Consumer Discretionary Stocks Will Benefit from New Tax Package

investors who demand more than the markets deliver. All investments contain risk and may lose value. Consult your investment professional before investing. Today is a great day to have Ira Jersey on the show. He is chief US interest rate Strategist for Bloomberg Intelligence and Ira, Before we get to what you're expecting for the year ahead, what we can expect lead tomorrow with the f O m C meeting minutes, I want to talk about the action that we're seeing

in the bond market today. We're seeing a pretty broad based sell off that seems to be stemming really from the European bond market. What do you make of this? How much should people read into this action? It's hard to always around holiday periods to read a lot into into things because UM, there's people either putting on positions or taking off positions that UM to be either risked properly for the year ahead. UM. I think it's real.

I mean it's real in terms of the idea that UM, you know, people do think that the UM that yields are going to be somewhat higher, that the tax UH plan is going to help inflation and growth a little bit, and and you know, at the same time, I think a lot of people were really worried that, you know, the stock market was going to tank, and and people going into year end wanted to be a little bit long rate risk just as a hedge to some other risk your assets. So UM supported, this isn't big surprise.

I think, you know, we do have some pretty important technical levels we're sitting right at for ten year yield, So so you know, a move up to past two fifty, for example, to two and a half percent would be uh potentially mean that we could see last year's highs up, but around two six I would you agree that this is being driven that today's sell off in US treasuries is being driven at least to some degree by what's

going on in Europe. We had an ECB member, Benoit cu Uh say overnight that he thinks that the ECB is going to stop buying. They're not gonna extend the bond purchase program yet again as they did in October. Yeah. I think that's a big part of it. I mean that that's been a risk hanging out there. The ECB

has been a risk hanging out there for a while. UM. Now, even after if you go back to last June, about six months ago, when Mario Draggy suggested that the bond bank program could come to an end, you saw a pretty substantial selloff in UH in treasuries. Now, I think one of the question is how sustainable will that sell off B You know, is this going to be a

taper tantrum. When DCB recently cut their purchases of of bond buying UM from UM down to about thirty billion euros a month UM, then you didn't see a huge reaction in the in the US bond market. I'd also note that that the move today is is in real terms. So what's happened is you look at real yield, so you look at the tips market, and you see how how yields and tips are selling off. It's not inflation expectations that have gone up a lot um. It's really

in real space. So that leads you to believe that it's either some form of de risking, whether it's because of the ECB or just um UH or or just portfolio positioning for the rest of the year. It's something other than the expectation that inflation is going to run out of control. AIRA help me understand this. If we're having a big sell off at the long end, we're down now one and seven thirty seconds for a yield

of two point eight percent. And then I also told you that there were demonstrations in the streets of Iran and that North Korea is looking as if it at least wants a dialogue with South Korea. Why aren't people buying? Yeah, well, I think having a dialogue in on the Korean peninsula is probably a positive development in terms of reducing geopolitical risk.

Well but wait, wait, wait, wait wait the same But the reason I mentioned that is because that's also being voiced in the context of the North Koreans trying to drive a wedge between South Korea and the United States. Yeah, that's that's fair. Um. You know, I think the treasury market in a lot of ways has been very technical recently, where um, you know, the reason why yields continued to be so low is because of large central bank balance sheets.

It's because the of the economic situation in the US. So I think what you need to change to see a large rally in in treasuries would be something like a risk off event. And um, so I think in many respects, UM, today's move is going to be more in line with the idea that the equity market is up you have, UM, even though there's there's uh, you know,

local and regional tensions in some places. To make that a globally systemic event and therefore big risk off event would take something much larger than what's going on, um in the world today. And I think that stuff in the Korean Peninsula. You know, there was some volatility when some of those headlines first came out, but quite frankly, I think a lot of investors are a little bit numb to the headlines coming out of the Korean Peninsula

at this point. Well, I wrote, would you count yourself among those who are simply also because you're recommending the people in the US go by Japanese bonds, which arguably could could be impacted. Well, not so so. I think it's more of an interesting uh, it's it's a very interesting phenomenon that has has been occurring in the post crisis period where you know, a lot of people show the difference in yields between the US and either Germany or Japan and just say, how could US yields be

so high? How could corporate bond yields for you know, for mid rated corporate bonds be lower than that of treasuries and other jurisdictions. But I think you have to put that into context of two things. Is one, what's the risk free rate within those individual jurisdictions and in

those currencies. And secondly, if you do all of the currency hedging that you need to do, and you and you assets swap back Japanese debt into US dollars, what you end up what you end up finding is that Japanese yields are actually higher after you do all the

currency hedging that you need to do. So, um, you know, it's not something that an individual investor can really take advantage of, but large institutional investors do these kinds of trades all the time, where they'll buy a Japanese government bond or Japanese TA bill and then hedge that back into dollars and actually make thirty fifty basis points more

than the comparable US instrument. And I think that that's something that gets missed a lot of times just looking at you know, the new Fields being at zero and U S Fields being a two and a half percent. Thanks very much, Ira Jersey, much appreciated chief US interest rates strategist for Bloomberg in intelligence. Right now, let us take a look at what we should be focusing on in Bruce Biddles joins US now his chief investment strategist at BAARED based in Sarasota, Florida, where it is a

lot warmer than it is here in New York City. Bruce, congratulations for picking the right place to be right now. Um, so I want to get your sense on what we can expect this year, and I want to start with your perception of what did you get most wrong? And then what are you most confident about coming into Yeah, well that's I think what we got most wrong was the uh was the strength of the rally. I mean,

we came into the year believing that UM. The change of administration's UM in November of two thousand and sixteen was bullish for the market because we had a business friendly administration coming into power, and we felt that that was going to be Bullishit influence on the markets all year, but we didn't expect the SMP five on it or

the data rally as much as they did. But certainly we had the direction correct, A right, if you had the direction correct, I wonder if you could just ask answer this question about the direction of the tax overhaul bill and what that'll do to stocks? Well, will we see increased buybacks, increased dividends, Will we see stocks move

higher because of this repatriation of money? I think the tax legislation that passed UM in late December is certainly going to help the economy and if that helps the account me as expected, UM is certainly going to produce stronger top line growth and that should lead to stronger profit growth. Now we expect profits to grow about twelve or thirteen percent in two thousand and eighteen. Now, historically, if profits rise eleven percent every year, the stock market

typically responds with a very strong upward bias. Now, the risk to that environment, or that the strategy would be if the economy didn't respond, is expected. But I believe you'll see a mixture when the money comes back to the US. You'll see some stock buy back, some increases in dividends, but you'll also see an increase in capital spending. And UM that that I believe is going to be a very bullish element for the market in two thousand and eighteen. So you think that the US stock markets

are going to do pretty well. Does that mean that you're pretty bearish on bonds. No, we're not really bearish bonds that we think interest rates are likely to go somewhat higher now. UM short race, of course are going up. But the yield on the bench bar tenure Treasury note finished the year about where it started. You'll think about

two point four percent. I think it can give up to about two point seven seven five percent, perhaps before the markets would be negatively impacted, maybe even three percent on the tenure. But I don't see the inflationary pressures building the way some folks do. Now. Yes, Um, the economy now has filled the output gap. That's something to watch closely and of course, we're very close to full employment, which should we should certainly start to see some wage games.

But I think this is the very early cycle in inflation, and I don't think it's going to rise to the levels that that could upset the bondom market or the stock market. We think inflation will probably be in the area of two point four percent in terms of CPI for two thousand and eighteen. Bruce bittals they are a way you can describe for us the wall of worry? What what is it and why? Maybe you don't believe it, but maybe you could describe why do people believe that

it is an effective analogy? Well, I think the wall of worry is certainly um something that helped the stock market not only last year but throughout the bullor cycle that began in two thousand and nine. I think the fact that the Feller Reserve Board was responsible for so much of the liquidity that was that was forced into the markets made people a little unsettled, and that and the markets rallying every time a new quee program was

announced back in two thousand nine. Back in the eleven peg and twelve, I think folks were worried that wants to fit. Um pulled back from that policy that the markets would will lose that support and collapse. But certainly that has not been the case now. I think the fact that Trump in the election in two thousand and

sixth Team was another element. UM. A lot of folks felt that he would be disruptive and the markets would do poorly, and he asked the rhetoric out of Washington all year in two thousand and sevent Team was argumentative, but I think that really helped the market. It kept people UH from becoming um excessively optimistic. We don't see any sign of you four you really, except if you look at bitcoins for instance. But in the stock market,

we don't see it. Now. There's optimism, there's no question, but we don't see the type of optimism we saw back in two thousand for instance. One everyone was bullish, including the FED, on the fact that the business cycle would probably be repealed because of the new technology. That's that's not the case here. Um. Yes, there's some excitement, but if you if you go through the financial journals or the weekend, like I did, very very hard to

find a real bullish case expressed by anyone. Bruce I want to go through some of the sector calls that you had in your latest note. I thought it was interesting. One of the biggest upgrades was consumer discretionary companies that you had within the US stock universe, and that's you know, including home building and footwear, Caristinos in gaming, and this is up from where you had placed this sector as

far as performance heading into ten. Why do you think the consumers discretionary stocks are going to do better this year? I think there's two reasons. First of all, Um, the retail companies benefit great deal from the tax legislation. They typically have paid full boat when it came time for to pay their taxes, and I think they'll get a big,

big break because of the new legislation. The second part of that equation is that the consumers also going to get a break and they're going to be UM, They're gonna find more discretionary income in their pockets in two thousand and eighteen. So you have that dual effect for consumer discretionary stocks. They'll benefit from the tax legislation themselves, that will benefit from the consumer um having more disposable

income as a result of the new tax package. Bruce Bittles, you mentioned bitcoin, and I'd be remiss if I didn't get your thoughts on it. Well. Actually, um, I'm an agnostic on bitcoin. I'm not sure what it really means. A lot of folks believe it's just a bubble that's going to burst and going to hurt everything, and I don't think that's particularly true. Certainly, this speculation there is

is exorbitant, something we've never seen before. But nevertheless, it's not in any way or shape or fashion the size of these speculations we saw back in Internet stocks. So even the bitcoin exploded and imploded, I mean, I don't think it would affect anything at all. So whether there's a future there or not, I have no idea. But my guess is that will start. We'll probably see lower prices are a bit corn before we see higher. Well,

I want to thank you very much. Bruce Biddles is the chief investment strategist for Baired and Company, joining us from Sara Sota, Florida, talking about his outlook for what's going on in UH stocks and also in the bond market. We wish Jamie butter is our US auto reporter, a happy eighteen. Good to have you with us. Jamie, your story today has to do with car loans, and I'm wondering if you could just put this whole idea of car loans in the context of the rebates and the

offers that are being made. You can't help but see a television commercial for an automobile maker. I was looking at one Chevrolet, I believe, extending their employee discount to any one that comes in. If you're offering like you know, off, this can't be a great market, or am I missing something? Well, um, it's it's not a it's not a perfect market, but it's still a pretty pretty darn good market. Uh. And you're not, You're not missing anything. But it's that time

of year where you get some sales. Right. People are trying to clear out their old inventory. If you have, you know, seen models still out on dealer lots. Uh, you know maybe you missed times something or somebody else ransom discounts and and left you with too much inventory. You just got to get rid of those, right, because if you're selling, even if it's never been driven, if you're selling in calendar year eighteen, uh, you're going to have to give that car away. Well, so they're just

counting heavily in December and that that helps out. Okay, so so they're just counting heavily, but it isn't that bad. It's still pretty good. That said, definitely, sales are slowing. There was first annual sales decline in the US of automobile since two thousand and nine. And you spoke to some analysts who widely think that this year will be more of the same. Why, yeah, we're so it's reverting,

We're reverting to the mean. Basically, the view is that probably normal you know, normal demand in the US might be sixteen and a half million new cars and light trucks each year. We were well below that in the two thousand nine, two thousand ten, so we had some pent up demand. So we kind of overswung and we got to you know, seventeen and a half seventeen six, and now we're coming back, you know, probably seventeen two seventeen, maybe another half million down next year, maybe not quite

that much. We'll see um. And so it's sort of getting its way back and and and there's a lot of optimism, you know for those of us who have been watching these guys for so long, I mean, uh, in the that they're allowing sales to actually decline a little bit. Um is a is surprised. It's kind of

thing that they weren't doing before. For so many years, it was so much about scale, and there was, you know, the ethos, the mindset of the industry was you had to be bigger, bigger, bigger, And you know, GM, with its bankruptcy really taught us, you know, you can't always do that, but that isn't always the way. And so now they're leaner and they can they can afford to

be a little smarter. Okay, So Jamie, you're painting a pretty rosy picture that the decline in sales is at least in part by design, and that the automakers are allowing this to happen. But on the flip side, you are seeing the expectation of rising rates this year. We

already have seen overnight rates rise this year's last year. Rather, Um, I'm just struggling with pairing that and the idea that the credit is less available in some ways or will become less available, And is this something that they're going to be kind of they're forced to make it sound rosy. Yeah, well, we do have to keep an eye on incentives next year because you know, so you know, with volume above sixteen and a half, everybody should be making lots of money,

even if they're discounting their vehicles a bit. But in a in a tightening market, you get executives whose you know, compensation is geared around market share, maintaining market share, even gaining market share, and trying to do that in a tide market, things could get messy and you we could start to see I mean, we got to keep our eye on all the companies that that that Lee have leaned on incentives in the past and gotten themselves in trouble,

whether that's you know, GM, you know has their employee pricing. Now, you know, if they can't turn that off at the end of if they didn't turn that off at the end of December like usual, that could be a problem. Chrysler's one in the past has been a problem. Uh, they've really overrelied. Obviously, we want to keep an eye on Nissan and Hunt and some others because uh, things

could get could get messy. But in theory, they all see it coming and they're and they're going to manage for it and and not uh, you know, shoot themselves in the foot. Yeah, thank you so much for joining us, and happy New Year to you. Jamie Butter's is US autos reporter for Bloomberg News, coming to us from our Detroit bureau. And this is sort of a big question, uh him that I have frankly, which is, as you get rising rates, a lot of the loans that are

extended to people for cars are floating rate. They're going to be some of the most affected. So it'll be interesting to see what happens here. Yesterday, Californians were lining up to buy recreational marijuana legally for the first time as a new law went into effect. What the implications of this law are, Perhaps Chris Levy is the best position to tell us. He is co chairman and partner of Men, which is based in Los Angeles and is

devoted to helping with the infrastructure behind growing marijuana legally. Uh, and he joins us. Now, Chris, first, did I describe med men correctly? And second of all, how significant are the implications of this new law that goes into affecting California. Well,

the implications for the new laws are very significant. Um. If you look at the market size in California for legal marijuana, was a little over two billion, two billion, and we think the market potential with about US legalization UH is up to seven billion Chris, a threefold increase, Chris abt what fort as much as of the cost of legal cannabis are taxes? Correct? Significant portion um? Yeah, significant portion um. Not necessarily number, but yeah, significan portional taxes.

There's it out about it. UM. That's obviously part of what makes this a win win UM, you know, for both consumers and governments. Okay, So that's where I was going with this, is that the local governments they are satisfied with this because why they can, of course make a lot of money. We've noted that Massachusetts is going to be selling retail marijuana that starts July one. Maine

has approved that, Colorado, Washington, Oregon, Alaska, Nevada. Will this tip the federal government into allowing marijuana businesses to access the legal financial industry? Well, the marijuana business UM can already access the financial industry. The Department of Treasury UM approved guidelines in around banking in legal cannabis, and there's now over three hundred financial institutions that engage UM in

some foreign banking in the marijuana industry. But your bigger question, Um, I do think that this um, that there was a real watershed with the election in November. And when you look at the trend towards legalization at the state level, I do think it's inevitable that at the federal level we will see policy continue to to loosen up, and eventually we believe we will see full legalization at the federal level. Chris, you previously oversaw a hundred and fifteen

billion dollars of fundamental equities at Black Rock. Investing in the marijuana industry seems pretty far removed from that world. And I'm wondering do your former colleagues still kind of look at what you do as sort of, you know, eyebrows raised and saying, oh, yeah, you're investing in marijuana, did you try some or whatever else joke you can insert there. Um, has it hard to be treated differently now? Yeah?

And I say that that shift happened a little while back, um, And remember that I work in a community of investors, and investors are all about the business and is this a good industry or not? And when you look at the business characteristics of the marijuana industry, how they're very They're very compelling, and most of my colleagues from Wall Street get that. Well, will it be as compelling while it's made even more legal and accessible. Isn't part of

the popularity that it is not legal and accessible to everyone? Well? Now, from a demand perspective, UM and I should note that we we support full legalization and we support full legalization at the federal level because we think it makes both, Um, it makes sense for society and also makes sense for business. And uh no, I think as we open up the market, UM, that's going to create more and more opportunities for for

the players, especially for the players who have scale. And given the scale that we have, UM, we think we're positioned to benefit from all that. Well, having said that, will the industry then also take legal responsibility for any potential problems that happen as a result of the consumption of legal cannabis? I mean, I think for example, of liquor establishments, and you know, if you drive after having

a drink, you're going to be legally responsible for what happens. Yeah, I mean, we'll leave that up to the regulators UM and uh to determine that on a city vice city basis, But what I will say is when you look at the fast round cannabis, um, you know this is something that that's used responsibly, is really similar and in some metrics safer than alcohol. You know, if you look through Colorado for instance, UM, you know the UY related incidences

are are down. Chris, just real quick, whatever turn has been, like, say, for last year in marijuana related investments, come again with a question, what were returns like last year for marijuana related investments? Well, there there really is not much of a public stock market in the US. The point Tom, if we look north as the border in Canada, Um, you know the returns were We're off the charts. How those thoughted extremely Well, all right, we gotta we gotta,

we gotta run. We want to thank you very much. Chris Levy is the co chairman and the partner at Medmen, talking about investing in legal cannabis that began yesterday in California, and we'll be updating you one results from those continued sales. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox I'm on Twitter at pim Fox. I'm on Twitter at Lisa

Abramowits one before the podcast. You can always catch us worldwide on Bluebirg Radio