by Scott Krisiloff, CIO, Avondale Asset Management
All it took was a change in tone from Trump to get the bull market party revved back up this week. Many people have noted that the improvement has mostly been in “soft” survey data so far, but spending is likely to follow the surge in optimism. The real concern is what happens if the policy agenda stalls in a few months at the same time that inventories have been restocked and the Fed has raised rates. Even though economic activity is picking up, stock prices are so over-extended that it will take a growth miracle to justify current valuations. If interest rates rise significantly, even a growth miracle may not be enough.
The Macro Outlook:
Trump changed his tone and the markets went wild
“A new chapter of American Greatness is now beginning. A new national pride is sweeping across our Nation. And a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is the Renewal of the American Spirit.” —President Donald Trump (Government)
Markets loved him already
“Well, there’s no question that animal spirits have been unleashed a bit post the election. Stock market is up a lot. Household and business confidence have increased significantly…there’s no question that sentiment has improved quite markedly post the election.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)
And he loves the bull
“The stock market has gained almost three trillion dollars in value since the election on November 8th, a record.” —President Donald Trump (Government)
Optimism is running high
“we were cautiously optimistic in November, but as it turns out, the weight in that statement should have been on optimism…if you look at the stock market, if you look at generally the growth profile in the United States, I think on average people are feeling noticeably better about it.” —Sotheby’s CEO Tom Smith (Art Dealer)
Surveys show that spending is on its way
“our fourth quarter consumer sentiment survey…revealed that post election homeowners have an increasingly favorable view of the national economy and their personal financial situations and we believe this trend will continue, as almost half of the homeowners we surveyed indicate that they are very likely to begin a home improvement project in the next six months, and more than half of homeowners believe that home values are rising and will continue to increase.” —Lowe’s CEO Robert Niblock (Home Improvement)
No one sees any reason to be concerned
“I think the state of the consumer from every measurement we look at, I mean, that there are no red flags out there why the consumers should be pulling back. Unemployment is stable. Wages are relatively up. And so, we don’t see anything from a macro standpoint that gives us any concern.” —JC Penney CEO Marvin Ellison (Retail)
But, every party needs a pooper
“As an aside, I feel compelled to add a bit of restraint to the recent enthusiasm regarding market conditions… While these trends are encouraging there is still uncertainty relating to the timing of sustainable demand driven growth. The mixed outlooks provided by our large customers reinforce the point that it is unlikely that we will see a meaningful turn prior to the end of our fiscal year in July.” —Donaldson CEO Tod Carpenter (Industrial Components)
There is a lot is riding on uncertain policy outcomes
“everyone is feeling better but there’s a higher probability, very gently higher probability, that there is some risk around it…If either the prospects for either legislation in the United States dim or people get a look at what the legislation is and they decide they don’t like it quite as much…Well, that would be an example of a situation where they may not be as enthusiastic and that would be a risk to the marketplace.” —Sotheby’s CEO Tom Smith (Art Dealer)
And the Fed is priming us for a March rate increase
” We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time. Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” —Federal Reserve Board Governor Lael Brainard (Central Bank)
” After the election we’ve seen very large increases in household and business confidence, we’ve seen very buoyant financial markets — the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction. So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.” —Federal Reserve Bank of NY President Bill Dudley (Central Bank)
“We stood pat after our meeting a month ago, but we’ll meet again in March to assess whether the time is right to raise rates further. In my view, a rate increase is very much on the table for serious consideration at our March meeting.” —Federal Reserve Bank of SF President John Williams (Central Bank)
A former dove is even talking about shrinking the Fed’s balance sheet
“As normalization of the federal funds rate gets further under way, monetary policy too is approaching a transition, prompting increased focus on the balance sheet…There are good reasons to expect a normalized balance sheet to be considerably smaller than its current size” —Federal Reserve Governor Lael Brainard (Central Bank)
Financials:
Dan Loeb sees plenty of investment opportunities
“I’m not sure that given the increase in S&P earnings that we expect due to changes in policy as well as tax reform that it’s as overvalued as people think, but no we don’t invest in markets, we invest in individual companies and we are seeing – we’re seeing plenty of good valuation situations.” —Third Point CEO Dan Loeb (Hedge Fund)
Consumer:
Retailers are lobbying hard against the border adjusted tax
“First, following the election, the border-adjustable tax has become a hot topic. As I’m sure many of you know, I was part of a contingent of Retail Industry Leaders Association CEOs who went to Washington, D.C. and met with President Trump, members of his administration, and various members of Congress to share our perspective on the potential harmful effects of this proposal. While we are concerned about the impact on retail business models, we are more concerned about the ramifications for hard working American families due to likely significant inflation that would ensue. Our key message is that we certainly support a pro-growth agenda, including corporate and individual tax reform, but we stress the importance of a thoughtful approach to tax reform to avoid any unintended consequences.” —Autozone CEO Bill Rhodes (Auto Parts)
Delayed tax refunds have been a headwind
“Late last year, the IRS announced that, in an effort to combat fraudulent tax refund filings, they would be delaying the issuance of refunds associated with returns claiming the earned income tax credit. Unfortunately, the timing of refunds typically begins in the last two or three weeks of our second quarter, and this year most of the refunds were delayed until after our quarter concluded” —Autozone CEO Bill Rhodes (Auto Parts)
Consumers are attracted to an industrial aesthetic
“now everybody is going back to this industrial kitchen look. where everybody is going back to a professional looking stove and hood, that looks and made for industrial style kitchen…people are looking for…I want to be able to look at my griddle and look like the griddle that they have at Five Guys, or Culvers, or Steak Shake, or you name it.” —Middleby CEO Selim Bassoul (Kitchen Equipment)
The QSR dining experience will probably change a lot over the next 10 years
“I’m fairly certain that my own young children will experience retail and restaurants in a very different way than I did. When we look at the digital landscape, our future is focused on removing those constraints and friction points that previous generations have accepted as a way of life, knowing that future generations just won’t accept it. For Shake Shack, that evolution begins now with our Shack App. Today, it’s focused on mobile pre-ordering.” —Shake Shack CEO Randy Garutti (Restaurant)
Healthcare:
Trump is proposing incremental changes to Obamacare
“First, we should ensure that Americans with pre-existing conditions have access to coverage, and that we have a stable transition for Americans currently enrolled in the healthcare exchanges. Secondly, we should help Americans purchase their own coverage, through the use of tax credits and expanded Health Savings Accounts –- but it must be the plan they want, not the plan forced on them by the Government. Thirdly, we should give our great State Governors the resources and flexibility they need with Medicaid to make sure no one is left out. Fourthly, we should implement legal reforms that protect patients and doctors from unnecessary costs that drive up the price of insurance – and work to bring down the artificially high price of drugs and bring them down immediately. Finally, the time has come to give Americans the freedom to purchase health insurance across State lines –- creating a truly competitive national marketplace that will bring cost way down and provide far better care.” —President Donald Trump (Government)
Industrials:
Trump wants to eliminate the defense sequester
“I am sending the Congress a budget that rebuilds the military, eliminates the Defense sequester, and calls for one of the largest increases in national defense spending in American history.” —President Donald Trump (Government)
Inflation is coming
“Yeah, there is certainly some inflation coming. We monitor our commodity prices every day and they are providing a little bit of a headwind going forward. We work to mitigate that, but that’s something that we are aware of.” —Donaldson CFO Scott Robinson (Industrial Components)
Materials, Energy:
Oil inventories are drawing down
“I think just in the last week or so, we’re starting to see very encouraging signs on inventory drawdown, and I think we’re getting close. It won’t be in the next month or two. I think we’re going to know a lot about how the OPEC cuts have affected supply/demand dynamics and the drawdown of that inventory. So we’re about there, but we just need a little bit more time on that” —EOG CEO William Thomas (Oil & Gas)
But oil producers are not taking chances on oil prices
“Over the past several weeks, we have entered into put option contracts providing a floor of $50 WTI and $51 Brent for most of our second half 2017 oil production. With this protection in place, we will move forward with our Permian Basin capital program knowing that any price weakness will not cause a funding shortfall.” —Apache CFO Stephen Riney (Oil & Gas)
People are getting more positive on the mining sector
“Sure, I think what you see are articles about the actual mining operators and producers like the Rio Tintos of the world coming out a little more positive on their balance sheet recovery et cetera, and so that’s getting people more positive about the mining sector.” —Donaldson CEO Tod Carpenter (Industrial Components)
Miscellaneous Nuggets of Wisdom:
Don’t sell people things they don’t need
“I remind my sales people, do not oversell, because if we oversell something and it doesn’t work, I will take it back from our customer, I will take it back. And that’s been a commitment from me, morally I’m not here to sell people things they don’t need.” —Middleby CEO Selim Bassoul (Kitchen Equipment)
Only the strong survive
“I‘ve been around for 30-some years and I always would tell you that we’ve always felt that the next five years are going to be more competitive than the last five. I would definitely agree with that comment today. We definitely believe the next five will be more competitive than the last five because only the strong survive.” —Kroger CEO Rodney McMullen (Grocery)
Full transcripts can be found at www.seekingalpha.com
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