The Trump agenda may be a bit more iffy, but it is certainly not dead, and the trading community still believes that some kind of tax cut is coming. » Read More
First quarter earnings are now expected to rise 10.4 percent from last year. » Read More
If the House vote fails, that's a clear negative for the markets and would lower the chances for tax reform. » Read More
While the S&P 500 is still only 2 percent off its recent historic highs, other sectors are already in correction territory. » Read More
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!
The IPO market is finally heating up. I've said that before only to be disappointed, but this time the calendar really is starting to fill up. Right now we have 12 deals in the pipeline, according to Renaissance Capital, which manages the Renaissance Capital ETF, a basket of recent IPOs.
The first significant IPO of the year should price tonight — Keane Group is a pure play on the oil and gas fracking business. They are players in all the right places — the Permian, Marcellus, Utica, Bakken. Like everyone else in this space, its revenue declined in 2015 and 2016. But OPEC cut output recently, and as prices have firmed, there's hope that business will be improving. They're looking to raise more than $400 million: 22.3 million shares between $17 to $19, up from 16.7 million shares earlier in the week.
There's more coming. With trading so strong, the market is starved for deals. There's lots of pent-up demand. Seven companies filed this Tuesday alone. Keane will be joined by Jagged Peak Energy, an oil and gas E&P that will be the biggest IPO of the year so far, valued at nearly $700 million. JELD-WEN Holding, a global manufacturer of windows, doors and treated composite trim and panels, launched a $550 million IPO — this is a play on the construction business. Laureate Education, the largest for-profit higher education company, announced terms for its IPO on Wednesday, but for-profit is a tough sell given how poorly they have performed.
We'll also have our first tech unicorn of the year, App Dynamics, which analyzes customers' business-critical software applications, seeking to raise $132 million with a market cap of $1.7 billion. That's a very low float, a favorite strategy of many tech firms seeking to go public. The strategy: restricting supply helps to create a spike on the first trading day.
It's not all great news... retailers are continuing to have problems. Claire's, which sells jewelry and accessories for young women and teens, withdrew its plans for an initial public offering on Tuesday. They follow in the path of Neiman Marcus, which also pulled its IPO. It's a tough situation: retailers need to raise capital, but the retail business is not good.
Still the overall direction is positive. Right now we have two big energy names in the pipeline, a tech unicorn, a construction-related company, and seven or eight smaller companies, mostly biotech. Not a bad start!
The first wave of fourth quarter earnings, including that of Morgan Stanley on Tuesday, have generally been above expectations.
But as we digest the results, it's worth noting that 2016 was not a banner year for earnings. S&P 500 earnings are projected to be up a measly 0.9 percent, according to Thomson Reuters.
Remember: The S&P 500 was up nearly 10 percent last year, so almost all of the gains came not because earnings were up but because the multiple expanded.
Much of the problem comes from the catastrophic 77 percent decline in energy earnings.
And the market is anticipating much of this will reverse in 2017. Right now, earnings are expected to rise 12 percent, but most analysts have not changed their 2017 estimates to reflect the Trump agenda. Many strategists believe 20 percent growth could be possible.
That's why the markets are like a tightly coiled spring: There is going to be a lot of pressure to perform big in 2017.
Here are the expectations for some of the bigger sectors, rounded off:
2017 earnings expectations
Source: Thomson Reuters
That's not a typo on energy: up 366 percent. Analysts have a 100 percent increase in earnings penciled in for ExxonMobil, the biggest energy name out there.
Is any of this remotely possible? Several well-known strategists told me it was.
I recently moderated the annual Philadelphia CFA dinner with Citigroup chief equity strategist Tobias Levkovich, as well as Richard Bernstein and AJO Partners' Ted Aronson. Bernstein is in the camp that earnings are going to expand for several reasons:
Levkovich also said earnings could be stronger than expected, particularly with a corporate tax reduction. He noted that corporations are currently paying a 27 percent effective tax rate. Assuming that stays the same, 2017 earnings for the S&P 500 could go from $118 in 2016 to $128. If the effective tax rate goes to 20 percent, earnings could get to $140, he said.
That would be an earnings boost of nearly 20 percent.
Bernstein is certainly right about one thing: Something does appear to be changing. This has important implications for investing in stocks versus bonds. Remember 2014-2016, when everyone was investing for yield, no one was investing for growth? Now the talk is about growth. What happened to our favorite slogans: "lower for longer?" and "the new normal?" Don't hear that as much any more.
Instead, Bernstein pointed out, the question if you're a bond bull is very simple: Will nominal growth in the U.S. be stronger or weaker a year from now?
If it will be stronger, Bernstein and others have argued, it's rational to believe that stocks will rally, and bonds will not.
Learning to invest on Goldman Sachs' risk arbitrage desk, made famous by leader Robert Rubin, was once seen as a fast track to fortune.
As policymakers battle over Trump's economic initiatives, they won't have to worry about the U.S. becoming a deadbeat.
Snap shares soared Monday after several Wall Street analysts initiated coverage on the stock, including a "buy" rating from Goldman Sachs.