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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Friday, 17 Mar 2017 | 9:07 AM ET

Why Wall Street is excited about Trump's first step toward deregulation

Posted ByBob Pisani
Wilbur Ross, U.S. Secretary of Commerce
Zach Gibson | Bloomberg | Getty Images
Wilbur Ross, U.S. Secretary of Commerce

Last week, on March 7, a curious item appeared in the Federal Register. The Department of Commerce issued a request for information from manufacturers: "The Department of Commerce is seeking information on the impact of Federal permitting requirements on the construction and expansion of domestic manufacturing facilities and on regulations that adversely impact domestic manufacturers."

The request asked manufacturers to list the top four regulations they believe are most burdensome for their business, and asked for comments by March 31.

It's the opening salvo in a major battle to reduce regulations, one of the three main "pillars" of the Trump agenda, along with tax reduction and infrastructure spending.

Much has been made about the potential impact of a tax cut on S&P 500 earnings, but traders are no less enthusiastic about the potential impact of a reduction in regulations.

While several studies have indicated that a reduction in taxes could boost earnings 8% or more, (see my Trader Talk from yesterday), a reduction in regulations can also have a significant boost on earnings.

The issue, of course, is that very few regulations have been changed, so it's not yet possible to run models about how fewer regulations will impact earnings.

But just taking President Trump's promises at face value would imply a boost to the bottom line. He signed an executive order in January to scale back regulations on businesses, promising to cut regulation by 75% by eliminating two regulations for every new regulation enacted.

Just think through what would happen to earnings and margins if even a small part of that promise came through.

For big industrials like Caterpillar, fewer regulations will help drive down the cost of production. That will improve the bottom line.

For other industries that employ large numbers of people, even a modest change in regulations could make a big difference. The trucking industry, for example, has long complained about Federal Motor Carrier Safety Administration rule that limits drivers' drive time per day and over a seven-day period. The American Trucking Association has been lobbying to ease those rules.

For financials, fewer regulations will enable them to reverse the massive increase in corporate compliance staff and may lead to an increase in trading activity.

This could lead to a very significant improvement in the bottom line for banks. A recent Vanity Fair article noted that the six largest U.S. banks by assets spent $70.2 billion in 2013 on regulatory compliance, nearly double what they collectively spent in 2007. At JP Morgan, 43,000 of its 236,000 employees — 18.2% of its workforce — are now involved in compliance, twice the number in 2011. Author William D. Cohan concluded: "[T}he job of nearly one out of every five people working on Wall Street these days is to watch what four other people do all day long."

Again, the lack of details make modeling difficult, but you get the drift: it would be a positive for earnings and its close cousin, margins.

Margin, simply put, is the ratio between a company's revenues and expenses. It can be sliced many ways (gross margin, operating margin, net profit margin) but is roughly a measure of profitability.

It's probably the single most important metric for those looking at profitability trends.

According to Thomson Reuters, the S&P 500 hit historic highs on margins of just over 10% in 2015, and it's been drifting around that range since then, currently at 10.1% for the first quarter of 2017.

There are several reasons margins have struggled to improve, but everyone agrees that one of the primary problems is that sales growth has been stagnant while the cost of doing business — the cost of goods sold (COGS), which is the cost of materials and the direct labor costs used to produce the goods — have been rising. More time, more bodies spent in compliance is a key factor in driving up those costs.

That's where the Commerce Department request comes in — it's a follow-up to the president's executive order and is just the start of an attempt to quantify some of the accumulative damage from excessive regulations.

One director of a local government economic development organization involved in building industrial development parks wrote in to describe the quagmire around getting wetland approval for his projects: "Dependent [sic] upon the type and 'value' of the wetland being impacted, the costs can be thousands of dollars per acre."

One small business owner bitterly complained about electrical licenses he has to have he never used to need, and crane certifications he is required to have that don't apply to his business: "I have a small 10-employee business, and between insurance and other requirements, we can not stay afloat."

You'll hear a lot more of these types of comments from Wilbur Ross' Commerce Department in the coming months.

But you can already see why Wall Street is enthusiastic that a reduction in regulations is a second crucial aspect of the Trump agenda.

By CNBC's Bob Pisani

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  Thursday, 16 Mar 2017 | 2:13 PM ET

Now that the Fed hurdle has been cleared, the 'Trump Bump' must come through

Posted ByBob Pisani

Stocks have cleared two of three major hurdles in the past day. The last may be the most difficult of all.

The outcome of both the Dutch election and the Federal Reserve meeting were market friendly. The Dutch appear to have turned back a populist tide, and the Fed has calmed rate hike jitters by clearly implying rate hikes would continue to be gradual, which means three hikes this year, three hikes next.

This is a remarkable feat: the market has convinced itself that it can keep going even though the Fed is changing its stance from being "data-dependent" to "we're going to keep raising rates for a while."

But that's only happening because of the last hurdle: the Trump rally, the magic elixir of tax cuts, lower regulations, and infrastructure spending that is not the sole reason for the market rising, but arguably has been the primary reason.

How long will the market continue to give the "Trump rally" the benefit of the doubt? For the moment, the market's support has been unwavering.

A more interesting debate has emerged this week: has the market already discounted the full effect of Trump's proposed tax cuts, infrastructure spending, and reduction in regulations, and won't rally much more even if the agenda is passed?

It's a good question, and I think the answer is: there is plenty of upside. It's one thing for the market to move on vague hopes of tax cuts and less regulation — I agree it's a big part of the recent boost — but it's another when you actually see real numbers. And that's when we can get a second boost.

Let me show what I'm talking about. There have been numerous studies done on the potential impact of tax cuts. One done by Thomson Reuters noted that while the stated corporate tax rate is 35 percent, the effective tax-rate — what the average company actually pays — is 26 percent. They estimated that changing the effective tax rate from 26 percent to 20 percent would increase earnings in the S&P 500 by 8.7 percent.

That is a huge increase. Bear in mind that we have just come off an earnings recession, where earnings decreased for five quarters before finally rebounding.

The market has rallied on these kinds of expectations, but don't kid yourself: no company has changed guidance, and few if analysts are boosting their numbers this year, based on this. Not yet.

And that's why there is still plenty of room for upside. Once these pass, the guidance increase will give a new boost to stocks.

JP Morgan quant strategist Marko Kolanovic, who is widely followed on Wall Street, noted as much in a note to clients today, claiming that the Trump Agenda amounts to a "Trump put": "[A]ssuming the full benefit of tax reform on 2018 earnings ... would justify the S&P 500 at meaningfully higher level than our current price target of 2,400."

The downside is that if we get a smaller loaf than expected — particularly a much more modest tax cut — the market will adjust downward.

»Read more
  Wednesday, 15 Mar 2017 | 3:54 PM ET

The Fed struck just the right tone with the markets

Posted ByBob Pisani
  Wednesday, 15 Mar 2017 | 7:33 AM ET

Trader Talk: Are you ready for a 2,000 point drop in the Dow?

Posted ByBob Pisani

Are you ready for a 2,000 point drop in the Dow? That's what a "normal" correction would look like now.

Normal corrections look kind of scary when markets are at these highs.

The Dow hit a new high on March 1 at 21,115.

That means a 10 percent drop — what would be considered a "correction" — would be a decline of 2,111 points. Sounds pretty steep, no?

Here's an even bigger drop: 3,000 points. Dan Wiener, who runs the Independent Adviser for Vanguard Investors and runs money as president of Adviser Investments, pointed out to clients that over the past 30 years the stock market has declined an average of 14.3 percent from high to low on an intrayear basis.

That translates into a 3,019-point decline from the Dow's March 1 top.

Finally, here's an illustration of the power of staying in the market, not trying to time investing, and the beauty of compounding interest. March 9 was the eighth anniversary of the bottom of the market. It was widely noted that the S&P 500 was up over almost 250 percent since then.

Here's an even more interesting tidbit: It's up about 310 percent when dividends are accounted for.

That's the power of compounded interest! That's about a 19 percent annual compounded gain every year for eight years.

Think about that. Your money would be up an average of almost 20 percent a year when dividends are included and the money is reinvested over the last eight years. That is a remarkable run. Can stocks gain 20 percent a year for the next eight years? Maybe, but it's unlikely: "[Y]ou need to keep your expectations in check," Wiener said.

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  Tuesday, 14 Mar 2017 | 2:33 PM ET

Big oil's list of worries just got bigger

Posted ByBob Pisani

Oil is down again today on concerns Saudi Arabia may be throwing in the towel on cutting its oil output. It's the latest in a string of headaches for big oil.

Saudi Arabia indicated to OPEC its production had increased to 10.011 million barrels per day in February. The markets immediately took this to mean that the Saudis had reversed some of the cuts it had made the previous month.

But in statements issued in the middle of the day, the Saudis reiterated that they were "committed and determined to stabilizing the global oil market."

And that production increase? They insist Saudi crude supply was little changed and in-line with OPEC output cuts. The source of the confusion, the Saudi energy minister said, was "The difference between what the market observes as production, and the actual supply levels in any given month, is due to operational factors that are influenced by storage adjustments and other month to month variables."

If this sounds like a bit of official gobbledygook to you, the market has initially taken it that way as well.

Oil was little changed after this announcement, so the market clearly believes that there are cracks in the Saudi commitment to the production cut deal.

This is adding to the "oversupply trade" that is now taken over as the dominant motif in the energy trade, replacing the "reflation trade" that has dominated for several months.

The result? Crude down another 2.3% to the lowest level since November 30th. Does that date sound familiar?

That was the day OPEC announced the production cuts!

The list of crude troubles is getting longer:

1) High U.S. inventory trends

2) High U.S. rig count

3) Record speculative longs in oil

4) E&P capital spending growth

5) A potential Fed rate hike that takes the dollar higher, hurting oil

Put it all together and it means that a lot of complaceny is getting flushed out of the oil trade in the last few weeks, along with a lot of expectations for higher 2017 earnings in Big Oil:

Energy this month

Crude oil down 12.4 percent
Big Energy (XLE) down 3.4 percent
Oil & Gas E&P (XOP) down 6.3 percent
Oil Services (OIH) down 7.3 percent

These are on top of earlier declines that began in January.

As usual, ExxonMobil is the poster child for a lot of these issues. It hit a 52-week low last week. Earnings are expected to increase 60% this year, revenues 30%, much of it predicated on higher oil.

How much higher? Certainly closer to $60, and not $47 where it is now.

Big Oil has two other notable problems independent of the price of oil: 1) continuing low natural gas prices, and 2) increasing difficulty in growing oil production.

Morningstar highlighted the production problem in a note to clients this morning: "With rising resource nationalism, Exxon has found it increasingly difficult to increase production and book reserves. As a result, it's more reliant on higher-cost projects than in the past."

It's not all bad news. Exxon's dividend — now with a 3.7% yield — still appears safe for the moment.

There's one final point: the Saudis may have some motivation for letting go of the production deal. It may have to do with a very important elephant in the room: Aramco. The Saudis certainly are willing to sacrifice market share by cutting production, PROVIDING it will prop up oil prices and lead to a higher valuation for Aramco, which is scheduled to go public next year.

But look what's happening: the Saudis are sacrificing by cutting production, and oil prices are STILL going down.

This is crushing the Saudis' expectations. The Saudis have been saying that Aramaco could be worth north of $2 trillion, but there have been reports for weeks that it could be worth $1.0 to $1.5 trillion.

Yikes! Imagine being the Saudis: "We've sacrificed market share to others, oil is still going down, and now the valuation on Aramaco may not be worth anywhere near what we thought it would be!'

Seen in this light, it would make perfect sense if the Saudis started to question the wisdom of continuing with production cuts.

»Read more
  Friday, 3 Mar 2017 | 5:08 PM ET

The world's biggest stock index celebrates its 60th birthday on Saturday

Posted ByBob Pisani
Confetti drops on traders at the CME Group's Chicago Board of Trade. (File photo).
Tim Boyle | Bloomberg | Getty Images
Confetti drops on traders at the CME Group's Chicago Board of Trade. (File photo).

The S&P 500 Index officially launched 60 years ago on March 4th, 1957. While the Dow Jones Industrial Average — which started way back in 1885 — is the most well-known reference point for the state of the stock market, the S&P 500 is far and away the gold standard for investors.

It's the most popular index in the world, with almost $2.4 trillion indexed to it. Nothing else comes remotely close.

Why did the S&P become so famous? And why did creating indexes by market capitalization win out over other indexing systems, like weighting all stocks equally, or by price, as the Dow Industrials do?

Standard & Poor's was running indexes for many years prior to the invention of the S&P 500. They were running four separate indexes since the 1920s — Industrials, Transportation, Utilities and Financials. In 1957, they decided to combine all four indexes into one index of 500 companies, and the S&P 500 was born.

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About Trader Talk

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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