A Wall Street Legend Agrees With Sjug
Manufacturing is booming?! Not so fast... The real story on this week's big economic news... Tax reform is back on the table... The 'Trump Trade' returns... A Wall Street legend agrees with Sjug...
The U.S. manufacturing sector is booming again...
At least, that's what the latest data from the Institute for Supply Management ("ISM") suggests.
The ISM's Purchasing Managers Index (or "PMI") – a broad survey of manufacturing activity – rose to 60.8 in September. Readings above 50 indicate expansion... And this reading represents the fastest pace of expansion in more than 13 years, since May 2004.
While manufacturing only accounts for about 12% of economic activity today, this measure is considered an important indicator for the greater economy. After all, if America's factories are humming along, it's a sign that consumers are healthy, too.
Unfortunately, the reality may not be as rosy as the headlines suggest...
You see, a similar measure from data-analytics firm IHS Markit showed the sector expanded at a far slower pace. Its U.S. Manufacturing PMI rose only slightly to 53.1 last month.
What accounts for the big divergence? It likely has something to do with the recent hurricanes, and how they affected one particular component of the ISM's PMI.
Most components in this index rose only modestly last month. However, the ISM's supplier deliveries subindex surged more than seven points to 64.4, a 13-year high.
This component tracks the timing of supplier deliveries. A higher reading indicates it took suppliers longer to deliver on average. In general, a longer delivery time is a bullish sign... It suggests suppliers can't keep up with manufacturer demand. But that likely wasn't the case this time. As Bloomberg reported...
The strength of the advances in the ISM's gauges partly reflects impacts from hurricanes Harvey and Irma. Harvey forced the shutdowns of Houston-area refineries and chemical plants...
Timothy Fiore, the ISM survey committee chairman, said on a conference call that the most direct impact from the storms was in the supplier deliveries index, indicating longer lead times; that gauge factors into the overall index.
In other words, a significant part of the ISM's big increase wasn't real. Despite what the headlines suggested, there was no boom. The U.S. economy continues to grind along.
In other economic news, President Trump finally released his tax plan last week...
The proposal calls for dropping the top individual tax rate from 39.6% to 35%, and suggests eliminating personal exemptions in favor of a larger standard deduction. It would cut the corporate tax rate from 35% to 20%. And it offers a one-time tax break to incentivize companies to bring overseas profits back to the U.S.
The plan still leaves many questions unanswered. And it remains to be seen if it will make it through the Republican-led Congress. But the market doesn't seem to care. The "Trump Trade" is back on. As the Wall Street Journal noted on Friday...
In a throwback to the early days after President Donald Trump was elected, shares of U.S. banks and industrial companies are climbing and small-capitalization stocks are in record territory, while Treasury bonds and their stock-market proxies have fallen out of favor. The U.S. dollar, beaten down for much of 2017, is rebounding.
Underlying those trades are a combination of business fundamentals, economic data and policy expectations... While there is some skepticism that the Republicans' tax overhaul plan will pass, the fact that a proposal was put forth this week has tantalized investors with the prospect of improved earnings.
We do our best to avoid politics in the Digest...
We aren't fans of politicians of any stripe. But we do recognize that real tax reform could have important consequences.
It could stoke economic growth to levels we haven't seen in a decade or more. Significant restructuring of the tax code could potentially even delay the credit-default cycle Porter has warned about.
Naturally, the Trump Trade sectors should do well. Domestic small-cap companies – which face the heaviest tax burdens today – would be among the biggest beneficiaries. And banks and industrial companies could benefit from the higher rates and stronger economic growth that are likely to follow.
But it could be a boon for the market, too... According to a recent note from Goldman Sachs analysts, every percentage-point decrease in the corporate tax rate could boost the per-share earnings of the S&P 500 by a full dollar. If Trump can successfully lower this rate from 35% to 20% as proposed, today's expensive market could suddenly look more reasonably priced.
The largest firms also hold hundreds of billions of dollars overseas that might be returned to shareholders – through buybacks and dividends – should Trump's "repatriation tax holiday" become a reality.
Of course, this doesn't mean tax reform is required for the market to head even higher...
Stocks have soared this year despite little to no progress on any of Trump's policy proposals to date. And if our colleague Steve Sjuggerud is correct, they're likely to continue moving higher even if the latest proposal falls flat.
Steve believes we're beginning a "Melt Up" – an explosive final stage of the long bull market – that could push prices to incredible new highs before it ends.
He says the market's vital signs remain healthy, and most investors still aren't wildly bullish. Tax reform or not, Steve thinks the bull market still has further to run.
In fact, as he told us live on stage in Las Vegas last week, new data suggest the Melt Up could last even longer – potentially years longer – than he originally believed possible.
That's a bold call. But Steve is no longer alone...
'A favorable market for equities at least until 2019'...
Byron Wien now agrees.
If you're not familiar, Wien is vice chairman at famed private-equity firm Blackstone Group. He's a 50-year veteran of the markets and one of the most respected forecasters on Wall Street. From his latest market commentary...
In my conversations with institutional investors I find a surprising lack of optimism about the outlook for equities. The capitalization-weighted Standard & Poor's 500 was up over 11% year-to-date, excluding dividends, on September 18. Some would argue that only a few stocks are accounting for the rise, but the equal-weighted S&P 500 was up over 8% year-to-date as well.
Everyone is aware that the economic expansion and the bull market have continued for a long time. Equities bottomed in March of 2009 and the economy began to strengthen in June of that year, so we have been in a favorable period for investing for more than eight years. Cycles usually do not last this long. We all know it can't go on forever, but I believe we could continue on a positive course for both the economy and the market for several more years.
The principal reason for this conclusion is that the usual factors that warn of a bear market or recession are not evident... I would also be concerned if retail investors were euphoric about equities as they were in 1999 or 2007. They are generally optimistic, but not excessively so... Investors large and small are also leaning toward the defensive...
There is always much to worry about and the investment business requires money managers to weigh the variables and make a judgment. Based on my analysis, I think we will have a favorable environment for equities at least until 2019. I will, however, be watchful for changes in the conditions that brought me to that conclusion.
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As we mentioned yesterday, Richard has agreed to share some fascinating new research – which he presented to a standing-room-only audience at our Las Vegas conference last week – with all interested Stansberry Research subscribers.
If you'd like to know without a doubt when it's finally time to head for the exits, we urge you to join us for this FREE event.
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Brill comment: Sorry, Charles, we think you've misunderstood... Our discussion in yesterday's Digest centered on how to invest to profit from a new, potentially groundbreaking Alzheimer's drug, not how to obtain access to treatment.
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The only thing we can't share with Digest readers is a way to potentially make even more money than owning Biogen shares directly. This more speculative recommendation is for Stansberry Venture Technology subscribers only.
But none of this has anything to do with treatment availability. If (and when) this drug is approved by the U.S. Food and Drug Administration, it will become available to the public and will likely be covered by Medicare.
We hope that clears up the confusion.
October 4, 2017