The Next 100 Days and Beyond

If the financial markets are discounting mechanisms for future results, why is so much attention paid by the media, the pundits and the markets themselves to Trump’s first 100 days in office? Isn’t that looking in the rear-view mirror?

Trump may have gone into office as a bull in a china shop expecting his agenda “To Make America Great Again” and “America First” to be on its way to passage within his first 100 days in office. But, clearly that has not happened for a number of reasons starting with Trump and his advisors rushing the process and not gathering the needed support from all impacted groups including the American public.

It does not help that DC is dysfunctional as there are battles not only with the Democrats but also within his own party. He needs to gather ground swell support behind his agenda to pressure Congress to move forward. Trump and his team have learned invaluable lessons from these failures, which will benefit them over the rest of his term, which is not dissimilar from other Presidents. And there always can be more executive orders.

Trump is the most pro-business and pro-growth President that we have had in a very long time and the investment ramifications for the next 100 days and beyond are clear. He no longer appears to be an isolationist nor should we fear trade wars. He appears to have had a mindset change regarding China, which will benefit us promoting “fair” trade and also dealing with North Korea.

What should Trump do now? He should go for small changes that yield big impact like lowering corporate taxes where there is little disagreement between and amongst the parties. A victory would improve his stature with the American public, boost the domestic economy, create jobs and raise income levels.

Afterwards, he should introduce his trillion-dollar infrastructure program, as there should be little resistance there too. Two wins! All the while, he should continue reducing onerous regulations while continuing to support fair and free trade as well as energy independence. Tillerson and Mattis continue to mold his foreign policy and national defense. Ross is doing a fine job, too, on trade. No complaints here!

Trump has shifted from the far right toward the center right on virtually every issue. It is clear that Bannon and Priebus who supported extreme views, have lost his ear while Cohn, Mnuchin, Kushner and Ivanka have gained stature and influence. Let’s see what happens with the Paris accord as a test.

We applaud these changes as this country works best governed from the center with a conservative bias.

While the first 100 days was much ado about nothing regarding actions to stimulate the domestic economy, it really was significant as Trump set the tone for the foreseeable future. We are seeing his negotiating style–starting with extreme views but willing to accept less to get movement. Just look at what he is now willing to accept to get a continuing budget resolution: no wall.

Despite the surge in business and consumer confidence after the election, we were not surprised that U.S. growth slowed to less than a 1% gain in the first quarter. How many times have we said over the last two years that our economy acts as an accordion with one strong quarter followed by one weak one and so on and so forth. Weakness was evident in consumer spending (mostly cars and lower utility bills as it was a warm winter), government spending down 1.7% and inventories were reduced after a strong build in the fourth quarter.  Strength was seen in residential and non-residential construction and net exports.

The most important statistic reported last week was that total compensation, which includes wages and benefits, increased 2.4% in the quarter over the past year. Growth in total employment of well over two million over the last year coupled with higher wages and benefits is a great recipe for acceleration in consumer spending this spring.  Clearly we are set for a big rebound in the second quarter but it will be only become sustainable at higher growth levels, say 3%, upon passage of a good part of Trump’s agenda “To Make America Great Again” which we do expect in the second half of the year. Look through that windshield.

If the U.S. economy slowed so much in the first quarter, then you must ask why corporate earnings grew the most in 7 years, nearly 11%. The answer is a combination of growth overseas being surprisingly strong; volume and pricing improving for the first time in many years; and costs being held down after many years of restructuring. Well over 75% of companies reporting so far have equaled or beaten prior estimates and maintained an optimistic view of the future as order books with better pricing had meaningful sequential gains over the prior quarter. What happens if you add a corporate tax cut, repatriation of over a $1.7 trillion in foreign cash at a preferential rate, fair trade and a huge infrastructure program to boot? Even if the corporate rate is reduced to 20% from a normalized rate of 28% today, corporate profits are boosted by 11% automatically. While everyone is aware of this potentially occurring, none of this is factored in the numbers/markets until passage.

The bottom line is that the stock market is undervalued today at this level of earnings coupled with these low interest rates. The ten-year treasury is less than 2.3%. But what if I can buy stocks undervalued on today’s numbers with the potential of a huge boost from Trump’s agenda?  Let me give you one example of a stock that I mentioned last week and do own, Nucor Steel. The company is earnings at a $5.00-per-share rate for this year compared to $2.52 per share in 2016 with a 35% federal income tax rate. Ask yourself what happens if there is a surge in capital spending including for the infrastructure plus federal income taxes are lowered to say 20%. Nucor’s base earnings swells to well over $7.00 per share with free cash generation of approximately $5.50 per share. This company has raised its dividend for 38 consecutive years and has routinely paid large extra dividends when over capitalized. Not a bad investment today at $60 per share.

Each stock in our portfolio has many ways to win–each with special circumstances. I don’t count on the market for my performance as it is all alpha driven. The one overriding trait is that each company in our portfolio has superior management with a great game plan to win in a globally competitive landscape with its employees/shareholders best interests in mind.

Did you see the action in U.S. Steel this week? Got killed as earnings disappointed because the company underspent over the last few years so plant downtime and maintenance went through the roof. The company lost money in the same quarter that Nucor’s earnings hit all time highs.

Let’s wrap this up.

Trump’s agenda is clearly pro-growth and pro-business. While nothing was passed nor been formally introduced over his first hundred days, he and his team learned invaluable lessons on how to proceed. It is clear that his mindset has moved from the far right to the center right and his actions show that he is willing to work with our foreign partners to enhance peace and prosperity for all.

Reflation really is a global phenomenon as witnessed by acceleration in growth in Europe, China, Japan, and the emerging markets in the first quarter.  I fully expect the U.S. to kick in with acceleration in growth in the second quarter followed up by passage of many parts of Trump’s “Make America Great Again” agenda in the fall that will benefit 2018 and 2019.

The big surprise has been the strength in corporate profits not only here but abroad too. U.S. corporations stand to benefit most from Trump’s agenda, which no one has factored in to their estimates. If stocks are undervalued on today’s numbers as we assume, then what happens after passage of a corporate tax cut and a huge infrastructure program? A successful investor anticipates change, both positive and negative, and positions his portfolio accordingly.

Activists continue to play a major role in today’s stock market. Corporate managements and boards must always be looking for ways to close the gap between the intrinsic value of its company and its stock price or they invite an activist to enter and force the issue. If an activist can come in and force Honeywell, one of the best run companies in the world with superior stock performance over 10 years, to consider spinning off a division to create even more value then no company is immune from an activist. All of this is good for stock prices. And yes, we have owned and still own HON as one of our core holdings.

Expect major changes in Trump’s tax program. He will take more away from the wealthy to satisfy the Democrats and lower the expected future deficit that his plan would have cost even with dynamic scoring. The key is for him to pass corporate tax reform, an infrastructure program, free and fair trade and less regulations opening America to become great again. Then he can repeal/replace Obamacare and do individual tax reform.

Corporations are doing much better than anticipated with further growth ahead even before Trump’s pro-growth, pro-business agenda becomes reality. I fully expect that the benefits of his agenda will become reality later this year benefitting 2018 and 2019. If I am not paying for any of it today, the upside tomorrow is huge. Patience will be needed but our best days are ahead.

Remember to review all the facts; step back, pause, reflect and consider mindset shifts; look at your asset composition with risk controls; do in-independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

Leave a Reply

Your email address will not be published. Required fields are marked *