The Treasury secretary is learning how virtually every syllable out of his mouth is being parsed and traded upon. » Read More
Buybacks keep rolling along, but here is why they are no panacea for all of the market's problems. » Read More
The two underpinnings of this rally — the Trump Rally, and the Reflation Trade — are both very much intact. » Read More
Oil is likely to remain in the low $50s for the rest of the year. » Read More
The German stock market closed today at its lowest level of the year. That may sound surprising, given that that the European economy is showing clear signs of improvement. ECB Chief Mario Draghi said the European recovery was "resilient." The Eurozone PMI rose to its highest level in 69 months.
Yet there it was: The German DAX down 1.2% to a new low for the year, with the rest of Europe down as well.
What gives? It's obvious that political fears are trumping economic optimism.
Now they are beginning to realize that they could be wrong on the direction of European politics, and they are trying not to get surprised again.
No one is laughing anymore at the populist candidates who have been making provocative statements for years.
No one is laughing anymore when Marine Le Pen, the leader of France's populist National Front party and one of the front-runners in the upcoming French election, says she will pull France out of the eurozone.
If they leave, what does it do to the eurozone experiment? That is a clear negative for bond prices. Right now, sovereign debt is priced with an implicit backstop from the ECB. But under Le Pen's plan, the French government would be the sole backstop, with a bunch of Socialists in charge! How would you price the credit spread? I bet you'd cut the price of French bonds.
Snap has investors hoping that the IPO market may finally be taking off, after a virtually lost year in 2016.
One small detail in the announcement caught my eye. What's amazing to me is that this may be the largest IPO since Alibaba — with an estimated market capitalization between $20 and $25 billion — and it has only 1,859 employees.
That may seem like a lot of people, but compared to other companies with a similar market cap, it's pretty small.
Employment at companies with market cap between $20 billion and $25 billion
If you want to narrow the focus to just technology companies with a similar market cap, there is still far greater levels of employment among what could be called "old tech:"
Employment at technology companies with market cap between $20 billion and $26 billion
It's easy to understand why a company like Snap employs fewer people: the nature of most new software/social media companies is that they don't need that many people.
My point? These companies — the software companies of the future — may be great engagers and they may have a great business model, but they are not going to be employing vast numbers of people.
Of course, Snap is still growing. They only had roughly 600 employees the year before. So getting to 1,859 was quite a feat and they will undoubtedly add more.
But not that much more. They are unlikely to ever have the 31,000 people Micron has.
"If the goal is job growth, it's not going to be coming from these companies. They just don't need that many people," Cindi Profaca from IPOfinancial.com said.
Fewer employees, of course, means higher productivity, and that's one of the reasons these companies are so attractive to investors.
"That's why there is such high multiples for these software companies. The profit margins are really high because they can scale very easily without adding that many employees," Kathleen Smith from Renaissance Capital said.
Let's hope Snap finally puts the IPO market into high gear. President Donald Trump's emphasis on cutting regulations is music to the ears of those in the small-cap universe that makes up most IPOs.
Just don't expect many of these companies to move the needle on the jobs report.
Finally, tax reform is at least coming up on President Donald Trump's agenda.
He hosted a meeting on tax reform and trade with the ranking members of the Congressional Finance and Ways and Means Committee, which included Senator Orrin Hatch. There's hope investors may soon get a better sense of the timetable for reform.
However, traders are being made aware that initial euphoria over tax cuts may have been a bit too, well, euphoric.
Bank of America/Merrill Lynch's equity and quantitative strategist, Savita Subramanian, has released a very comprehensive review of tax reform, as part of a 25-page walk-through of several scenarios.
Two assumptions inform Subramanian's analysis:
The Trump administration's "America First" approach and the protectionism it entails will "make us poorer," Larry Summers, former Treasury Secretary, told CNBC Wednesday night.
The economist said in an exclusive interview that he's concerned by President Donald Trump's "reckless disregard for the United States' role in upholding an international order."
"I've been very alarmed by the reluctance to rely on evidence and the setting of principle in making policy," he said, "rather than the reliance on gut-feeling and driving towards zero sum deals."
Specifically, Summers fears that the "protectionist" policies, such as the proposed border tax, could possibly impair and slow U.S. growth.
"Hyper protectionism will make us poorer," Summers said. "Consumers will pay more for their goods, which means they'll have less spending power to spend on American goods, and that'll definitely have consequences for the economy ... Other nations will retaliate, and that'll have consequences for the health of our companies. The consequences of protection are that we will be poorer and the world will be less safe."
The White House did not immediately respond to a CNBC request for comment. The Trump administration's well-established position is that the United States should reexamine its trade and regulatory practices to boost U.S.-based companies and create the jobs within U.S. borders.
Summers said that he does believe that corporate tax reform is imperative for the United States. But reform policies should be crafted with proposals that are more practical than the border-adjustment tax that was proposed by the House GOP and is getting an increasingly warm reception within the administration.
"I think the limbo we're in, in respect to corporate taxes that leave trillions of dollars abroad, is untenable and does real economic damage. So I'm a strong supporter of corporate tax reform," Summers said. "But it should be done right. It shouldn't be something that undermines the competitiveness of many businesses."
Considering the much improved state of the economy, the Fed statement was very much on the dovish side. There was one modest upgrade to the economic outlook in the first paragraph with the addition of this sentence: "Measures of consumer and business sentiment have improved of late."
As for inflation, while it appears there was a modest boost to the inflation outlook by saying "inflation will rise to 2 percent over the medium term" the Fed also said that "market-based measures of inflation compensation remain low."
For many, that effectively took March off the table. Fed funds futures for March showed odds of a March rate hike falling to 22 percent from 29 percent before the statement.
Even if a rate hike was unlikely in March, I was a bit surprised they didn't at least raise the expectations a bit.
After all, the Fed has plenty of cover to finally reduce its accommodative policy...
We're just about halfway through earnings season, and the results have been encouraging, with blended earnings up 7.1 percent for the fourth quarter and revenue up about 4.2 percent, according to Thomson Reuters.
The good news: the 2016 earnings recession is now over.
Now the hard part starts. The markets are anticipating double-digit earnings growth in all the major sectors throughout 2017. That includes an increase of 10.5 percent in the first quarter alone. The two largest sectors, technology and financials, are expecting earnings to increase 14 percent and 16 percent respectively, in the first quarter.
Is there any chance corporate America can deliver on the big expectations?
It's a tall order, and part of the problem with the markets in the last few days is that we may be entering a period when the market is settling into more realistic expectations.
1) The current quarter numbers, while up, are very uneven. There are expectations that revenue growth will be substantial in 2017—up more than 7 percent in the first quarter alone—but early signs are not encouraging. Tuesday alone, of 21 S&P 500 companies reported, 16 missed on sales.
David Aurelio, who tracks earnings for Thomson Reuters, noted that only 46 percent of those reporting are beating on the top line in the fourth quarter, well below the 59 percent historic norm.
"That tells you that expectations are a bit high," Aurelio said.
2) Corporations are being very conservative on 2017 guidance. Nick Raich, who tracks corporate earnings as the Earnings Scout, noted that of those that have reported and commented on 2017 earnings so far, only one in four are seeing first quarter estimates raised by analysts, less than the three-year average.
"After Trump was elected, people thought for sure we would see 2017 estimates turn higher, but they are not," Raich said. "The companies are still in wait and see mode to see if the Trump promises of lower taxes and infrastructure spending would really translate into higher earnings."
3) Traders are debating how much real earnings "oomph" will come from lower taxes. Initially estimates of a substantial earnings boost of 10 percent to 15 percent to the S&P 500 from lower taxes were based on rough calculations that the corporate tax rate would go from 35 percent to roughly 20 percent. Traders are now realizing that the picture is far more nuanced. Raich noted that the average corporation that has reported for the fourth quarter has an "effective" tax rate (what they really pay) of roughly 24 percent, with many paying rates even less than that. Only 25 percent are paying the maximum rate of 35 percent.
There's no doubt corporations will benefit from a tax cut. Earnings conference calls are full of generally positive references to tax cuts, like this one from Verizon on Jan. 24: "Whichever year is the first year it applies to, whether it applies to 2017 or whether it initially apply to 2018, we're definitely seeing it being a benefit to the cash taxes we pay. But given the uncertainty of the specifics of the plan, it's a little too soon to say exactly how much that could be."
There's the problem: warm and fuzzy commentary is not translating into any earnings increase, at least not yet. At the very least, those expecting a 15 percent bump in earnings just because of a tax cut may be expecting too much. And throw in more complicated discussions like border taxes, and you can see why traders are re-examining the whole issue.
Finally, there is a much broader macro question the market is grappling with: can the baton pass smoothly from easy monetary policy to easy fiscal policy? This is the central question. If it can, there might be a smooth handoff, and earnings will rise enough to justify current prices. How well that transition goes will determine if the rally can continue.
It really goes back to an issue that almost no one has stopped to consider: is this truly a self-sustaining economic recovery? Or is the global economy still on life support and dependent on central banks? Are phrases that have become famous in the last few years like "the new normal" and "lower for longer" truly consigned to the ash heap of history?
Why are the markets down Monday? Because Donald Trump is straying from the themes that initial caused stocks to rise, but also because the trading community is starting to realize that even "clean" issues like corporate tax cuts are more complicated than they first seemed.
What moved the markets initially on the Trump election was tax cuts, and to a lesser extent hopes for infrastructure spending. The markets stopped rising in mid-December awaiting more news. When nothing happened, markets languished.
Stocks rallied last week when Trump started meeting with auto CEOs, issued executive orders on pipelines and the environment, and the Democrats got into the act with a $1 trillion infrastructure proposal.
Get it? Tax cuts and infrastructure spending and the reflation theme move the markets. No news on this, markets languish. And when markets perceive that the priorities are with other issues like immigration policy and trade issues and Obamacare—issues that are perceived to be potential quagmires—the markets drift lower.
And when the markets sees Trump focusing on issues like a possible tightening of the H1B visa, a visa near and dear to the tech community, you can see an immediate negative response. Big tech and especially software names are all down because this may directly threaten the ability to bring in talent no matter where it is.
If you don't think reports that President Trump is drafting orders to overhaul the H1B work visa program isn't alarming Wall Street, here's what Morningstar had to say about this on Friday:
"[A] growing number of software development talent is coming from international markets, while various industry sources believe India will become (if it has not already) the largest center for software development talent in the world...we believe tighter immigration and H1B visa regulation could have a material impact on the ability of these firms to not only hire the people they need, but could also lead to a spike in the requisite compensation to hire such talent."
There's an even deeper problem: a growing realization that the tax cut issue is more complicated than it seems. What the market wants is a clean, across the board reduction in taxes from 35 percent to, say, 20 percent. But Trump is greatly muddying the water by focusing on issues like border adjustability taxes and caps on deductions, and we haven't even got to repatriation of overseas capital.
Bottom line: It's going to be a messy first 100 days. The shame is earnings are slowly improving, but with so much policy uncertainty CEOs have been reluctant to crow about 2017 earnings boosts from any of the Trump agenda.
The investing world is very different today than it was on Oct. 14, 2009, which was the first significant close above 10,000 for the Dow Jones Industrial Average after the financial crisis.
In those seven years, exchange-traded funds have gone from a small business with about $745 billion in assets under management and roughly 800 ETFs to today, when ETFs have roughly $2.5 trillion in assets under management with nearly 2,000 funds.
The Inside ETFs Conference in Hollywood, Florida, is entering its final day, and participants are marveling at how much — and how quickly — the industry has grown.
Behind it are two powerful trends: first, a move toward indexing rather than stock picking, or active management. Second, a desire to pay lower fees; ETFs are significantly cheaper than mutual funds.
The Inside ETF conference has begun, and by all accounts it is the biggest exchange traded fund gathering yet, with close to 2,500 participants spread out over four days of meetings.
I will be moderating the leadoff morning panel, Inside ETF Round Table: Where to Invest in 2017.
Here's six hot-topic trends for ETFs in 2017:
Days after the Trump inaugural, the Inside ETFs conference is kicking off in Hollywood, Florida, and by all accounts it will be the biggest gathering around exchange-trade funds yet, with close to 2,500 participants spread out over four days of meetings.
One hot topic on everyone's mind: Donald Trump and his impact on the markets. Anyone for Trump ETFs?
I'm only partly kidding. The rise of "thematic investing" — placing bets on themes like Cyber Security ETF or Cloud Computing or Airlines — makes it perfectly feasible that someone might float a "Trump ETF" consisting of stocks that may benefit from his presidency.
Even if that doesn't happen, the early buzz on the conference is that there is plenty of debate on how to construct a Trump-based ETF portfolio, including:
Past this, there is a lively debate about the wisdom of concocting a basket of "Trump ETFs." The challenge with the Trump trade is he says he is strong on defense, then slams defense stocks. He's pro-business, but he slams drug stocks. That's why many are telling clients with strong stomachs to gear up for more "Trump headline investing" around sectors like Oil & Gas Exploration, Defense & Aerospace and Pharmaceuticals.
Health Care is a particular challenge, since the focus on Obamacare is such a huge unknown. Will Trump insist on a single-payer system? Will he go after drug companies and make them pay less?
Here's the problem: The Trump presidency will be headline-driven, so making a traditional sector call may be tricky. But is there a chance he could suddenly start talking about, say, how awesome the restaurant industry is? Sure. And on that day — and maybe for some time after — you can expect heavy volume in the Restaurant ETF. Yes, there really is a Restaurant ETF.
That's why we will likely see more industry-specific ETFs as investors try to figure out broad thematic plays rather than old-school sector plays.
As for Trump, the best investing idea I've heard is from a trader who said that Twitter should sell co-location services to high-frequency traders so they can be as close as possible to Twitter's servers so they will get news of any Trump tweets before anyone else.
Now that's one way for Twitter to raise revenues!