Category: zerohedge

Yesterday, the dollar slumped and yields dropped after a WaPo report claimed that the corporate tax cut could – the core piece of GOP tax reform – would be delayed by up to a year, a clear indication that there may be irreconcilable differences in the Senate regarding tax reform. Then, moments ago, Axios confirmed as much, reporting that the Senate “won’t release its version of the GOP tax bill tomorrow”, citing a senior GOP aide. On Tuesday Mitch McConnell said that the bill would come out on Thursday. That said, the aide reportedly said “this wasn’t a delay, because the release of the Senate bill was always going to start after the House Ways and Means Committee finished marking up its bill.”

As Axios explains, the delaying introduction of the bill is problematic “because it not only gives off the impression that things aren’t going well (whether it’s true or not), but also removes one more day that could have been spent getting the caucus on board with the bill.”

Meanwhile, speaking on Bloomberg, Treasury Secretary Mnuchin said that the White House’s preference would be to start the corporate tax rate cut next year, which again implies a material probability of delay.

“Our strong preference is that the corporate tax rate starts next year. The longer we wait, the worse it is for the economy,” Mnuchin said in interview on Bloomberg TV.

Asked whether he rules out delaying corporate tax cuts: “Again, I’d just say, the president’s strong preference — he feels very strongly that he wants to start this right away. But having said that, we’ll have to look at the entire Senate package — I assume it’s just a money issue — as to how they’re moving the different pieces around”

“It’s not a philosophical issue; I’m sure they’d like to start this just as soon as they can”

Some other soundbites courtesy of Bloomberg:

• MNUCHIN: STATE ELECTIONS DIDN’T CHANGE OUR TAX STRATEGY
• MNUCHIN: WE’RE GOING THROUGH HEALTHY PROCESS ON TAXES ON CMTEES
• MNUCHIN: PRESIDENT WOULD LIKE TO KILL HEALTH CARE MANDATE
• MNUCHIN: KILLING HEALTH CARE MANDATE WOULD FREE UP LOT OF MONEY
• MNUCHIN: HOUSE MOVE ON CARRIED INTEREST STEP IN RIGHT DIRECTION
• MNUCHIN: WE’RE SENSITIVE TO NEED OF STATE TAX EXEMPTION
• MNUCHIN: THERE ARE SHORT-TERM CONCERNS ABOUT FX IMPACT ON TRADE
• MNUCHIN: PART OF DOLLAR STRENGTH REFLECTS U.S. ECONOMY
• MNUCHIN: I DON’T THINK YELLEN HAS MADE DECISION ON STAYING

In the final update, CNBC reports that “the Senate tax plan is not expected to include a controversial 20 percent excise tax on imports by multinational companies, according to three people briefed on the issue.”

The tax is a critical revenue raiser in the House bill—worth about $155 billion over a decade—and applies to purchases by U.S. subsidiaries of multinational businesses from their foreign counterparts. Among the most vocal opponents of the new fee is the conservative advocacy group Heritage Action, which called it a “backdoor border adjustment tax.”

 

The fee covers both intangible goods such as intellectual property as well as consumer parts. But unlike the border adjustment tax—a proposal that Republicans have discarded—the transactions must occur within a single parent company. Business groups such as the Organization for International Investment also fear the tax could disrupt international supply chains and raise costs for multinational companies—and ultimately consumers.

 

“It’s an extraterritorial reach into global supply chains that were never part of the U.S. tax base,” OFII President Nancy McLernon said. “It will have a disproportionate impact on international companies that have made a deliberate decision to invest and create jobs in the United States.”

Last week, House Ways and Means Committee Chairman Kevin Brady defended the tax as a crucial to ensuring that companies do not shift profits overseas. He said that the border adjustment tax was abandoned months ago and that the excise tax in the current bill bears no resemblance to that proposal.

With so many moving parts and even more conflicting opinions, it will be surprising if a one day delay by the Senate is all it boils down to.

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From here on out, if you see a car without a driver meandering around suburban Phoenix, don’t be alarmed: It’s just Google's Waymo division testing its new driverless taxis – the first of their kind to be tested on US roads without the supervision of a “safety driver."

Wayno has revealed that – effective immediately – it will begin testing the driverless taxis – referred to in technologist parlance as a “level 5” driverless vehicle – in Chandler, Arizona. Thew news represents an important milestone that establishes Waymo as the leader in automated driving technology. Waymo CEO John Krafcik made the announcement Tuesday during in a speech at a web summit in Lisbon, Portugal.

“We want the experience of traveling with Waymo to be routine, so you want to use our driver for your everyday needs,” John Krafcik, Waymo’s chief executive officer, said at the Web Summit conference in Portugal. “Fully self-driving cars are here."

According to Ars Technica, for the last year, Waymo has offered free taxi rides to ordinary people who live near the Phoenix suburb of Chandler. Until recently, the company's modified Chrysler Pacifica minivans had a Waymo employee in the driver's seat ready to take control if the car malfunctioned.

One reason the company is so confident in its techonology, as Bloomberg points out, is the Alphabet subsidiary has racked up more autonomous test miles on roads than others developing the tech, including Ford Motor Co., General Motors’ Cruise Automation unit and Uber. However, Google’s rivals have certain advantages that may ultimately help them beat Waymo to market. For example, Uber has a massive customer network that depends on its drivers for rides. And Ford and GM have the manufacturing capabilities to crank out new units with very little delay.

And by the looks of it, Waymo is gearing up to challenge Uber by using its service to begin offering rides. Krafcik, a former Ford executive, said that an on-demand service would be the first commercial use case for Waymo. During his appearance at the summit in Lisbon, he also discussed how the vehicles may replace personal car ownership, a nightmare scenario for OEMs like Ford and GM.

“Because you’re accessing vehicles rather than owning, in the future, you could choose from an entire fleet of vehicle options that are tailored to each trip you want to make,” Krafcik said, according to a transcript of his remarks. People could claim the cars for a day, a week “or even longer,” he said. He ticked off the ways driverless cars could be redesigned if the vehicle didn’t need space for a driver: to ferry groceries, as a “personal dining room” or for naps.

Waymo began testing its taxi service in Phoenix back in April. It’s progress shows how Google has played to its strengths by building the best technology available. However, the question of scalability still remains.

As the New York Times points out, driverless cars are regulated by a patchwork of state laws. Arizona, like many states, has no restrictions against operating an autonomous vehicle without a person in the driver’s seat. On the other hand, California, where Waymo is headquartered, requires any self-driving car to have a safety driver sitting in the front.

However, just because Waymo can legally test these cars, doesn’t necessarily mean they’ve been optimized for safety. In December, Waymo published a report for California’s Department of Motor Vehicles about how frequently its driverless cars “disengaged” because of a system failure or safety risk and forcing a human driver to take over. In the report, Waymo said this happened once every 5,000 miles the cars drove in 2016, compared with once every 1,250 miles in 2015. While that’s certainly an improvement, these types of incidents are hardly rare.

So, the question is, how will Waymo handle these situations when they inevitably start cropping up (indeed, if they haven’t already)? We imagine given all the publicity around several high profile cases of deadly car accidents involving Tesla’s autopilot software, that the company has planned for these risks – or at least, we hope they have.

And we’re not the only ones. Consumer Watchdog, a frequent critic of Alphabet, said that data demonstrated that the cars are not ready to drive without any human intervention and that Waymo was following the Silicon Valley model of “beta testing” a new technology on the public – to a potentially dangerous end.

“It’s the wrong approach when you’re dealing with self-driving cars,” said John M. Simpson, a director at Consumer Watchdog. “When things go wrong with a robot car, you kill people."

To be sure, researchers believe self-driving cars can be safer than cars operated by human drivers because they are programmed to adhere strictly to traffic laws, they don’t get distracted, and they don’t take unnecessary risks.

But that reality is a long way off.

Then again, who are we – the public – to stand in the way of progress? The tech gods of Silicon Valley have spoken, and they’ve said we will have autonomous vehicles commercially available by 2025 – which is ludicrously soon, considering where the technology is right now. Because the reality is this technology needs to function flawlessly by the time it’s put in the hands of the consumer.

Of course, regardless of the cost in lives and damage, once the technology is ready, the world will understand that it was all worth it.

In a bit about driverless cars, Stephen Colbert once joked that they’re “a high tech alternative to dropping a brick on the gas peddle and jumping in the back seat.”

Given Waymo’s safety record. That bit might prove eerily prescient.
 

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“A Happy Trumpiversary to all our readers this morning”

       – Deutsche Bank

Today marks exactly 12 months since the US election on November 8th 2016, and as Deutsche Bank writes in “A Happy 12 Month Trumpiversary For Markets?” a lot has happened in the last year, although most surprising may be that for all calls of market collapse should Trump get elected, the S&P 500 has actually soared over 20% in the past 365 days according to Goldman which recently calculated that the Trump rally so far ranks as the fourth-best 12-month gain following a presidential election since 1936, trailing only Bill Clinton (1996, 32%), John F. Kennedy (1960, 29%), and George H.W. Bush (1988, 23%). 

As Deutsche Bank then picks up, “needless to say that the victory was unprecedented and also a massive shock around the world. Following Trump’s victory, it was widely expected that we’d see a much higher chance of fiscal spending but also a reinforcement of the backlash against globalisation and associated forces of which migration policy and trade were probably first and foremost. In reality what we have seen in the last twelve months is plenty of evidence of backlash against globalisation, hostility and controversy, but very little in the way of fiscal policy.“

Here is the rest of Jim Reid’s observations on how the market has progressed so far under president Trump.

The debacle around healthcare reform probably best characterises the difficulties the President has faced in that regard. So with today marking the one year anniversary, we thought we would take a look at how markets have performed over that time period. For the purpose of this we’ve included our usual monthly performance assets, as well as a few other US assets. First and foremost after running the numbers what stands out is the sheer number of assets which have seen positive returns. Indeed in USD terms, out of a sample of 41 assets, 38 have seen positive total returns.

 

As we know US equity market performance has been relentless. The S&P 500 has returned +23.5% over the last 12 months and has seen a positive total return in every month since Trump was elected. Interestingly this hasn’t actually been the best 12 month performance for the S&P 500 following an election. That award goes to the 1944 election victory for Franklin D. Roosevelt which saw the S&P 500 rally +36.8% in the year following. The twelve month performance post Trump ranks 7th in the last 23 elections. Meanwhile the Dow has rallied +31.5% and the smaller-cap Russell 2000 index has returned +25.4%. It hasn’t just been US equity markets that have seen blockbuster returns though. Indeed it’s very much been a global rally. The biggest winner is the FTSE MIB (+47.8%) while also in Europe the DAX has returned +34.1%, Stoxx 600 +27.9%, Greek Athex +38.2% and IBEX +24.9%. The UK’s FTSE 100 has returned +21.4% while in Asia the Nikkei is +25.5% and Hang Seng +30.7%.

 

In bond markets, as we know Treasuries have seen some huge ranges but ultimately performance has been benign. Indeed Treasuries have returned -0.1%. In fairness the big move for Treasuries came in the first few weeks of the election victory where we saw 10y yields spike nearly 80bps. If we take performance from the yield highs of last December then performance is actually more like +3.5%.  

 

More significant for bonds though has been the shape of the yield curve. Having spiked as high as 136bps, the 2s10s curve has now flattened to just 68bps and is at the flattest since 2007. The 5s30s curve (79bps) is also at the flattest in 10 years. Alternatively 2y yields have moved from 0.854% on election day to 1.629% now and the highest in the last year. 10y yields were at 1.855% on election day, touched as high as 2.626% in March and are now at 2.309%. The equivalent for 30y yields is 2.616% on election day, 3.212% high in March and 2.770% now.

 

So while equity markets may have benefited from high expectations for fiscal spending, US Treasuries have by and large priced out any expectation with each passing day under Trump’s presidency.

 

In terms of other markets, credit markets have returned anywhere from +2.9% to +14.4% with higher beta credit outperforming (HY and Sub-Financials). Emerging markets have also had been swept up in the rally with EM bonds returning +4.7% and EM equities +28.6%. Commodities have been more of a mixed bag. Gold is unchanged over the time horizon while Silver has dropped -7.8%. On the other hand Oil is up +26.6% and Copper +29.7%.

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In what is sure to stir up a media storm of over analysis, the Kremlin has commented that there is a strong possibility that Donald Trump and Vladimir Putin will meet on the sidelines of the upcoming international summit in Vietnam.

“Both Putin and Trump have extensive plans for bilateral meetings, which have been agreed upon long beforehand. There is also the APEC summit program, so the relevant offices are trying to choose an appropriate timing and format,” he said, adding that the likeliness of a Trump-Putin meeting was high.

As Strategic Culture Foundation's Andrei Akulov notes, President Donald Trump told Fox News last week that he may meet with Russian President Vladimir Putin. He said it was very important to meet the Russian leader. The US president expressed hope that Russia would help solve the North Korea problem. "It's hard to overestimate the importance and significance for all international matters of any contact between the presidents of Russia and the United States," said Putin’s spokesman Dmitry Peskov.

Donald Trump's trip comes at a time the Asia-Pacific policy goals require clarification against the background of the US withdrawing from the Trans-Pacific Partnership (TPP) agreement. President Trump is pushing bilateral trade deals to replace the TPP, but Asian countries are reluctant to open negotiations, while South Korea is balking at his demand to renegotiate the existing trade accord. The relations with China and the problem of North Korea top the agenda. In Vietnam, the US president will articulate a new policy for Asia built on the concept of a “free and open Indo-Pacific” region. The idea presupposes bringing together Japan, Australia, and India to contain a rising China.

Putin and Trump first met at the G20 summit in Hamburg in July when they discussed allegations of Russian meddling in the US presidential election. Back then, the leaders agreed to focus on better ties. However, the relations have soured further since that time as the diplomatic scandal broke out. In August, the president signed new sanctions against Russia. During the election campaign, Donald Trump pitched himself as a leader who would normalize the relationship. The American voters backed this stance. But the promised improvement has not materialized.

Today, the relations between Russia and the US are on a downward spiral of sanctions and accusations. It’s true that the Russian-American relations are struggling through their most difficult period since the end of the ?old War. The domestic context makes it virtually impossible for the US president to attempt any kind of fundamental reset.

No breakthroughs are expected but there is a range of burning issues to be urgently addressed despite the divisions. What the leaders could do is implement a "ceasefire" on the diplomatic blows of the past few months. The hole is deep enough; it’s time to stop digging.

With Syrian conflict entering endgame and de-escalation zones in place, Russia and the US face responsibility for ending the conflict and launching the nation-building process. Syria should not divide but rather unite the two powers. Ukraine and North Korea will be included in the agenda. It’s also logical and imperative for Russia and the US to pursue cooperation on Libya and Afghanistan.

With arms control eroding, the time is right to launch discussions on the future of New START and the divisions over the Intermediate-Range Nuclear Forces Treaty (INF) Treaty. Moscow has declared readiness to negotiate an extension of the New START, but the US position remains unclear. If nothing replaces the New START, there will be a new situation when strategic offensive forces are beyond any control for the first time since SALT-I was signed in 1972. The fate of the INF Treaty is uncertain with both sides accusing each other of violating the agreement. It would be right if the presidents gave orders to launch meaningful discussions to smooth away the existing problems.

A lot of issues of mutual concern could be addressed if the US reversed its decision to shut down most channels of cooperation including the Presidential Commission (21 working groups). Regional security and arms control will probably dominate the official bilateral agenda but strong interaction between academics, media, businesses and public diplomacy could help manage existing problems and make the relationship much more fluid.

Much has been said about what causes the current deterioration, while almost nothing is said in the mainstream media about the fact that the dialogue is still alive despite all the snags on the way. Contacts are maintained.

This was in focus of the talks held in Helsinki between Russian Deputy Foreign Minister Sergei Ryabkov and US Undersecretary of State Thomas Shannon on September 11-12. US Secretary of State Rex Tillerson, has maintained dialogue with Russia over the conflict in Syria, and raised the possibility of joint stability operations, including de-escalation zones and ceasefire observers. In June, numerous US companies took active part in the St. Petersburg International Economic Forum (SPIEF).

The divisions were deep when the “Helsinki process” was launched in the 1970s. The Helsinki Final Act dealt with a variety of issues divided into four “baskets.” The same thing can be done today.

It is quite possible to put the differences into a basket to be addressed separately, while concentrating on achieving progress in the areas where it can be done. The fact that the initiative to arrange a meeting comes from the US proves the fact that Russia is an important world actor that no international security problems can be solved without. The APEC summit in Vietnam provides an opportunity to revive dialogue on the issues of common interest. It should not be missed at a time when the bilateral relationship has tumbled to a nadir.

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Mexico vehicle production hit a new record high in October – up 11% since President Trump's election…

 

And Mexico vehicle exports are near record highs – up 13% since President Trump was elected…

 

Maybe Mexico can afford to 'pay for the wall' after all…

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Authored by 720Global's Michael Liebowitz via RealInvestmentAdvice.com,

If someone told you that the President of the United States in 2028 would be a Democrat and a woman from the state of New York, could you guess who it might be? We highly doubt it. In 1998, ten years before being elected president, Barack Obama had just been re-elected to the Illinois State Senate and was on no one’s radar as a Presidential candidate. In fact, had you been told at that time an African-American Democrat from Illinois would be president in 2008, it’s likely you would have assumed that two-time democratic presidential nominee Jesse Jackson would be the 44th President. In 1990, George W. Bush had just bought the Texas Rangers baseball club and was still four years from becoming Governor of Texas. In 1983, Bill Clinton was ten years out of law school and serving his second term as Governor of Arkansas. We could keep going down the line of presidents, and you would realize that even armed with some key details about the future, it would be extremely difficult to predict who a future president might be.

Stock investing is a little different. If you know the future level of three simple data points, you can calculate to the penny the price of any stock or index in the future and the exact holding period return. This precise prediction will hold up regardless of wars, economic activity, natural disasters, UFO landings or any other event you can dream up.

Unfortunately, those three data points are not readily available but can be inferred using historical trends, future expectations and logic to project them. With projections in hand, we can develop a range of price and return expectations for an index or an individual stock. In this paper, we provide an array of projections based on those factors and provide return expectations for the S&P 500 for the next ten years.

Factor 1: Dividends

Dividends are an important and often overlooked component of stock returns. To emphasize this point, an investor guaranteed a 3% dividend yield based on the current price, receives a 30% gain (non-compounded) in ten years. In other words, the investor has at least a 30% cushion to guard against price declines over a ten-year period.  That is what Warren Buffett refers to as a “moat,” and it is a wonderful benefit of investing in dividend-paying stocks.

The scatter plot graphed below compares the S&P 500 dividend yield to the Ten-year U.S. Treasury Note yield since 1980.  This historic backdrop helps project the S&P 500 dividend yield for the next ten years.

Data Courtesy: St. Louis Federal Reserve (FRED)

From 1980-1999, Treasury yields and dividend yields behaved alike. The trend line above, covering these years, has a statistically significant R-squared of 0.84 (84% of the move in dividend yields can be explained by moves in the 10-year yield). Since the year 2000, that relationship has all but disappeared. The R-squared for the post-financial crisis era is a meaningless .02.

Around the year 2000, dividend yields appear to have hit a floor ranging from 1-2%, despite a continued decline in Treasury yields. The reason for this is that many companies want to entice investors with higher dividend yields. As such, they raised dividends to keep the dividend yield relatively attractive. Had the regression of the 1980-1999 era held, dividend yields would be below 1% given current Treasury yields.

The graph above makes forecasting the future dividend yield relatively easy. As long as Ten-year U.S. Treasury yields stay below 5-6%, we expect dividend yields will range from 1-2%. Accordingly, we simplify this analysis and assume an optimistic 2% dividend yield for the next ten years.

Dividend Yield – Base/Optimistic/Pessimistic = 2%

Factor 2: Earnings

Over the long-term, earnings are well correlated to economic growth. Our ten-year analysis easily qualifies as long-term. Over shorter periods, there can be sharp variations due to a variety of influences such as regulatory policies and tax policies all of which influence profit margins. To arrive at reasonable expectations for earnings growth, we first consider economic growth. The following chart plots the declining trend in GDP growth since 1980.  Given the burden of debt, weak productivity growth and the obvious headwinds from demographics, we think it is likely the trend lower continues.

Data Courtesy: St. Louis Federal Reserve (FRED)

Next, we consider S&P 500 earnings growth rates. Earnings growth over the last three years, ten years and since 1980 are as follows: 3.18%, 4.38%, and 5.93% respectively. Given the economic and earnings trends, we believe a 3% future earnings growth rate for the next ten years is fair, 5% is optimistic, and 1% is pessimistic.

Earnings Growth – Base/Optimistic/Pessimistic = 3.00%/5.00%/1.00%

Factor 3: Valuations

Robert Shiller’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) is our preferred method of valuation as it averages earnings over ten year periods. In doing so, it avoids short-term volatility of earnings and provides a more consistent baseline reflective of a company’s or indexes true earnings potential.  Currently, the CAPE of the S&P 500 sits in rare territory, as shown below. In fact, outside of the late 1990’s tech boom, there were only two months since 1881 when the Shiller CAPE was higher than today’s level – August and September of 1929.

CAPE has a history of extending well above and below its mean. Importantly, it also reverts to its mean after these long stretches of time. It does not seem unreasonable to expect that, over the next ten years, it will again revert to its mean since 1920 of 17.29. An optimistic scenario for 2028 is a CAPE reading of one standard deviation above the mean at 24.77. The pessimistic case is, likewise, one standard deviation below the mean at 9.70. Further, as shown below, we also present an outlook assuming CAPE stays at its current level of 31.21.

The graph below shows CAPE and the three forecasts along with the current level.

Data Courtesy: Robert Shiller http://ift.tt/rs5Abz

CAPE – Base/Optimistic/Pessimistic = 17.29/24.80/9.70

What does 2028 hold in store?

The following graph and table explore the range of outcomes that are possible given the scenarios outlined above. To help put context around the wide range of expected returns, we calculated an equity-equivalent price of the 10-year U.S. Treasury Note and added it to the graph as a black dotted line. Investors can use the line to weigh the risk and rewards of the S&P 500 versus the option to purchase a relatively risk-free U.S. Treasury Note. The table below the graph serves as a legend and reveals more information about the forecasts. The color shading on the table affords a sense of whether the respective scenario will produce a positive or negative return as compared to the U.S. Treasury Note. The far right column on the table indicates the percentage of observations since 1881 that CAPE has been higher than the respective scenarios.

Data Courtesy: Robert Shiller http://ift.tt/rs5Abz and 720Global/Real Investment Advice

As shown in the graph and table above, only scenarios 8 through 12 have a higher return than the ten year U.S. Treasury Note. Of those, three of the five assume that CAPE stays at current levels. Scenario 8, shaded yellow, has a negligible positive return differential.

Summary

The bottom line is that, unless one has a very optimistic view on earnings growth and expects valuations to remain elevated beyond what historical precedent argues is reasonable, the upside is limited, and the downside is troubling. The odds favor that a risk-free investment in a 10-year Treasury note will provide a better return through 2028 with less volatility. With current 10-year note yields at roughly 2.25%, that should emphasize the use of the term “troubling.”

The lines in the graph above are smooth, giving the appearance of identical returns each period. Markets do not work that way. These projections do not consider the path taken to achieve the expected total return and they most certainly will not be smooth. The best case scenario, and the one least likely to occur is for volatility to remain low. This would generate the most orderly path. Given that the post-crisis VIX (equity market volatility index) has averaged 17.7, current single-digit levels are an aberration and it does not seem unreasonable to expect more volatility in the future.

Even if one of the scenarios plays out exactly as we describe, the path to that outcome would be very choppy. For instance, if the worst case scenario played out, an investor may lose 60-80% of value in a matter of one or two years. However they would most likely have better than expected annual returns in the years following.

In a follow up to this article we will take this thought a step further and discuss the so-called path of returns. We show you the expected and actual path of returns from 2005 to 2015 and argue that an investor armed with the three factors, and a little discipline, may have generated much better returns than those earned by investors using a buy and hold approach.

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WTI/RBOB extended losses post-API data overnight, but DOE data sparked some algo chaos as a surprise crude build (+2.24mm vs -2.45mm exp) was offset by a bigger than expected gasoline draw (exactly opposite what API reported). In addition, US crude production jumped to a new all-time high – take that OPEC!

 

API

• Crude -1.562mm (-2.45mm exp)
• Cushing +812k
• Gasoline +520k (-1.85mm exp)
• Distilates-3.133mm

ADOEPI

• Crude +2.24mm (-2.45mm exp)
• Cushing +720k
• Gasoline -3.31mm (-1.85mm exp)
• Distilates -3.359mm

Last night's API data showed smaller crude draw and a surprise gasoline build, but DOE surprised with a big crude build and biugger gasoline draw (and a notable build in Cushing stocks)…

 

Production has normalized back at cycle highs as storm effects fade, surging to new cycle highs in the last week

 

And total US Crude output just hit a new record high…

 

WTI was back below $57 and RBOB below $1.80 ahead of the DOE data, sinking after last night's surprise gasoline build

“If the EIA data disappoints then it could take further steam off the market,” says Jan Edelmann, analyst at HSH Nordbank.

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Gartman does it again.

Yesterday we reproted that with futures spiking, and the S&P set to open just shy of 2,600, Gartman panicked, and closed out his shorts, instead predicting a “violent, parabolic” move higher.:

We have been wrong… badly… in taking even a modestly bearish view of the global equity market and effecting that bearish view via a position in out-of-the-money puts on the US equity market bought a week and one half ago. Fortunately we effected that bearish view with puts rather than with direct short positions in equites and/or via short position in the futures themselves, so the damage wrought has been minor. But the real damage is that we are not long of equities as obviously we should have been. Our position has to be covered and covered it shall be, for we fear that we are about to enter that violent… and ending… rush to the upside that has ended so many great bull markets of the past. At this point, the buying becomes manic and prices head skyward. Speculation is the order of the day, not investment and when such periods have erupted in the past prices have gone parabolic until such time as the last bears have been brought to heel and the public has thrown investment caution to the wind. We’re there now; this may become wild.

Whether Gartman’s bullish reversal was the catalyst for yesterday’s market weakness is debatable, however, one day later, with the modest selling persisting, here is Gartman again, and one day after Gartman closed his equity short, in anticipation of a “violent, manic” surge higher in the market, here he is again, explaining that he’ll “not hesitate even for a moment but to return to the short side of the equity market in US terms and perhaps even
broadly in global terms if the reversals in the DAX hold through Friday’s close.” To wit:

Having covered our small short position in the US market we had had via a position in slightly-out-of-the-money puts, we’ll not hesitate even for a moment but to return to the short side of the equity market in US terms and perhaps even broadly in global terms if the reversals in the DAX hold through Friday’s close. This is the hardest thing any investor/trader/analyst must be able to do: to acknowledge having been wrong for a short while only to see the market vindicate the initial position and thus to be forced to return to the original trade at a less advantageous price. We face that possibility even as we write.

And so, with condolences to the bears, it appears that yesterday downward pair trade set up, is now over.

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With Republicans scrambling to find every possible dollar to pay for Trump’s “massive” tax reform package, on Wednesday morning a new analysis by the CBO calculated that repealing ObamaCare’s individual mandate – an idea that had been floated previously by Trump – would save $338 billion over 10 years. CBO previously estimated repeal would save $416b over 10 years due to reduced use of Obamacare subsidies, demonstrating once again how “fluid” government forecasts are.

The report was released as the Senate prepares to unveil its own version of the Tax reform bill amid growing GOP dissent, and comes as some Republicans are pushing for repealing the mandate within tax reform, as a way to help pay for tax cuts. Still, as The Hill reports, that idea has met resistance from some Republican leaders who do not want to mix up health care and taxes. Previously the CBO had come under fire on Tuesday from Sen. Mike Lee (R-Utah), who slammed the agency after Sen. Bill Cassidy (R-La.) told The Hill that he had been informed that the CBO was changing its analysis of the mandate to find significantly less savings.

Just as notable was the CBO’s announcement that it was changing the way it analyzes the mandate, which Republicans suspect would show less government savings and fewer people becoming uninsured as a results.

“The agencies are in the process of revising their methods to estimate the repeal of the individual mandate,” he said. “However, because that work is not complete and significant changes to the individual mandate are now being considered as part of the budget reconciliation process, the agencies are publishing this update without incorporating major changes to their analytical methods.”

Sen. Tom Cotton, R-Ark., who has been one of the most vocal advocates of including repeal of the individual mandate in the tax bill, has touted the savings that would come as a result. His team said it is confident that the scoring will include similar numbers to previous reports. “We’re confident the CBO estimate will still show a substantial — north of $300 billion — savings for tax reform,” Caroline Tabler, spokeswoman for Cotton, told the Washington Examiner in an email.

CBO has been criticized for years for its analyses on the effects of the individual mandate. Republicans have charged that the mandate isn’t as effective as CBO concludes and have said they want to see it repealed. Some Obamacare supporters also have said it should be stronger by becoming more expensive or should be more heavily enforced.

While the CBO calculation is a boost to Republicans who want to repeal the mandate in tax reform, because it means there are still significant savings to be had from repealing the mandate, mandate repeal still faces long odds. Repealing the mandate – a broadly unpopular decision in many states – could also destabilize health insurance markets by removing an incentive for healthy people to enroll.

Earlier in the day, the CBO said that according to the Joint Committee on Taxation, the “Tax Cuts and Jobs Act” would increase deficits over the next decade by $1.4 trillion, which is good enough to slip under the $1.5 trillion limit required for reconciliation. The CBO did however add that the additional debt service would boost the 10-year increase in deficits to $1.7 trillion.

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Despite record high stocks, record high consumer confidence, and 'full' employment, LendingClub is struggling to originate high-enough quality loans – crashing almost 20% after slashing its Q4 outlook.

CEO Scott Sanborn on LendingClub’s conference call pointed to a new credit model that represents "a tightening with an overall shift to higher-quality grades and higher quality approvals within grades," and said Equifax’s significant data breach "has put consumers on edge."

The stock is now back near record lows…

 

Analysts are watching what the company will say at its Dec. 7 investor day; some cut their price targets…

MORGAN STANLEY (James Faucette)

• 3Q shows "credit box setback," with origination growth hurt as LC tightens credit, re-calibrates marketing with launch of 5th gen credit model
• Targets expected at investor meeting will "weigh heavily"
• Cites positives, including high borrower demand, high institutional funding, securitization demand; cites negatives including near-term costs of new credit model, lower-than-est. retail investors and managed funds for net-net-worth individuals; sees EFX, hurricane impact as transient
• Overweight, PT $6.50 from $7

NEEDHAM (Kerry Rice)

• Below-est. outlook is squarely in focus, with 4Q view trailing amid origination headwinds as LC re-targets its marketing, tightened credit related to F&G grades
• 3Q was mixed, with strengthening marketplace fundamentals despite near-term headwinds; notes strong originations, but light rev., Ebitda due to higher-than-est. securitization program costs, EFX breach impact, natural disasters (both transitory)
• Flags strong demand from both borrowers and investors, consistent execution of securitization transactions, continued improvement in loan performance
• Buy, PT $7

BTIG (Mark Palmer)

• Solid 3Q obscured by weak 4Q outlook due to implementation of new credit model
• Notes mgmt "made it clear" during conf. call that anticipated slowdown in 4Q originations wasn’t due to macroeconomic or competitive environments, but rather to deliberate decision to accelerate implementation of 5th-gen credit model in September
• New model uses recent data, reflecting current environment in which consumers in higher-risk portions of prime-credit population have more personal leverage, different mix of credit exposures; mgmt believes revised model (which looks at credit behavior over time rather than as a snapshot) will give them confidence needed to scale platform, drive rev., earnings, CF growth in 2018
• Buy, PT $9

WEDBUSH (Henry Coffey)

• Reported noticeable rev. miss and indicated it’s been tightening credit, a move which may cut LC’s total addressable market (TAM) by 3%-6% and cap future growth
• New, more comprehensive credit scoring model, tighter underwriting, significantly restricting purchase/resale of loans classified as F&G to have direct impact on 4Q
• Problem likely to persist given challenges and costs associated with originating loans capable of meeting/exceeding loss-adjusted return hurdles
• Neutral, PT to $5 from $5.50

JANNEY (John Rowan)

• Guidance is light as mgmt tightens up credit
• Flags mgmt mentioning will go into mediation to potentially settle securities class-action lawsuit relating events of 2016; may impact 4Q
• Highlights mgmt remarks about temporarily not making loans available to investors while conducting product/price tests designed to reduce defaults, prepayments, and noting marginal-prime borrowers are seeing many new credit offers, which is driving prepayments; seemed to indicate some cohorts of consumers have over-levered
• Neutral, PT to $5 from $6

COMPASS POINT (Michael Tarkan)

• "Credit and competitive concerns re-emerge"; mgmt tightening underwriting appears consistent with recent actions taken by Discover, Prosper, but it still leaves Compass Point wondering what happens to investor demand when the credit cycle starts to turn
• Adds that LC, by cutting out lower-tier borrowers, is forced up the credit spectrum to compete for borrowers vs slew of spread-based traditional lenders who have recently entered category; this may weigh on customer acquisition costs, pressure transaction fee rates
• Believes origination volume needs to accelerate meaningfully — in an intensifying competitive landscape — for model to drive meaningful returns for shareholders
• Sell, PT to $4 from $5

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