Let the lobbying games begin on ‘border tax adjustability.’ Cutting the corporate income tax rate is easy. Allocating the cuts and the offsets (costs) now gets caught in the crosshairs of everyone’s own corporate interests. As we get closer to inauguration, investors will start caring about policy details. In case you missed it in the weekend WSJ, Retailers Risk Multibillion Dollar Earnings Hit Under GOP Plan
Wal Mart, Costco and others face higher tax bills under plan to eliminate deductions for imported goods.
If only we were able to ‘pay’ for the corporate tax cut via cuts in spending but that is not at all in the conversation.
While the trade threat tweets on our end have already begun, let the overseas response to them begin. In the weekend FT, “Beijing Warns of Tit-For-Tat War if Trump Imposes Tariffs on China Goods.” Also, “Japan Rallies to Defend Toyota After Trump Warning.”
I’ll tie this to markets. The question for investors is not only what will earnings be this year but under these and other macro circumstances, the $64k question for 2017 will be ‘what should the right multiple be on these earnings?’ Are we really going to think it’s just going to be the same as in previous years even though many factors that drove that multiple expansion over the past 7 years are now reversing? Such as low interest rates, QE, historically low interest expense, and post WWII lows in labor costs which combined for the highest profit margins since WWII? Can hoped for revenue growth offset that?
Last week Trim Tabs said that a record amount of money flowed into equity ETF’s in December which followed the previous record in November (total of $110.6b which astonishingly is 7% of equity ETF assets). It’s obviously coincident with the euphoric rally in stocks post election. We know it doesn’t matter until it does but I found another valuation chart (on zerohedge) defining the point in time this flood of money is coming in from retail investors. Why do they decide to wait this long in a bull market to decide to pile in?
Reported late Friday, China’s FX reserves shrunk to $3.01T in December, about in line with the estimate and down from $3.052T in November. Part of this was outright outflows but some was also the dollar rally which negatively impacted the value of their existing currency holdings. In an interview on Bloomberg, Fan Gang, an advisor to the PBOC, said “the decline in foreign reserves is ‘good news’ in the long term, because large FX holdings by the government are inefficient.” He also pointed out that because the yuan is now part of the IMF SDR basket that the Chinese don’t need to hold as many reserves. What that right amount to hold is we don’t know and what the right level of the yuan the Chinese will tolerate we also don’t know. It’s most likely that the Chinese are willing to tolerate more currency weakness and further declines in reserves but they will do their best to make it happen in an orderly fashion and expect more capital controls as FX reserve declines continue from this point on. For the US, more shrinkage in reserves will also mean more US Treasury selling. The yuan is weaker today after last week’s spike. The Shanghai comp was up .5% but the H share index was flat.
A China and tech proxy that is Taiwan saw a 14% y/o/y jump in December exports vs the estimate of up 10.4%. Comparisons are very easy though as last December saw a 14% decline. This is not market moving globally but points to the likelihood that the slow global trade story is for now bottoming out. The Taiex didn’t respond to the upside surprise and was lower by 1/3 of a percent.
German IP grew by .4% m/o/m in November which was less than the .6% estimate but October was revised up by two tenths and the y/o/y gain of 2.2% was the 3rd best of 2016. A main catalyst for the boost was in construction and is directly a beneficiary of ECB policy. Housing inflation is a new phenomenon in Germany where many households rent. ECB policy is completely disconnected from Europe’s largest economy and expect a 2017 battle between Mario Draghi and the Germans.
Also out of Germany, November exports jumped by 3.9% m/o/m, well more than the estimate of up .5%. That’s the best month since 2012 but just helped Germany to play catch up on the year as 2016 exports for the 1st 11 months of stats is up less than 1% over the same time period last year. After the German data, the euro is flat vs the US dollars while German bunds are up slightly after last week’s weakness. European banks are leading European bourses lower and its Italian banks that are the most weak.
The British pound is down sharply in response to comments from Theresa May over the weekend where she said she’ll “prioritize” immigration rules and controlling it over the more economic issue of access to the single market. “We are leaving. We are coming out. We are not going to be a member of the EU any longer. So the question is what is the right deal for the UK? We will be able to have control of our borders, control of our laws.” This soap opera will be long and ongoing. The FTSE 100 is benefiting today a touch from the weaker pound but the FTSE 250 which is more domestically focused lagged a bit behind.