reform taxes, fire up infrastructure spending and help the economy?

Things began to unravel when he sought to use executive powers to control immigration — with both the first and second attempts blocked by the courts. More significant was the recent setback in efforts to replace the Obamacare healthcare law.

Republican leaders abandoned a vote after failing to win enough support to pass a hastily assembled bill. “I didn’t want to take a vote. I said why should I take a vote?” says Mr. Trump, who pledged to repeal Obamacare as soon as he took office. Asked how he felt about the setback, he is still sore: “Yeah, I don’t lose. I don’t like to lose.”

He stresses that Republican lawmakers are still trying to reach a deal. But he says it “would be fine” if the Freedom Caucus, a group of hardline conservatives who are fierce opponents of Obamacare and also unhappy with the first bill, remain holdouts.

“If we don’t get what we want, we will make a deal with the Democrats and we will have in my opinion not as good a form of healthcare,” says the president. “But we are going to have a very good form of healthcare. It will be a bipartisan form of healthcare.”

(Financial Times)


Eric Peters has some thoughts on Washington…

Swamped:“Tax reform without tax cuts never works,” said the politico. “Because reform makes 50% of taxpayers winners and 50% losers.” To bribe the losers, you need to slash their taxes. The bigger the reforms, the bigger the required bribes. And Republicans want a massive reform package. “But Trump has no money to bribe the losers unless he generates it through Obamacare repeal and BAT (border adjustment tax).” Obamacare repeal was supposed to create $300bln of bribe money, and BAT would’ve generated another $1trln. But BAT also creates winners and lowers.

Swamped II: “Trump desperately needs the $300bln from Obamacare repeal to pay off the BAT losers, or that policy is dead on arrival,” continued the same politico. “And that is why Ryan told Trump that healthcare reform had to come first.” The Donald, Pence and Bannon all agreed. “But by the time they finished negotiating Obamacare repeal, they only ended up with $100bln. And even that couldn’t pass.” And $100bln isn’t even enough to pay off the BAT losers. So that’s now dead too. “So major tax reform is dead, so is major infrastructure.”



As does Byron Wien…

One question that has to be raised by the failure to pass the health care bill is whether there is too much anarchy in Congress for any major legislation to get through in spite of the Republican majority. This has to make one a little apprehensive about how quickly the economy will improve to the 3% growth level. This could put my estimate of earnings for the Standard & Poor’s 500 in jeopardy and mean that the stock market is ahead of itself and vulnerable to a correction. I still think higher highs are ahead of us, but they may occur later than I originally thought. It will also be important to see how Donald Trump deals with legislative adversity, disagreements with foreign leaders over trade and defense, and geopolitical confrontation (North Korea). These factors will play a critical role in investor attitudes and market performance.



The stock market continues to fade the tax and infrastructure plays…

Exhibit 1

You can also see the difference in sector performance between the Q1 and post-election time frames…

The market wants to return to a growth stock world as Tech, Consumer Cyclicals and Healthcare are being bought up in the near term.

Sector Performance



For Q1, the Russell 1000 gained about 6% and added $1.375 trillion in value…

These 20 companies made up half of that value add. Note all of the technology names.

Tech Giants

One more time, the market wants growth, not value…


Travel and tourism makes up 8% of U.S. GDP. Earnings call comments this month will be very closely monitored…

“One of two things is going to happen. Either the US has to go on sale in order to keep volumes up, or volumes are going to come down. When we look at our business, the leading indicator is pricing. Pricing has come down.”

Expedia said it will reveal the full picture behind the pricing shifts when it reports its first-quarter results next month. But Mr. Khosrowshahi’s warning comes after the World Travel and Tourism Council (WTTC), an industry trade body, said there are “early signs” of growing “anti-US sentiment” among tourists.

Flight search data collected by ForwardKeys, a travel software group, showed airline bookings to the US were down 6.5 per cent in the week after President Trump in January issued his first executive order against the entry of citizens of seven Muslim-majority countries, which was later blocked by the courts.

(Financial Times)


Hawaii is already seeing the impact of lost travelers due to the tighter visa restrictions…

This can only be a significant positive for Macau and many other Asian travel destinations.

Hawaii will host its largest incentive travel group from China next month, but roughly 40 percent of Nu Skin’s top distributors won’t be joining their peers because their visa applications were rejected.

More than 6,000 Nu Skin distributors in China and Hong Kong qualified for the trip, but fewer than 4,000 of them were able to get approved to travel to Hawaii, said Jadie Goo, who was born and raised in China and currently serves as the Hawaii Tourism Authority’s brand manager for China and Taiwan.



Hmmm… Fewer tourists, more Teslas, or just a mismatch in refinery production?

@bespokeinvest: This is the first time since 2005 that gas prices have been down YTD at this point in the year.


Speaking of driving, Morgan Stanley is not optimistic about the outlook for used car prices…

While we all know that automobiles are a depreciating asset, are owners mentally prepared for a 20-50% drop in prices?

Exhibit 12

(David Stockmans/Contra Corner)

Hard assets continue to set new relative lows versus financial assets…

@katie_martin_fx: BAML is a bank after my own heart.

Chart 12

(BofA/Merrill Lynch)

If you or your clients own restaurants (or other high labor-intensive businesses), you will want to read this article if your state is considering legalizing drugs…

…the city is facing a major problem as a result of one of its biggest recent tourism drivers. The pot industry is taking a toll on local restaurant work forces and in some cases, liquor sales. “No one is talking about it,” said Bobby Stuckey, the James Beard award winning co-owner of Frasca Food and Wine in Boulder and the soon-to-open Tavernetta in Denver. “But Colorado’s restaurant labor market is in Defcon 5 right now, because of weed facilities.”

…young workers who once saw employment opportunities in the restaurant business are flocking to grow facilities and dispensaries. Bryan Dayton, who co-owns three popular dining destinations in the Denver/Boulder area—Oak at Fourteenth, Acorn, and Brider—feels it acutely.

“Our work force is being drained by the pot industry,” he said bluntly. “There’s a very small work pool as it is. Enter the weed business, which pays $22 an hour with full benefits. You can come work in a kitchen for us for eight hours a day, in a hot kitchen. It’s a stressful life. Or you can go sort weed in a climate-controlled greenhouse. It’s a pretty obvious choice.”

…Jennifer Jasinski, a Wolfgang Puck alum whose Denver restaurant empire includes seafood-oriented Stoic and Genuine, beer joint Euclid Hall, and her flagship Rioja, agreed.

“Cooks take trimming jobs and make $20 an hour, but it’s not just that. Pastry chefs are in high demand in the pot world. Laced candies and gummy bears are sought-after treats when they are made well, so pastry chefs and cooks can make them for three to four times the money a restaurant can pay. All this just exacerbates an already tight work force in Denver.”



With the pull of construction workers into the legalized drug trade, it is no wonder why Denver, Seattle and Portland lead in house price appreciation…

Economists had predicted the inventory crunch would ease this year, as several years of solid price gains induced more sellers to put homes on the market and spurred home builders to break ground on more new homes.

Instead, inventory has gotten tighter as demand has increased rapidly and the pickup in construction has lagged behind. Sellers also have become hesitant to put their homes on the market because rising prices and mortgage rates have made it more expensive to trade up.

In December, the number of homes for sale hit the lowest level since the National Association of Realtors began tracking such data in 1999. It has ticked up slightly since, but inventory in February remained 6.4% below a year earlier and about 30% below the long-term average.



Active investment managers use Bloomberg terminals. That is a growing problem for Bloomberg…

Bloomberg terminal count falls for second time ever – the number of Bloomberg terminals fell by 3145 to 324,500 in 2016. This was only the second time in the company’s history that it suffered a Y/Y decline in the terminal count (the other time was during the financial crisis).



A great model for someone looking to learn coding but who may lack the resources for training…

Don’t want to borrow to get the education you need to land a high-paying job? A coding bootcamp is now paying students to learn computer programming, rather than charging tuition — and guaranteeing them jobs when they graduate.

The Virginia-based company, called Revature, is setting up classrooms at college campuses around the country and recruiting college graduates for a free 40-hour-per-week, 12-week crash course in hot skills like Java and data management. The students receive minimum wage during the course. In return, graduates commit to working for Revature for two years, at an annual salary of anywhere from $50,000 to $65,000. (Revature sends its graduates out to work as contract software engineers at firms such as banks, health insurers, retailers and the like.)

Since November, Revature has set up paid immersion classes at two colleges: Arizona State University and Queens College in New York. Company officials say they plan to start offering similar classes at the University of Missouri in June, and George Mason University later in the year. They say they hope to add additional campuses later in the year.



Over the break, I found a marketplace that should still be robot free for the next several decades…

If you enjoyed “Jiro Dreams of Sushi”, keep an eye out for a new documentary called “Tsukiji Wonderland”. Better yet, grab the kids and hop on a plane to Tokyo and take them to see the Tsukiji Fish Market in person. On a daily basis the market trades fish to feed 24 million people. If you have been to a high-end sushi restaurant in a big city, then you probably have eaten a fish that has traveled through these halls. Put it on your bucket list.

In Tokyo, Japan, the Tsukiji Fish Market is a massive complex where a wide variety of fish products are brokered. The Market employs over 12,000 workers, and about 30,000 customers conduct business there daily. The Market provides fish for Japanese restaurants and consumers, but also sends exotic product throughout the world. The documentary focuses upon the Japanese wholesalers who become fish experts, and devote their life to finding the best, most-desirable fish for their finicky customers.



How a millennial sports fan thinks about his video spend today and tomorrow…


The Mutual Fund Observer has always been a must read for any financial advisor or retail investor…

Each month the team separates the wheat from the chaff in the mutual fund industry. And since MFO does not advertise or have a mutual fund to sell, they do not hold back on their opinions in order to help you find and avoid funds for your portfolios. Shameless self-promotion: This month’s issue is especially good.

Mutual Fund Observer

(Mutual Fund Observer)

And Lastly…
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