Weekly Research Briefing: All Swept Up

November 12, 2024
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Not even close. Congrats to Team Red for figuring out what American citizens wanted and what they didn't. The full GOP sweep in Washington D.C. will lead to new excitement and stimulus which is why the equity and credit markets are reacting so positively. 2017 income tax rate breaks for individuals will likely remain. Corporate tax rates could fall to 15% and be joined by long lists of regulation cuts. The DoJ and FTC will be much more relaxed over future M&A combinations. Just look at every U.S. index make a new all-time - led by the S&P 500 which now has a six-thousand handle. Only the very unprofitable Russell 2000 has yet to ring the new high bell, but it could easily do so this week.

Now is the time to enjoy the market lift as the election tailwinds and the growing seasonal trade lifts prices into the first quarter. Then you will need to have your game plan in place for how to navigate the new administration. How high will tariffs go? How many deportations will occur? How many Treasuries will need to be issued for the tax cuts and increased government spending? Plenty of uncertainty now with questions that need to be answered in the future to help us make estimates for future levels of inflation and interest rates. The FOMC cut the Fed Funds rate by another 25 basis points last week, but future rate cut expectations have been sliced significantly since Tuesday's election. As the Fed Chairman told us at the presser, we can't assume anything right now. We just have to wait and see what the 47th White House does.

Besides the Election and the FOMC meeting, we did get a great set of data from the ISM Services series showing strength across the board driven by new orders, business activity, supplier deliveries and employment. This week the economic highlight should be the release of the CPI and PPI data. It will also be a big week of Fed speakers grabbing mics including Powell on Thursday. I'd expect them to stay to a non-political script as Jerome Powell did on Thursday. Enjoy the week and all the green gains building in your portfolios. It won't always be this easy.


Michael Hartnett of BofA Global summed it up well...

It is a good guess that oversized fiscal stimulus will be locked up for years to come given the monster that was created during COVID and what it did to the Democratic party last week.

The Biggest Picture: Trump won big, as US voters cared more about inflation, inequality, immigration than low unemployment; big sweep = big policies ($8tn tax cuts, $3tn tariff revenues, $1tn spending cuts) = inflationary boom = sell bonds; but contrarians note lower cost of living politically wise for both Trump & Fed.

2.0 CW: conventional wisdom remains Trump 2.0 = tariffs, immigration controls, tax cuts = “US inflationary boom” & “global deflationary bust” = long gold, long US dollar, long US stocks (NDX & RTY) vs International stocks, short US Treasuries, and that Election to Inauguration Day a risk-on window of opportunity.

BofA Global


With election uncertainty gone and year end seasonals in play, the markets scream "BUY"...

A key driver for stocks in the near term will be the reduction in political uncertainty, a dynamic that typically drives strong year-end returns in Presidential election years. The S&P 500 index has historically generated a median return of 4% between Election Day in November and calendar year-end (Exhibit 2). If repeated this year, that return would equate to an S&P 500 level of roughly 6015 at the end of 2024 and reflect a forward P/E multiple of 22x. Along with the resolution of election uncertainty, resilient recent economic growth data and continued Fed rate cuts support the healthy near-term outlook for US stocks.

Goldman Sachs


Of course, some stocks are much more expensive this time around...

The S&P 500 P/E multiple is 6 points higher than the last Trump Inauguration in 2016. Surprisingly, the small and mid caps are about the same.

Yardeni Research


Cutting the U.S. corporate income tax to 15% could add almost $100 billion to earnings next year...

BofA Global


So, while Q3/2024 corporate earnings handily beat estimates, the 2025 figures could be looking low also depending upon how the tariff games play out...

Goldman Sachs


The Russell 2000 small caps had their best week since 2020...

A cut in corporate taxation and U.S. regulations will help small cap companies more than most anyone else.

StockCharts.coms


Looking at the more profitable S&P 600 small cap index still shows a very large valuation discount to the large caps so plenty of room for smaller companies to run if they want...

@JeffWeniger: The P/E discount in Small Caps versus Large Caps is akin to observations made at the turn of the century. The S&P 600 is trading 25.4% cheaper than the S&P 500. We find this valuation relationship in 1976, 1998, 2001 and 2020.


The Dow Transports is looking forward to the increased shipping dislocations about to occur from future tariffs...

You can bet that manufacturers are pre-buying anything that will be looking at a 10-60% tariff. Expect a very busy year end for anyone working in logistics.

StockCharts.com


Not just the transportation stocks, but the financials and industrials have also taken flight post-election...


Fed Funds rate cut bets are falling sharply after the election...

Tax cut economic stimulus, new tariffs, immigrant deportations and few fiscal guardrails have led to slowing projections of future disinflation. The market is now thinking only 3 rate cuts in the next 12 months versus 4-6 cuts before the election.

CME Group


Investment monies are looking for homes across the equity and debt spectrums pushing everything to highs...

@SoberLook: The average spread for US investment-grade bonds has fallen to its lowest level since 1997.


Even junk is surging helped by a shrinking universe of fallen angels...

@neilksethi: High yield spreads this week hitting new 17-yr lows.


The early post-election buzz is that business leaders are looking forward to the new administration...

Business leaders expect lighter regulation and lower taxes to help accelerate deal activity.

Donald Trump’s convincing election win Tuesday and lower interest rates provide “powerful elixirs” for private equity that are likely to accelerate acquisition activity while boosting investor returns, trends that stand to benefit Carlyle Group, Chief Executive Harvey Schwartz said Thursday.

The election’s conclusion helps remove uncertainty from the market when it comes to “strategy, committing capital and making decisions,” Schwartz said during an earnings call with securities analysts. The results at the polls might induce more executives to move ahead with selling and acquiring businesses, he said.

WSJ


M&A is going to surge...

"Trump in his first -- first time he ran, he was a very pro-business pro-M&A. We've been on the road the last 2 days, and we were talking about M&A lot with investors, a lot with the hedge funds. Not related to just banking, but the last 2 years have been negative on M&A for every industry. We were with a group this morning. We said, what was the large last nonbank merger that happened, and everyone could -- in the room could tell us what hadn't happened. All the ones have been held up or decline, but didn't know the last large one. This -- going into a Trump presidency with probably a house and a Senate Republican, we are hopeful and are expecting that it's going to be more M&A friendly from a scale standpoint, from a time standpoint as well as clear rules." — First Horizon EVP & CFO Hope Dmuchowski

The Transcript


Maybe we will go back to just three companies controlling all the TV channels...

@JBFlint: Warner Discovery CEO David Zaslav says on earnings call that Trump administration could offer "an opportunity for consolidation that would provide a positive and accelerated impact on this industry."


Just look at Capital One's stock price last week to tell you how excited the M&A markets are right now...

It has been a rough year for betting on big takeovers. Now, some in the hedge-fund industry hope President-elect Donald Trump could breathe new life into the business, by giving American corporations more freedom to pursue major deals.

The optimism is already evident in surging stock prices for some companies, like Discover Financial Services DFS 4.60%increase; green up pointing triangle, that are pursuing combinations. It is part of a broader optimism across Wall Street about potentially lucrative opportunities under a second Trump term.

In recent months, numerous high-profile acquisitions have either struggled to close or failed, including a plan to unite Tapestry and Capri Holdings, the companies behind Coach and Michael Kors. The pileup has ripped through the hedge-fund world, leading to unexpected losses and several top traders losing their jobs.

Now however, the new president’s pro-business, lighter-regulation agenda “means a pro-merger environment that will embolden companies to get bigger through acquisitions; it is as simple as that,” said Orkun Kilic, a London-based arbitrager. “I am very excited for the next four years.”

WSJ

StockCharts.com


Will 2025 M&A volumes rival 2021 or 2007?

@carlquintanilla: MORGAN STANLEY: “.. With YTD announcements +25% versus 2023, cyclical and structural factors support an even larger +50% increase in 2025, driven by the return of sponsors and large cap deals.”


Speaking of M&A, another Russell 2000 small cap component exits stage left...

Blackstone Inc. agreed to buy Retail Opportunity Investments Corp. in an all-cash deal valued at about $4 billion.

The purchase price is $17.50 a share, the companies said in a statement Wednesday. That’s 34% more than the real estate investment trust’s closing share price on July 29, the day before a report of a possible deal...

Retail Opportunity Investments has 93 shopping centers, focused in the western US. Its property portfolio, which often features grocery stores as anchor tenants, was roughly 97% leased at the end of September.

Bloomberg

Barchart.com


And one more Russell 2000 small cap company is going private...

Ampersand Capital Partners and GHO Capital Partners said they would take biopharmaceutical company Avid Bioservices CDMO 0.16%increase; green up pointing triangle private in a $1.1 billion deal.

The Boston- and London-based investment firms, respectively, said Wednesday they would purchase all of Avid’s outstanding shares for $12.50 apiece. The purchase price represents a 14% premium to the company’s closing price at the end of the regular session, and a 22% premium to its 20-day volume-weighted average share price...

Avid Bioservices Chief Executive Nick Green said the company’s board, which unanimously approved the sale, considered several options before determining to move forward as a private company under new owners.

WSJ

Barchart.com


Who needs the public markets for liquidity?

Activewear maker Vuori will allow some early investors and employees to sell shares in a tender offer that values the company at about $5.5 billion, according to people familiar with the matter.

The tender, also known as a secondary share sale, is about $825 million, said some of the people, all of whom asked to not to be identified discussing private information...

The deal represents a significant jump from Vuori’s $4 billion valuation in 2021 — when the company raised $400 million from SoftBank Group Corp.’s Vision Fund 2 — and establishes it as a formidable American clothier. Another existing investor is Norwest Venture Partners.

Bloomberg


The GE garage sale was a very profitable event. Will Boeing's be next?

@wallstengine: $BA | Boeing is reportedly considering selling its Jeppesen navigation unit as part of efforts to reduce its $58 billion debt load, per Bloomberg. Sources indicate the sale, potentially valued at over $6 billion, has already drawn interest from private equity firms and other companies. Boeing is said to be working with an adviser on the possible sale.


A new high for U.S. vs. the World...

@GunjanJS: "The US is now trading at a record P/E premium to MSCI World ex US of almost 60% and represents 73.65% of MSCI World market cap, also a record high" --SocGen


Speaking of the World, which countries will be spending the most time with Mr. Lighthizer?

Bloomberg


The tariff news flow will be very important to all of our company and economic models...

Making matters more difficult for investors, fiscal policy is just one part of Trump’s agenda that could shift the economy. The president-elect has also put forward ambitious, if ill-defined, plans to introduce broad-based tariffs, impose stricter immigration controls and carry out mass deportations of people who entered the country illegally.

Both tariffs and deportations could spur inflation, pushing yields higher, according to many economists. They could also slow growth, dragging yields lower.

In the case of tariffs, many businesses and economists agree that higher levies on imported goods would be passed on to consumers. Inflation would likely rise, at least in the short term. But consumers could also balk at the higher prices and cut back on their spending.

Deportations, meanwhile, could force businesses to increase wages to lure new workers, and then raise prices. Employers could also respond by cutting back on production.

“It all kind of depends on the scale and scope of tariffs and immigration,” said Ed Al-Hussainy, senior interest-rates and currency analyst at Columbia Threadneedle.

WSJ


Anyone who imports goods should plan for the worst and hope to be positively surprised...

Trump has vowed to impose massive new tariffs, eyeing a duty of 20% on all foreign goods and 60% or higher on goods coming from China. On the campaign trail, he also dropped threats of even-higher rates on specific countries and products.

He faces relatively few constraints in imposing his promised tariffs and doesn’t need to consult with Congress. A 1977 law gives him authority to impose duties in cases of an “unusual and extraordinary threat” to national security, foreign policy, or the US economy. Alternatively, he could use other legal provisions he invoked in his first term to raise some tariffs. Those require a public comment period, which add a delay.

Some Trump advisers have suggested he might use the threat of tariffs as a negotiating tactic with allies and rivals alike and back off the notion of imposing them across the board. Others have suggested that Trump is truly serious this time about rewriting the rules of international trade, no matter the consequences. He’s also pointed to tariffs as a way to help pay for the big tax cuts he’s promised, though economists argue they won’t raise nearly enough money. In either case, tariffs are expected to play an even larger role in his second term.

“We advise readers to take the president-elect’s threats of tariffs seriously if not literally,” Wells Fargo & Co. economists Jay Bryson and Michael Pugliese said in a note to clients Wednesday.

Bloomberg


How Morgan Stanley has approached it...

@carlquintanilla: MORGAN STANLEY: “.. we modeled 60% tariffs on China and 10% on the rest of the world, all at once. We estimated that policy would boost core inflation by roughly 0.9pp and reduce GDP growth by around 1½pp. A more phased approach, and one that may be more targeted, would imply smaller effects because they would be spread over time. With an already robust economy, moderate #tariffs would hurt growth but not necessarily cause a recession.”


Manufacturers are going to be burning working capital to load up on inventory before tariffs go into place...

"Now that Trump has won the U.S. presidential election, the near-term risk of material tariff increases on consumer goods coming out of China has solidified, triggering 2 action items: The first is we will continue our inventory build in the U.S. unabated, likely until the increased tariffs are enforced; and second, we will move 120-volt production out of China SKU by SKU as quickly as possible, which is accelerating the project we started 2 years ago. We expect to be 80-20 on this project by the end of '25, with the first incremental SKU going live around March, plus or minus." — Breville Group MD, CEO & Director Jim Clayton

The Transcript


This will likely be the last holiday season to buy cheaper shoes and apparel...

Matt Priest, CEO of the Footwear Distributors & Retailers of America, a trade group, said the 2019 Trump tariffs worked out to about $1 billion in additional costs for shoes purchased by U.S. companies. By the time the shoes hit store shelves, Priest estimated they cost consumers between $3 billion and $4 billion more.

Columbia Sportswear CEO Tim Boyle recently told The Washington Post he expects to raise prices if Trump increases tariffs. “We’re buying stuff today for delivery next fall,” he said. “So we’re just going to deal with it and we’ll just raise the prices. … It’s going to be very, very difficult to keep products affordable for Americans.”

The Oregonian


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