As you probably know, Donald Trump is going to address Congress on Tuesday and as CNBC’s John Harwood writes, the President will be “saddled with the lowest approval ratings of any new chief executive in modern American history.”
Harwood is of course referring to the NBC/WSJ opinion poll which I outlined earlier on Sunday in “Trump Celebrates Historic Achievement.”
Now I don’t know about you, but I’m fired up about Trump’s forthcoming speech. I mean if you watched that train wreck of a presser he held earlier this month and you’re not excited to see what the new commander in chief comes up with Tuesday night, then you need to check your f*cking pulse.
Think about it. That sh*t show of a press conference included the following list of instant classic Trump-isms:
- “I just wanna let you know, I inherited a mess”…
- “Drugs are – becoming cheaper than candy barssssz”…
- “You know what uranium is right? This thing called nuclear weaponsssss, and other thiiiings – like lots of things are done with uranium – including some bad things”…
- “I love to negotiate thiiiings – I do it really well – and all that stuff”…
- “Nuclear holocaust would be like no other”…
- “The news is fake – because so much of the news is fake”…
- “I watch CNN – it’s so much hatred – I don’t even watch it”…
- “The greatest thing I could do, is shoot that ship right out of the water”…
- “WE’RE GOING TO INVADE MOSUL”… “WE’RE GOING TO INVADE MOSUL!”…
- “Remember Hillary Clinton – she did a reset – remember – with the button – the stupid plastic button that made us all look like a bunch of jerks – HERE take a look”…
Of course the truly impressive part of the whole thing was that in addition to delivering perhaps the most hilarious set of quotables in Presidential history, Trump also managed to insult i) the entire African American community (again) by implicitly suggesting that all black people know each other, ii) all women (again) by suggesting that a female reporter should coordinate his schedule, and iii) the entire Jewish community (again) by claiming that a question about the White House’s stance on anti-semitism was out of bounds.
So God only knows what Tuesday is going to be like but I, for one, am f*cking excited to find out.
Markets, on the other hand, are a bit nervous about the whole thing. And understandably so. After all, the entire reflation narrative that, along with the Catalyst Fund’s forced buying, is largely responsible for the ramp in stocks is on the line. Trump promised a “phenomenal” tax plan nearly three weeks ago. We’ve yet to see it, leading many to come to the conclusion that, just as we all suspected, no such plan f*cking exists.
Keep in mind that record high stock prices notwithstanding, this market is predisposed to fading the Trump trade. And indeed – as I explained earlier today – the fact that yields on safe haven bonds are beginning to move lower even as risk rallies suggests that if Trump doesn’t deliver, there’s a very real chance that yields plunge, undermining the dollar, stocks, and the whole reflation story in the process. Recall what FX trader Mark Cudmore said last week:
I don’t remember a presidential speech to congress ever carrying such event risk for markets as Trump’s address next Tuesday. Mainly because it’s not normal for there to be so little clarity about what will be said. Betting on Trump stimulus has been a tired theme for weeks. The excess exuberance has disappeared but the majority of analysts and investors don’t appear to have surrendered yet. There’s now a genuine two-way risk. If he delivers some clear practical details of a tax plan, with a concrete and near-term schedule, then expect all that pre-Christmas enthusiasm to return. Given Trump’s track record, we can expect bold promises which will provide some exciting headlines –- so the short- term risk may be skewed toward an optimistic interpretation. Will that then provide the moment of ultimate capitulation for Trump trades? That’s certainly the risk if those headline promises aren’t backed up by the substance of a viable and detailed plan. Speculative short positioning in Treasuries remains near a record -– the potential short-squeeze would see 10-year yields break back down through 2.3%, triggering a clean-out of some structural real money positions and a collapse in the dollar. And the damage would spill-over into equities this time.
So that’s the setup for what’s almost guaranteed to be a batsh*t crazy speech on Tuesday night. Here with more on what’s coming is Barclays and Goldman.
Volatility expectations for Tax Reform and ACA Themes. In our view, tax reform and ACA replacement are likely to be two of the most important themes in the next week as the President begins to lay out legislative priorities for Congress. We analyze the volatility of various groups of stocks to track these themes.
Tax reform: Investor nervousness has increased on high-tax stocks. Lowering the statutory corporate tax rate would primarily benefit companies with the highest effective tax rates. We acknowledge there are many other important factors in the tax current reform discussions such as destination based tax, interest deductibility and capex expensing; we use tax rate as a proxy for the potential benefits of tax reform.
Investor expectations for near-term tax reform may be low. We find that high-tax-rate companies have underperformed low-tax-rate companies by 2% over the past month and implied volatility on high tax names has increased relative to the low-tax-rate names (Exhibits 2 & 3). At a minimum, this suggests investors are not pricing a high premium for stocks that are likely to benefit from a lower corporate tax rate. Below, we show recent performance and implied volatility of high and low tax baskets created by our Portfolio Strategy team (sector-neutral baskets of the top and bottom 50 S&P 500 stocks by tax rate).
ACA Replacement: Healthcare stocks have rallied, but have low implied volatility. We identify seven stocks that are most exposed to ACA replacement due to the high percentage of revenue generated by the government. In Exhibits 4 & 5, we show that these stocks have rallied 15% since November 1, 2016, vs. the SPX up 11%. Much of the outperformance has come in the past couple weeks.
Investors do not expect big moves in the near term. The average 1-month implied volatility of these names has continued to decline over the past four months, suggesting that investors have either become more comfortable that the changes to the ACA will be modest or that these changes are not likely to come in the near term. We believe the next two weeks will give investors more visibility on the outlook for the ACA, driving higher volatility than is priced in. We see buying volatility on the names in this basket as attractive.
Next week’s State of the Union address should provide clarity on whether the US administration’s lack of detail on potential changes to trade and fiscal policies is a reflection of changing policy priorities.
US: distraction or policy choice? The US administration appears to be in no hurry to introduce tariffs or other restrictive trade policies on China or Mexico; together, these countries account for about 30% of US imports. Likewise, on the other major policy items – the government’s public investment programme and tax reform – specificity is lacking. While there have been some hints about the type of corporate income tax reform that the administration might deliver – a broadening of the base and cuts to the tax rates – markets are still waiting for the 2017 key draft fiscal budget. Markets will be attentively watching next week’s State of the Union address (28 Feb). We think that the presentation to Congress will be a good opportunity for the President to more clearly flesh out his policy priorities and goals, especially on trade, taxes, and public investment.
We believe that the policy focus needs to move away from immigration and health care toward fiscal policies if the administration wants to deliver on tax and spending policies that could boost economic activity in the current calendar year. Absent any re-prioritisation of policy in the very near term, we believe investors should re-orient their view on tax reform to 2018. Delays in a possible fiscal boost would make the 2017 government’s growth target of c. 3% challenging (Barclays forecast: 2.5%). For now, our policy baseline remains a combination of anti-trade policies in the form of tariffs against Mexico and China and expansionary fiscal policy that provides a boost to economic activity later this year, but we acknowledge that the probability of our baseline materialising has fallen substantially in recent weeks.
Oh, and in case this wasn’t already going to be “circus enough”, consider the following from Politico:
House Democrats are seizing on President Donald Trump’s first major speech to Congress Tuesday as an opportunity to troll the new president in prime time.
Many of the same Democrats who boycotted Trump’s inauguration are choosing not to skip his first address to Congress as president, instead opting to bring guests directly affected by the administration’s controversial policies on immigration and refugees and Republican attempts to repeal Obamacare.
“It’s my hope that gallery is going to look like America,” said Rep. Jim Langevin (D-R.I.), who is leading an effort to have his colleagues bring diverse guests Tuesday and will be joined by Rhode Island Dr. Ehsun Mirza, a Muslim-American born in Pakistan. “It’s another reminder to the president that he’s not the arbiter of patriotism.”
The effort is designed to put a human face on Trump’s immigration and refugee policies — and perhaps steal a bit of the spotlight from the president’s big speech. Though it’s unlikely to resonate much beyond Tuesday night, members said doing something is better than nothing.