In his much anticipated address to Congress that was widely described as “presidential” avoiding attacks on the media and Democrat opponents, even if once again thin on detail, President Donald Trump reaffirmed his pledge on infrastructure, defense spending and tax overhaul, in broad brush strokes, and judging by the surging futures and US Dollar this morning, investors are giving him the benefit of the doubt for now.

Among the more notable economic highlight, Trump flagged plans for $1 trillion in infrastructure investment, and repeated earlier comments on trade and corporate tax reform without giving details. After the speech, the dollar extended gains as investors refocus on comments by Fed officials, which have spurred market expectations for a possible interest rate increase as soon as this month with March rate hike odds soaring yesterday.

Before we breakdown Wall Street’s take of Trump’s speech, here is a list of the 12 key things that mattered in Trump’s speech courtesy of Axios:

A rundown of what to note from Trump’s first address to a joint session of Congress.

1. Tone: The speech was, by some distance, his most “presidential” since running for the office. He was totally on message, controlled, uncaffeinated, un-Trumpian.
2. Breaking the ice: Trump began his speech with riffs on Black History, civil rights, and a condemnation of anti-Semitic violence. He received standing ovations.
3. Head fake on immigration: As we reported, there was no way Trump was going to have a conversion to Jeb Bush-style immigration reform. He spent much of the speech highlighting the crimes committed by immigrants in the country illegally, and he gave no concessions on immigration
4. Declined to endorse the border adjustment tax: “We must create a level playing field for American companies and workers. Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them almost nothing.”
5. More detail on healthcare: Trump gave Speaker Paul Ryan a big win by listing some components of the House GOP plan — and, as we forecast, the big one was tax credits. See David Nather’s analysis.
6. Says his budget will increase funding for veterans. A well-received line: “Our veterans have delivered for this Nation –- and now we must deliver for them.”
7. Crucial language on infrastructure: “To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States — financed through both public and private capital –- creating millions of new jobs.” The key phrase — “that produces” — coupled with the mention of private capital — means the Bernie Sanders dream of $1 trillion in new government spending remains a fantasy.
   Sought to tie the African-American experience to nationalism: “We’ve financed and built one global project after another, but ignored the fates of our children in the inner cities of Chicago, Baltimore, Detroit — and so many other places throughout our land.”
8. Promises: Listed pledges made and kept. He gave plenty of applause lines for (at least some) Democrats, including withdrawal from the Trans-Pacific Partnership trade deal and his request that “new American pipelines be made with American steel.”
9. “Radical Islamic Terrorism”: Trump is still using the phrase, despite the reported disapproval of his new national security advisor.
10. NATO: Trump made a happy man of Defense Secretary Mattis and the rest of the foreign policy establishment, which has worried about his previous comments that NATO is “obsolete.” Tonight, Trump said: “We strongly support NATO, an alliance forged through the bonds of two World Wars that dethroned fascism, and a Cold War that defeated communism. But our partners must meet their financial obligations.”
11. A emotional moment — and the longest applause of the night: “We are blessed to be joined tonight by Carryn Owens, the widow of a U.S. Navy Special Operator, Senior Chief William “Ryan” Owens. Ryan died as he lived: a warrior, and a hero –- battling against terrorism and securing our Nation.”

And here are select excerpts from Wall Street analysts giving their first impressions of the Trump address:

TD Securities (Priya Misra)

• Speech was risk positive and reiterated pro-growth policy
• Market has given administration benefit of doubt and could continue for a little longer
• Equities may look “vulnerable” if markets don’t get details and progress on tax reform

Matsui Securities (Tomoichiro Kubota)

• Drug prices comment negative, though not particularly surprising
• Investors may switch even more to equities from bonds if Trump’s policies are put into practice

BDO Unibank (Jonathan Ravelas)

• Speech “very general, disappointing investors looking for specifics”
• Uncertainty continues as potential reforms are still work in progress
• U.S. and global markets are in limbo and will stay in consolidation in short term, given lack of reform details
• Next focus will be Fed

Rivkin Securities (William O’Loughlin)

• Trump’s speech was “enough to keep the optimism alive”
• Investors are now “just expecting that sometime in the near future he will give specifics”

Societe Generale (Kyosuke Suzuki, head of FX & money-market sales)

• Positions largely squared ahead of this event and in absence of any negative comments from Trump, USD is underpinned for now by expectations for a Fed rate hike this month
• With timeline for tax and budget already known, and markets having little expectations for any details to come out of Trump’s speech, focus is turning to a slew of monetary, budget and currency events in mid-March

Scotiabank (Qi Gao, FX strategist )

• “Dollar retreated somewhat during Trump’s speech, partly due to profit-taking. His speech hasn’t spurred another wave of Trumpflation trade. He repeated what he said before. We are awaiting Yellen’s speech due at 2am HKT on Saturday.”

National Australia Bank (Julian Wee, senior market strategist)

• Speech contains little that’s new and “what might be more pertinent for EM Asian FX is the presence of an overt protectionist tone, which would be supportive of USD/Asia”
• Still, the lack of details on many of his plans and how they will be funded will dominate market sentiment
• “Chances are this delicate balance between the two factors could remain for the near future given almost no mention has been made of how all this spending will be funded, leading to the USD/Asia remaining relatively directionless”

Mizuho Bank (Vishnu Varathan, economist)

• Emphasis on immigration, with skew toward skilled immigration, suggests wage pressures will be reinforced
• “All else being equal, this should be bearish for bonds and bullish for the dollar. Yet the ‘fair trade’ stance could suggest that too much dollar strength will face criticisms so there’s a rather twitchy path for dollar bulls”
• Dollar upside will be susceptible to spurts of reversals; long dollar bets will be fraught with fears of jawboning and EM currencies could be knocked back for now
• Cost-reduction emphasis also sets up yields and the dollar for two-way swings

Oanda Corp (Jeffrey Halley)

• Speech that was high on rhetoric and low on detail has been mostly built into the USD price already and bulls may be slightly disappointed
• “I would expect a ‘no news is good news response’ in EMFX today with most regionals to stay gently bid against the USD. Key now will be Yellen’s speech Friday and if hawkish, will see the March FOMC meeting unexpectedly ‘live’ ”

Yesterday we noted that GM launched an aggressive incentive program in the month of February to clear out some of its pickup truck inventory.  In fact, incentives on the company’s Silverado were up 56% YoY to $6,996, while discounts on the Sierra were up 82% to $5,315 (see “GM Pickup Incentives Surge Over 80% As Auto Bubble Continues To Show Signs Of An Imminent Bust“).

But apparently GM isn’t the only auto OEM who may have had to splurge on incentive spending in February to clear out inventory piling up on dealer lots.  Inventory days across the industry are up massively YoY and stood at 85 days at the beginning of February, up 22 days from January 1st and up 8 days compared to the same time last year.  As one Honda dealer told Bloomberg, the inventory pile up at his dealership has become so excessive that for the first time in 37 years of business he was forced to rent an overflow lot to park unsold cars in February.

For the first time in his 37 years working at New Jersey car dealerships, Larry Kull had to rent extra space to store unsold new Honda vehicles — one of the latest signs that the record U.S. auto market is cooling.

Across dealer lots in America, inventory is piling up as automakers produce more cars than are being bought. Dealers had about 85 days worth of cars and trucks on hand at the beginning of February — about 22 days more than at the beginning of 2017 and eight days more than a year earlier, according to Automotive News Data Center.

“The sales are good, I just have more product on the ground than I’ve had before,” said Kull, who has about 60 days of passenger cars including Civic compacts and Accord sedans stocked at an office parking lot down the road from his Honda store in Marlton, New Jersey. He prefers to have just 45 days worth of cars on hand.

Meanwhile, this news comes just as wall street prepares to digest new car sales data tomorrow.  Overall sales for February are expected to be down slightly while GM is expected to perform ‘best’  among the D3 on their massive incentive spending (though we’re not sure it’s much of a victory if you’re giving the cars way).

And the import brands are expected to have mixed results as well with VW benefiting from an easy YoY comp associated with their emissions scandal that effectively halted sales a year ago.

As we noted yesterday, there are only two ways to deal with the rising inventory conundrum: i) cut production or ii) splurge on incentives to sell more cars.  Unfortunately, financing terms for autos are about as loose as they can get and interest rates are now headed in the wrong direction so selling more cars the old fashioned way seems unlikely.

Production cutbacks also have already begun. GM and Fiat Chrysler have eliminated shifts, laid off employees or scheduled days off early this year at plants making slower selling models including the Chevrolet Cruze compacts, Chrysler Pacifica minivans and Buick Lacrosse sedans.

While heavy inventory is a signal of potential pressure on automakers’ profits, it also boosts costs for dealers, which pay interest on inventory as well as any extra expense to store vehicles.

“No one likes to cut production or dial up incentives, and we’re seeing a bit of both,” Thomas King, an analyst with J.D. Power, said by phone. “We’ve got a lot of cars on the ground when the market is moving away from cars.”

Meanwhile, as one dealer points out, part of the inventory problem is a heavy mix towards cars when buyers are now looking to take advantage of low fuel prices and trade up to an SUV.

Raj Murjani, a sales manager at a Lexus dealership in Queens, said he’s selling about 40 or 50 fewer vehicles than usual this month. He sees the gap in popularity between SUVs and sedans continuing to widen, as low gasoline prices encourage consumers to switch to bigger vehicles.

“If it’s a person who’s been in a sedan and they got just the slightest taste of an SUV, they don’t ever want to go back,” he said. “They think going back into a sedan is a downgrade.”

Of course, we’re sure each of these buyers has done extensive modeling on the long-term equilibrium price for crude oil…

In the first bit of good news to surface for the Dallas Police and Fire Pension (DPFP) in quite some time, the Dallas News is reporting the pension board has “won” a $2 million settlement against their former real estate fund advisor, CDK Realty Advisors.  Of course, the settlement falls slightly short of the $320mm in losses allegedly caused by CDK, but a win’s a win, right?

Meanwhile, city officials who complain they had little control over the fund’s activities but are now being forced to find a way to bail it out, had mixed reactions to the settlement.

“We need every dime possible coming into the fund, especially from those that played a role in its downfall,” Mayor Mike Rawlings said in a statement. “This settlement appears to be a small step in the right direction, though I still hope to see more transparency and details about the scope of the alleged wrongdoing by CDK.”

Lee Kleinman, a City Council member and former member of the fund’s board, said he was “shocked CDK got off the hook for a mere $2 million considering the amount of fees they bilked out of the system over the past decade.”

But others highlighted the importance of getting CDK’s cooperation. “We could have hammered these guys a lot harder perhaps” by taking the matter to trial, said Philip Kingston, another city councilman who serves on the fund’s board. “But getting their cooperation to chase down other potential sources of recovery I think was really important.”

For those who missed it, here is some background on how CDK Realty same to find themselves to be the target of an FBI raid in April 2016 related to their management of real estate investments on behalf of the DPFP…turns out they may have had some issues marking their real estate portfolio to market (see “Dallas Cops’ Pension Fund Nears Insolvency In Wake Of Shady Real Estate Deals, FBI Raid“).

To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP’s administrator for a couple of decades right up until he was forced out in June 2014.  Starting in 2005, Tettamant oversaw a plan to “diversify” the pension into “hard assets” and away from the “risky” stock market…because there’s no risk if you don’t have to mark your book every day.  By the time the “diversification” was complete, Tettamant had invested half of the DPFP’s assets in, effectively, the housing bubble.  Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa. 

Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets “performed” remarkably well throughout the “great recession.”  But as it turns out, Tettamant’s “performance” was only as good as the illiquidity of his investments.  We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have “discretion” over how they’re valued.

In 2015, after Tettamant’s ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund’s prior real estate manager, CDK Realty Advisors.  Turns out the new managers were not “comfortable” with CDK’s asset valuations and the mark downs started.  According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm.  Per the DPFP 2015 Annual Report:

In August 2014, the Board initiated a real estate portfolio reallocation process with goals of more broadly diversifying the investment manager base and adding third party fiduciary management of separate account and direct investment real estate assets where an investment manager was previously not in place. The reallocation process resulted in the transfer of approximately $600 million in DPFP real estate investments to four new investment managers during 2015. The newly appointed managers conducted detailed asset-level reviews of their takeover portfolios and reported their findings and strategic recommendations to the Board over the course of 2015 and into 2016. A significant portion of the real estate losses in 2015 were a direct result of the new managers’ evaluations of the assets.

Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension’s former investment manager, CDK Realty Advisors.  There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book.  At it’s peak, CDK managed $750mm if assets for the DPFP.

And for those curious what an actual FBI raid looks like…here you go…though it’s slightly less exciting than you might think.

Of course, as you might expect, CDK has denied any wrong doing…

A lawyer for CDK stressed Monday that the settlement is not an “admission of any wrongdoing or liability for any claims.”

“CDK Realty Advisors was one of several commercial real estate managers hired by the Pension System,” Steven A. Schneider said in a statement. “CDK was not involved in or responsible for the design and construction” of the controversial  Museum Tower in the city’s Arts District. He said the firm was also not involved in the fund’s high-profile investments in luxury homes in Hawaii and a resort and vineyard in Napa County, Calif.

The firm has contended in a court filing that the real-estate investments it recommended were profitable for the fund.

…and it’s previous managers were able to quickly launch a new firm called “Harvest Interests” which is actively pitching the Lubbock Fire Pension Fund for new capital.

CDK’s principals started a new firm last year called Harvest Interests. Cooley spoke to the Lubbock Fire Pension Fund in November about moving forward with real estate investments,according to meeting minutes.

Cooley said “they had settled with Dallas Police and Fire, but the paperwork was still being worked through,” according to the minutes. Cooley told the Lubbock fund that CDK will become defunct at some point in the future after investments it manages are sold, the minutes say.

What more is there to say really?

While largely considered among the less relevant of Fed indicators, once one gets beyond the traditional “modest to moderate expansion pace” summary of the economy, the Fed’s Beige Book release does in fact contain informative, and oftentimes useful anecdotes about the state of the economy as disclosed to the Federal Reserve. And since the latest, February, beige book comes at a time of major economic overhaul, it contained several particularly notable observations.

At the headline level, the Beige Book confirmed what is largely known, i.e., that the economy continues to expand at “a modest to moderate pace from early January through mid-February.” Some other observations:

• Consumer spending expanded modestly since the last report.
• Retail sales increased at a subdued pace across most of the nation, with a number of Districts noting an ongoing shift from in-store to internet purchasing.
• Auto sales varied widely, but were said to be up in most Districts.
• Tourism activity was mixed but mostly stronger.
• Manufacturing activity accelerated somewhat, with most Districts characterizing the pace of growth as moderate.
• The energy sector showed modest growth in early 2017, and transportation activity was steady to somewhat higher across the nation.
• Home construction and sales continued to expand modestly in most Districts, while residential rental markets were mixed.
• Home prices were steady to up modestly in most Districts, and a number of Districts noted low inventories of existing homes.
• Commercial real estate construction grew modestly, and sales and leasing activity grew moderately. Lending activity was steady to somewhat higher.

And yet, at the very end of the economic activity summary was this somewhat surprising note: “Businesses were generally optimistic about the near-term outlook but to a somewhat lesser degree than in the prior report.” So was this the beginning of the end of the hope trade? Perhaps, although following today’s blow off top in the S&P, the trade may have reset itself again.

On the topic of employment and wages, the Beige Book had the following observations:

• Labor markets remained tight in early 2017, with some Districts noting widening labor shortages
• A number of Districts noted that staffing firms were seeing brisk business for this time of year, and one noted more conversions from temporary to permanent workers
• A number of Districts noted that shortages of skilled workers—particularly engineers and IT workers—were driving up their wages, and there were also some reports of labor shortages in the leisure and hospitality, construction and manufacturing industries
• Employment grew moderately in most of the nation, though three Districts characterized growth as modest and two reported that it was little changed.

As for pricing pressures, the Fed said that these were little changed from the prior report, and added that “most Districts reported that selling prices were up modestly or moderately, though four indicated that prices had largely leveled off. Input prices were up modestly, on balance.”

It also reported that energy prices and farm prices were mixed but mostly steady, on balance, while prices for construction materials climbed in a number of Districts. Overall, businesses said they expected both input prices and selling prices to increase modestly in the months ahead. Considering the surge in headline inflation on the back of surging energy prices in recent weeks, it is not exactly clear if the Fed was looking at the same data as us.

That said, what was most interesting in the Beige Book was not the comprehensive summary but what the various districts reported. It was here that the Fed revealed anecdotes about the impact of the stronger dollar, concerns about the repeal of Obamacare, Atlantic City casino revenues, retailer fears about online competition, shipping container volumes, the impact of immigration policy on labor supply and even a sharp drop in Broadway theater attendance.

The key observations:

• Several Districts indicated concern about the affects of the strong dollar.

• Boston: Some hotel and restaurant groups feel that the executive order limiting travel from certain countries may have adverse business effects as the United States may not be perceived as a welcoming country. One healthcare staffing firm, for example, lost a substantial number of listings a few weeks ago when one of its clients issued a hiring freeze in Boston, waiting to see what happens with Obamacare.
• New York: An agency in New York City reported brisk hiring from small to medium sized financial firms. Tourism activity has shown signs of continued softening, with Broadway theaters reporting sharp declines in attendance in January and especially February, and hotels generally reporting lower occupancy rates
• Philadelphia: Contacts at the Jersey Shore indicated that peak summer bookings are filling up earlier each year. Even casino revenues in Atlantic City have finally begun to register some year-over-year gains on a more consistent basis
• Cleveland: A data analytics firm reported that brick-and-mortar retailers generally are experiencing 1.5 percent to 3 percent price declines. One factor driving the declines is competition from their Internet counterparts
• Richmond: Port officials reported record strength in container volume since the previous Beige Book. At one port, volume was described as “off the charts,” and another had its best month ever for loaded containers
• Atlanta: Many commercial contractors indicated that the pace of nonresidential construction activity had increased from a year ago, with many reporting backlogs greater than one year
• Chicago: An auto dealer expressed concerns that standards were loosening further for sub-prime auto financing
• St. Louis: Contacts reported moderate wage growth since the previous report. On net, 63 percent of contacts reported wages were slightly higher or higher than a year ago
• Minneapolis: Casino-related revenues in Deadwood, S.D., suffered a significant decline — as much as 25 percent at some operators — leaving one industry spokesperson to comment that the drop was “alarming”
• Kansas City: The number of active oil and gas drilling rigs continued to increase modestly, primarily in Oklahoma and New Mexico
• Dallas: Energy contacts were unanimously negative in their expectations about the impact of the proposed border adjustment tax on their firms. One clothing retailer said sales in border cities and energy-related areas remained sluggish
• San Francisco: Contacts in the agriculture sector noted that proposed changes in immigration policy could limit labor supply, particularly during harvest season, and drive up wage costs

end

White House Prepares For Trade War, Warns US “Will Not Be Bound By WTO Decisions”

In the latest warning from the White House that it is set to unleash trade policy that will be in sharp conflict with generally accepted trade norms, most likely a reference to some form of Border Adjustment Tax, the Trump administration has warned that the U.S. isn’t and won’t bound by decisions made at the World Trade Organization, in outlining a new trade agenda that “promises to root out unfair practices by foreign countries” and to escalate what are already simmering trade conflicts.

According to a document obtained by Bloomberg News and titled “2017 Trade Policy Agenda”, the US plans to defend its “national sovereignty over trade policy,” the Office of the U.S. Trade Representative said in an annual document laying out the president’s trade agenda. The reason for the loophole: under the terms of its entry into the WTO, the U.S. didn’t abandon its trade rights. “Given this history, it is important to recall also that Congress had made clear that Americans are not directly subject to WTO decisions,” according to the trade office, which takes the lead in negotiating trade deals.

As Bloomberg adds the Trump administration’s skepticism toward the WTO, the Geneva-based body that referees trade disputes, signals a new willingness by the world’s biggest economy to pursue its interests – even if it means undermining the global order the U.S. has led since World War II.

“It reflects their belief that the global system isn’t serving U.S. interests and they’re going to do all they can to rewrite in favor of U.S. interests,” said Adam Taylor, a former senior Canadian trade official based in Ottawa. “The biggest worry is that you can’t have the rules that govern the global trading system being ignored by one party and expect the system to keep functioning.”
The Bloomberg report confirms what we reported several weeks ago when according to the FT, the EU and other US trading partners have begun preparing for a legal challenge to a US border tax proposal in a move that “could trigger the biggest case in World Trade Organization history.” The reason is that “the EU and other US trading partners are worried about the impact on their exports and have been deploying lawyers with a view to eventually challenging it before the global trade watchdog.”

However, if according to the Trump administration, such claims are unfounded as the US never agreed to be bound by them, it virtually guarantees significant complications when it comes to global trade relations as soon as more details of Trump’s protectionist trade policies emerge.

The overarching purpose of the administration’s trade policy will be to “expand trade in a way that is freer and fairer for all Americans,” according to the report. “Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and services industry exports,” it said.

These goals can be better met by focusing on bilateral negotiations than multilateral deals, the government said. Trump has withdrawn the U.S. from the Trans-Pacific Partnership, an agreement with 11 other nations. He has also said the U.S. plans to renegotiate the North American Free Trade Agreement with Mexico and Canada and level the playing field with China.
Additionally, the U.S. will work to break down unfair trade barriers in markets that block U.S. exports, while strictly enforcing U.S. trade laws to prevent the U.S. market from being “distorted by dumped and/or subsidized imports that harm domestic industries and workers,” the USTR report said. The U.S. will update existing trade deals as necessary to “reflect changing times and market conditions.”

It is such bilateral relations, however, that concern existing US trade partners who have carefully constructed pre-existing trade arrangements, and which the White House implicitly warns will be abrogated without fears of penalty or legal consequence.

The Trump administration will also resist efforts by other countries, or international bodies such as the WTO, to “advance interpretations that would weaken the rights and benefits” of the U.S. under its trade agreements, the government said.

In short: despite Trump’s “paliative” speech last night, at least when it comes to global commerce relations, trade wars are virtually assured.