At yesterday's press conference, President Trump persisted in calling mainstream media reports #FakeNews. As we pointed out, these attacks are working because media trust has been in decline for 20 years.
Here's a quick look at the key issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.
#NATO #Mattis #Trump
Defense secretary James Mattis warned other NATO countries to meet their defense spending requirements or the U.S. may not be as active as before. Mattis is staying in line with one of candidate Trump’s campaign themes that other NATO countries need to pull their own weight. Currently only five countries meet the NATO military requirements.
President Trump’s infrastructure plan got a boost yesterday from a report by the American Road and Transportation Builders Association. The report found that 55,710 bridges are deficient in the U.S. adding fuel to Trump’s planned ~$1 trillion infrastructure spend. With infrastructure currently taking a backseat to health care and tax reform, this could elevate the issue on the Hill, but we don’t foresee action until tax reform begins to gel.
Early yesterday morning President Trump tweeted: “Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism - even before tax plan rollout!” Hyperbole? Trump isn’t known for his modesty.
So will the post-Election Day stock market tear continue? Will the U.S. economy actually grow? We say yes on both. The year-over-year growth rate in retail sales hit 5.6% on Wednesday, a level not seen since March 2012 as Hedgeye CEO Keith McCullough wrote in a note.
He also points out that the core reading on Consumer Price Inflation (CPI) hit the highest level in 5 years, accelerating to +2.5% year-over-year. The U.S. economy and inflation are heating up. Based on this economic data the bull market in stocks has room to run.
CFPB Director Richard Cordray will live to fight another day. Cordray has been on a very hot seat since Trump won the presidency, but the U.S. Court of Appeals for the DC circuit put aside a ruling that the bureau’s structure is unconstitutional.
Litigation is expected to last far into 2017 with oral arguments scheduled by the Court on May 24. Cordray can breathe a sigh of relief - for now - but the calls for his head won’t go away with House Financial Services Chair Jeb Hensarling making it his singular goal to get rid of Cordray. Hensarling has changed his mind on replacing the head of the CFPB with a bipartisan panel - perhaps so Cordray’s replacement could overturn some of his more extreme decisions.
SCOTUS Nominee Neil Gorsuch has spent the last few weeks going from Senate office to Senate office speaking with Senators on the merits of his nomination. Senate Judiciary Committee Chairman Chuck Grassley has now set the date for Gorsuch’s hearing on March 20th in line with the confirmations of SCOTUS Justices Sonia Sotomayor and Elena Kagan.
Now the question is can Gorsuch and Team Trump get eight Democrats necessary for confirmation in that span of time...
Janet Yellen appeared earlier this week before both the Senate Banking and House Financial Services Committees. As expected, the House hearing provided more fireworks, mainly over questions regarding the appropriate level of financial regulation and monetary policy. At both hearings, Chair Yellen gave little indication of when and if interest rates will be raised in the coming months.
Our Senior Energy Analyst Joe McMonigle writes that the White House tells EPA to get ready to quickly implement pending Executive Orders. You can read the full analysis here.
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Federal Reserve Chair Janet Yellen should be "ashamed of herself" for keeping interest rates low and creating a "false stock market," President Donald Trump said on the campaign trail last September. It's safe to assume that when Yellen's current tenure is up on February 3, 2018 Trump won't be offering her a second term.
#Fed #Yellen #TaylorRule
The speculation about who will replace Yellen is heating up. Hedgeye Senior Macro analyst Darius Dale has a few ideas in this morning's Early Look. We won't give you the whole run-down but one of the likely candidates is influential Stanford economics professor John Taylor.
Taylor has been a vocal critic of the Fed and is widely acclaimed for the "Taylor Rule." We'll spare you the details crafted in the hallowed halls of academia. Essentially, the Taylor rule is a formula that prescribes the proper interest rate so that an economy can operate at maximum employment, inflation and GDP.
Taylor is a true believer in monetary policy rules. "Had the Fed not deviated from rules-based policy before the [2008 financial] crisis, unemployment would not have increased so much," Taylor wrote recently.
If the Fed enacts a rules-based monetary policy, this would mark a fundamental shift from current easy money policies. As Dale writes this morning, "We can’t stress enough how much of a hawkish shift in policy that would represent."
The Chart of the Day below shows what the Taylor rule suggests for current and future interest rates. Way below the Taylor rule's prescribed rate (the red line) is the Fed's dot plot (each member's estimated policy rate, with the black line representing the median rate).
Take a look. "Needless to say, we don’t think market participants are prepared for a 4% Federal Funds rate by year-end 2018," Dale writes.
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
The U.S. economy is heating up. So is inflation. That’s kneecapping long-term bonds.
At yesterday’s testimony before the House Financial Services Committee, Fed head Janet Yellen said that the U.S. economy was "very close to achieving" objectives of maximizing employment and maintaining a stable inflation rate of 2% (the Fed's inflation target). On the news, investors anticipated the Fed would raise rates faster than was originally expected. The 2-Treasury yield jumped (from 1.206% the day prior to as high as 1.25%).
Investors don’t yet appreciate that the Fed is falling behind on growth and inflation. Interest rates could rise much faster than is expected. Data released yesterday confirmed this line of thinking:
The Fed says it’s data dependent. If they actually are, economic data over the coming months should force their hand. Interest rates will rise faster than the two or three currently expected by investors in 2017. That will be unequivocally bearish for Long-Term Treasury bonds (TLT). We say sell them.
Takeaway: Join us for a review of our WFM Long thesis today on why we think shares have 30% upside.
***We are hosting a Flash Call at 11:00 AM ET to go through our LONG thesis for WFM. Contact email@example.com for more information and access.
Whole Foods Founder John Mackey is taking back control of the company and has called for a slowing in store growth, focusing efforts now on costs and cash flow. This pivot for an industry leading growth company doesn’t happen often (think SBUX, MCD, TGT). It requires a period of revaluation and reset expectations. But it is also followed by significant outperformance if done correctly. That’s the road ahead we see for WFM.
Whole Foods reported another disappointing quarter last week, but more importantly they laid out a new path forward for the company. We published a note last week that explained why cutting capex is exactly what they need to do in order to improve the performance of this company. With John Mackey back in charge, he is taking the bull by the horns and returning this company to its roots by focusing on the core Whole Foods consumer.
This first cut is deep, but they can go deeper once they work through sites that are already in development, cutting capex to only maintenance and other necessary expenditures. We have seen this story before, and will provide examples of companies that grew too fast into an increasingly competitive environment, getting ahead of their skis and falling on their face. Pulling back on growth capex for a couple of years will allow them to refine their current footprint and accelerate profitability.
The core Whole Foods consumer is still alive and well, and by no means do we believe that the Whole Foods brand will die in the face of conventional competition. We will lay out in detail how we anticipate their new way forward to unfold, including conversation on their capital expenditure plan, the focus on the core consumer and how category management will change the way they operate.
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