Wall Street Sounds Alarm on Several Trump Trades

June 26, 2017   Stephen Taub

Deutsche Bank raises concerns over infrastructure trades, while UBS notes that investors no longer expect sweeping tax reform or a big uptick in GDP.

   
  U.S. President Donald Trump (photo credit: Andrew Harrer/Bloomberg)

So much for the so-called Trump trades.

Investors and Wall Street pros are growing increasingly skeptical that the kinds of policies that spurred a number of markets and specific investments following the election will materialize anytime soon.

Expectations—or rather hopes—for rip-roaring growth thanks to lower taxes and higher spending set in motion a variety of trades that all reflected the same investor euphoria right after the November elections. In fact, this excitement pervaded recent hedge fund conferences such as SALT in May.

Stocks surged, the dollar strengthened, interest rates rose (and bond prices thus fell), the notion being that faster growth would lead the Federal Reserve to raise interest rates a number of times, which would in turn send investors flocking to the dollar.

However, a funny thing happened on the way to making American investors’ portfolios greater—investors started to become more skeptical that some or any of these scenarios will play out anytime soon.

While stock prices continue to mostly climb, a subsequent reversal of conviction in a number of other markets has hurt hedge fund managers deploying a variety of other strategies.

Rates reversed direction and recently hit their low last seen on November 10. Since early January the dollar has fallen back and has traded in a very narrow range for some time now.

These trade reversals partly explain the difficult year experienced by macro hedge funds and commodity trading advisors (CTAs).

Now analysts are questioning other so-called Trump trades.

On Thursday, for example, Deutsche Bank downgraded the shares of Caterpillar from buy to hold and cut its price target from $121 to $106, in part because it has grown more skeptical over whether President Trump will get an infrastructure plan going anytime soon. "We have no visibility into if/when an infrastructure stimulus bill might be passed in the U.S., which would drive increased project activity," it tells clients in a new 22-page report. "Without an infrastructure stimulus, we see little prospects for continued [North America non-residential] construction growth."

Caterpillar is one of the largest makers of constructions and mining equipment, diesel engines and industrial gas turbines, among other heavy type of equipment.

Caterpillar and other stocks of companies that are likely beneficiaries of a surge in infrastructure spending have surged since the election. This leaves many of these stocks vulnerable to a sharp selloff if more investors share Deutsche Bank’s sentiment.

For example, CAT has jumped nearly 30 percent since November 2, several days before the election. The stock rose slightly on Friday despite the downgrade, closing around $104.

Another company whose stock has surged for similar reasons is Martin Marietta Materials, which is up 21 percent since early November and 34 percent since its October 11 low. Its stock was also up on Friday, closing above $227, which is down 5 percent or so from its high.

As we recently noted, infrastructure was one among a few major themes highlighted by veteran hedge fund manager Morris Mark of Mark Asset Management, who spoke at the recent SALT conference. He had acknowledged that Caterpillar’s stock was not cheap, but said Martin Marietta Materials, a supplier of construction aggregates and heavy building materials would do well with or without an infrastructure bill, which he insisted was not priced into the stock.

Another Trump trade that could be vulnerable is credit in general and high yield bonds specifically.

In a report published June 21, UBS stresses that investors’ mood has changed from earlier this year, when there were expectations of sweeping tax reform and a significant uptick in U.S. GDP.

"Fast forward to today and investors are downplaying the likelihood of fiscal stimulus," it adds. "Global credit impulses have fallen sharply. Consumer delinquencies are rising, raising doubts about the health of U.S. consumer balance sheets. And further declines in oil are leading investors to question the state of global demand weakness, not only U.S. shale oversupply."

Despite these developments, UBS points out that credit is holding in, "admittedly better than we anticipated, given an uptick in macro data disappointments."

It explains investors believe growth is strong enough to justify current credit spreads.

However, UBS tells clients that the U.S. high-yield market continues to price-in too much good news. "Put simply, U.S. high-yield spreads relative to U.S. investment-grade spreads imply a stable mid-cycle environment, akin to 2004-2006 or 2013-2014," the investment bank elaborates. However, it says the credit signals it tracks "remain moderately weaker than those in prior periods," suggesting a weakening economy.

It recommends investors rotate into longer-dated investment grade debt.

In fact, one of two ways it believes it would be wrong is if there is an "increase in U.S. tax reform odds."

So much for blindly following Trump-onomics.



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