Title: Weekly SSR call — "Higher for longer": the Trump red-sweep trade, tariffs & deficits, the income/baby-bond book, and two new infrastructure ideas (PPA, OCI)
Show: Special Situations Report (SSR) — weekly research call (premium, Discord voice space)
Guest: Jay Singh
Date: 2024-11-10
URL: https://discord.com/channels/1005949505671278603/1021151515907465297/1305375504831877122
Length: ~75 min (audio)
Note: Discord voice-call auto-transcription — NO (mm:ss) timestamps and no video, so the per-video page carries no deep-links (Ref column "—"). Obvious fillers (um/uh/you know) and transcription artifacts lightly removed; wording, numbers, names and claims otherwise verbatim. Auto-transcription name fixes: "Eris" = Aris Water Solutions (ARIS); "Costco/POSCO" (re Piraeus) = COSCO; "Torsten Sloke" = Torsten Slok; "Parais/Pareas" = Piraeus; "Chenier" = Cheniere; "Bezel III" = Basel III; "Qashqari/Kashkari" = Neel Kashkari; "Lina/Lena Khan" = Lina Khan; "AvaVic/a Vague" = Vivek Ramaswamy (Roivant).

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You guys should be receiving the PDF in probably the next five minutes. While I'm speaking, I'm posting the GDPNow graph so you can follow along in the macro channel. We're going to spend a lot more time on this call going through the Trump-trade discussion, because the more research I do into this, the more I realize that deficits and tariffs are going to completely change the 2025 inflation outlook. The title of my piece that you're getting in the PDF, and the title of this space, is "higher for longer."

You'll recall — and this is important for portfolio construction — that about 40% of the preferreds that we own are fixed-to-float. What does that mean? It means the preferreds go from like a 7% fixed rate, for example if you look at AGNC, to a SOFR plus four, SOFR plus five. A number of these names — if rates stay at 4%, SOFR will be around four, plus a 5% spread, that's a 9% dividend. That's insane. In the Apollo deck that I'm sending you guys, 80% of bonds in the world — and that includes Japan and Europe — trade at yields less than 5%. Now think about our prep portfolio. All the names we've added in the recent six months have been eight, nine percent baby bonds. Names like CTBB, CTDD were yielding 15%. And Apollo is telling you that credit spreads are at 15-year tights. Despite US risk-free rates being higher, the average IG bond is yielding close to 5%, and European and Japanese bonds are yielding less than that. So the income portfolio we have, while it's rallied, is incredibly cheap versus the rest of the IG and high-yield bond universe.

High-yield bonds in the US and Europe are yielding something like 300 basis points above the risk-free in both regions. I'm proud of the work we've done, because my income portfolio is yielding almost twice what the average IG bond yields. While some of the new issues we're looking at are going to be closer to seven and seven-eighths or eight and a half percent yields, that's still much better than where institutions and insurance companies are buying Apple bonds, Microsoft and Google bonds, or even Caterpillar bonds. You pull up Caterpillar — you think, okay, Caterpillar's going to be challenged, it's a cyclical, its customers in many markets around the world are slowing down in Europe and Asia — Caterpillar bonds yield five and a half percent, with all that risk built in. Whereas some of the baby bonds we're buying from financial companies that are doing relatively well, where you'd need a massive recession to get impaired, especially some of the better BDCs, are yielding around eight to nine percent. The CAT August '26 bonds are yielding four and three quarters. That's the current situation in the IG bond market. Hedge funds are having a terrible year, struggling for yield.

On top of that, the companies in the equity market they're buying — what's an example of a good company? A Moody's, ticker MCO, historically a value name, does $12 of earnings, compounding for the last 20 years. But the stock today is at 477. 477 on 12 — it trades at 40 times earnings, the highest multiple it's ever been in history. So that's the backdrop we have as investors: we have to be nimble, look at smaller issues, companies not in mainstream media, mid-cap and smaller-cap US names. Names that have done really well, like GEO. We had Aris — nobody on Wall Street was looking at Aris when we sent that out on August 25th. Aris basically recycles water for oil drillers in the Permian basin. Since August it's up like 40, 50 percent because people are realizing this is a real need and they're one of the main companies that provides it. They had decent earnings. That's not a big company — that's a 1.3 billion dollar market cap. What's GEO's market cap? GEO's market cap is 3.5 billion, and when we first bought it, it was a billion-dollar market cap. So that's the type of stuff we need to look at. The average baby bond issue we're looking at with you guys is like a two, three hundred million dollar issue. It's not a billion-dollar bond. That is where we think we're going to find value next year.

We'll also talk a little bit about merger arb and about Lina Khan going away. We think Lina Khan has been one of the biggest deterrents to more M&A announcements, and the chairman and CEO of Evercore, one of the largest M&A boutique banks, said the same thing. He believes Khan is going to be out after the January inauguration and you'll see spreads compress. More importantly, you'll see new deals announced where you might have a 10–15 percent spread that compresses. That's our bread and butter — finding deals where we can analyze antitrust risk and break value and financial conditions. The interesting thing about this environment has been Khan breaking up deals that really have no antitrust risk at all. For example, the Amazon–iRobot trade, where iRobot was such a small company at risk of going bankrupt without Amazon; similarly JetBlue and Spirit Airways; and finally Tapestry–Capri. The luxury handbag market is highly competitive. What was Lina Khan doing — protecting wealthy women from buying handbags? It made no sense in the traditional framework of antitrust. There's no discussion of the HHI ratio. HHI is the Herfindahl-Hirschman Index, which measures market concentration — you calculate it by squaring the market share of each firm in a market and summing the results. A lower HHI means a more competitive market; a high HHI means a concentrated market. The scale is zero to ten thousand. If a market is four firms with shares of 30, 30, 20, 20, the HHI would be 2,600. But the luxury handbag market under traditional ways of calculating it had an HHI over 5,000. So there's no reason, under quantitative ways — not emotional ways — of calculating concentration, that that deal should have been blocked. And the share price reflected that: it was a 50-plus spread, then sold off. We knew it would have bad earnings, so it was never a big position. But at $19 a share today, with Tapestry having until February, it's more likely that Tapestry does some kind of share buyback and offers Capri less cash — they wait until February after the inauguration and offer less. So it may not be a $57 deal. If I were the CEO of Tapestry, I'd use this to my advantage and offer them a $40 deal with the stock at $19 — a double — they should be grateful to get a double. Once Khan is gone, you're going to have more rationality. JD Vance is a fan of one or two of Khan's positions because he doesn't like big tech — she should have been focusing on Ticketmaster, a real monopoly, and on big tech, instead of all these small companies. But Trump is less of a fan, and JD's views will be secondary to what Trump's supporters want. So I look forward to Lina Khan leaving.

Let's get back to the economic calendar and some earnings insight from last week. For tomorrow, the 12th, we have two major data points: NFIB small-business optimism expected at 92, and a New York Fed one-year inflation expectation — I'll be watching to see if it's above 3%. On the 13th, MBA mortgage applications, a leading indicator for home purchases. Then CPI on Tuesday and PPI on Thursday — the two most important data points this week. After the CPI we have the federal budget balance, expected at only negative a quarter trillion — no big worries for October. But we have the biggest non-war budget deficit in history this year; we're going to have a $2 trillion deficit. Despite what Trump and Musk can do on cutting costs, we're likely going to have one-to-two-trillion-dollar deficits for the foreseeable future as long as rates stay this high, and there's really nothing we can do to change the rate outlook.

The CPI is expected to be 0.2% month over month, 0.3% on core. Year over year 2.6% versus 2.4%, core 3.3%. PCE has been lower — 16% of PCE is real estate whereas 30% of CPI is real estate, that's the main difference. PPI is expected higher: 0.2% versus 0% last month; core PPI 0.3% versus 0.2%; PPI ex-food, energy and trade even higher at 3.2%. On the 15th, Empire Manufacturing was negative 11.9, expected closer to zero. Retail sales has been stronger than expected — expected 0.3% versus 0.4% last month; ex-auto 0.3% down from 0.5%; ex-auto-and-gas 0.3% versus 0.7%. The import price index is supposed to go to negative 0.1% from negative 0.4% — a lot of risk for next year because import prices could go up dramatically with tariffs. We close the 15th with industrial production, business inventories and capacity utilization, flat at 77–77.5%; industrial production negative 0.3%. On the 18th, the New York Fed business activity and a housing price index. The main data points: CPI Tuesday, PPI Thursday, retail sales the 15th.

On earnings: 91% of S&P 500 companies have reported and 75% reported a positive EPS surprise, which surprised analysts. The surprises haven't been as big because expectations came down by about 3%. The blended year-over-year earnings growth rate for the quarter is about 5.3%. If that's the actual growth rate, it'll mark the fifth straight quarter of year-over-year earnings growth. As of September 30, the expectation had been revised down 3% to 4.3%; since then it's up 1%. Six of the 12 sectors are reporting higher earnings. For Q4, about 53 of the S&P 500 companies have issued negative guidance and 24 positive, so two-to-one negative. The forward 12-month P/E for the S&P 500 is 22.2 — above the five-year average of 19.6 and the 10-year average of 18.1, so about 20% higher. Some of that is justified because more than 40% of the index is now large-cap tech, monopolistic companies that deserve higher valuations — but not 40 times earnings. The market trading at 22 times does seem a little out of touch; perhaps it should be closer to 20 times. This is the highest valuation since 1999. Right now there's a lot of cash coming from outside the US — you've seen the dollar strengthen. There's $6.6 trillion in US money markets. The rich in the US are doing extremely well; corporations are doing really well; investment firms have had 15 years of positive returns. So unless you've been a really poor allocator, there aren't a lot of investment firms blowing up. As a result, the market can stay at a higher valuation for longer, just like rates can stay higher for longer, simply because we're the best of the worst in the United States.

With the Trump backdrop, you're going to see more money from Europe and Japan coming into the US because they're afraid of their own stock markets underperforming on margin compression and slower growth. The dollar is strengthening, so they want to diversify currency exposure. That's one reason the US market will continue to be supported. For those who think we'll lose reserve-currency status, it's many years away — especially if the US, the biggest consumer in the world, has the power to put tariffs on countries that don't cooperate. Small-cap valuations are one reason our small-cap names have done so well, even microcaps like the recent PETS recommendation in the Discord. Small caps are trading at 30% discounts to large caps. I posted a new version of that chart using the S&P 600 in the macro tab. Under a Trump presidency, with deregulation and US companies favored over international companies, you're setting up small caps for success.

I think a number of you should have the PDF now so you can follow along. Everyone should have an email with four attachments: the macro commentary I've been waiting to go through; the BofA Flow Show; the FactSet earnings insight with 91% of companies reporting so you can follow along by sector; and a 130-page credit-market-outlook deck from Apollo. Let me open my version and start going through that PDF.

On the first page I say: despite rates staying higher for longer with higher growth and inflation expectations, credit spreads are multi-year tights across investment-grade and high yield. Investors globally continue to ignore spreads. Why? Because everyone's looking at the risk-free rate, saying "we're buying bonds at 7%," and ignoring that spreads are only 2% for IG, less than that. Spreads for the majority of high-yield bonds are 50 to 100 basis points. So investors are buying bonds at 5, 6, if they're lucky 7 percent, and they're doing that because the US market is half of the world's stock market and the Fed is the biggest central bank — if the Fed keeps rates at 4%, the rest of the world has to be close to 4%. We also have a hangover from the Fed: we're still doing QT, and mortgage-bond spreads are back near post-COVID highs. Buying a mortgage bond backed by the US government at 6.4% is a much better risk-reward than buying Caterpillar bonds at 4.7%. That's the easiest way to explain why adding to and continuing to hold agency MBS preps, and adding a little to the higher-quality commons, is likely a good idea despite continuing rate volatility — even with a red sweep. While rates can potentially go to 5% at the long end, I don't think inflation gets out of control, because service inflation is going to slow at the same point goods inflation is maybe a little higher than expected. We expect a 50% chance of another Fed cut this year and only two cuts next year, with a caveat that growth stays near 3%; if slower, we'll change our view. That could keep the Fed funds at the front end near high threes or 4%, a sharp negative for commercial real estate and equity-in-debt, but a positive for yield-hungry investors. Since the November meeting didn't include SEP projections, we may know more about the Fed's longer-term view in December, and the rate outlook will have to be revised in a big way after the January 2025 inauguration depending on the deficit outlook, tax-cut extension and tariffs.

On page three you'll see two of our infrastructure ideas have hit it out of the park. GEO has more than doubled since we mailed it out in late 2023, and Aris, the oil-drilling-related water-recycling company, is up more than 50% from our August 25th subscriber email. We have two new potential infrastructure ideas. One is a Greek port called Piraeus, ticker PPA. If you have Interactive Brokers and can trade European equities, you can access it. It's the biggest port by passenger traffic in Europe and the fifth biggest by container traffic. It trades at under five times EBITDA and has greater than a 10% free-cash-flow yield; it pays a 5% dividend. We think they can raise the dividend to 78% payout. Operating cash flow is up like 30% in the last year. The other name, which we're sharing later in the month, is OCI, a Dutch fertilizer company. They sold about 11 billion in assets and are paying a €14.5 dividend on what was a €24 stock — right now it trades at €10.80, net of the dividend declared for the 15th. After they pay all that cash out, the company will still be a net-cash company, with over €3 billion of cash and about a €2.5 billion market cap — so a negative ~€700 million enterprise value. The risk: management is stupid and buys an unequal asset because they have so much cash, when the remaining asset is a cyclical nitrogen-fertilizer business. If they're smart, they wait. Management has been very prudent selling assets at high prices and paying out the €14.5 dividend. If they continue to do the right thing — grow the remaining business or buy a company cheap — this could have 30, 40% upside, or they could pay another dividend with the remaining cash. One risk outside M&A is a possible Dutch withholding tax on some asset sales — unclear. But you don't have that risk with PPA, the Greek port, which we have a full page on.

You can spend time going through the 130-page Apollo deck. A friend of mine, Torsten Slok — I've known him 15 years, he used to be macro chief at Deutsche Bank, now at Apollo — those are his graphs. The first graph: 81% of bonds in the world trade under a 5% yield. So when you see a baby-bond idea that yields 9%, you're earning 400 basis points above where the majority of bonds in the world trade. The second graph: the average spread is near the lowest spreads have been for investment-grade corporate bonds in history. The average IG spread is probably 60s today — nothing — even less than what our mortgage bond is, half the spread of a mortgage bond. That's not normal; it shows people piling into bonds focusing on yield and not actual risk. On page two you'll see beta compression across IG and high yield: the green line is IG bonds, US-only, around — European IG is around 30 basis points, almost no risk at all; higher-quality high yield is under 100 in both countries; it's the triple-Cs, the riskiest stuff, that bring the average spread to 300. You'll see IG and loan ETF inflows — loans, which are floating rate, see huge inflows; after July there was an outflow when people thought Powell would cut quickly, but now money's going back into loans, high yield, and IG, with the biggest flows into IG by a factor of five. Then money markets: because rates stayed this high, money markets are at $6.5 trillion. Global money markets are under $8 trillion, so 80% of money-market cash is in the US. Over half the global market cap is in the US and 80% of money-market cash is in the US — the US has been compounding while the rest of the world stagnates outside of India. That tells you how much firepower there is to buy assets. Not all $6.6 trillion goes back into stocks — maybe half goes back into checking accounts if rates fall, and half into risk assets. A dollar going to the market doesn't mean a dollar increase in market cap: the 6% move in the Russell and 2.5% move in the S&P and Nasdaq when Trump won were on less than $20 billion of inflows. Flows have a multiplicative impact on valuation, and I don't think people really understand that.

Let's go to page three — the election. Former President Donald Trump will return to the White House in January, the Senate has flipped red, and a red sweep is the most likely outcome. Markets reacted by extending popular Trump trades — pushing up bond yields, the US dollar and equity futures as investors assign higher odds of Trump turning proposals into reality. We think the new president may prioritize tariff and immigration policies over tax cuts, because the Trump tax cuts expire at the end of 2025, so he has little incentive to scare people about deficits right away. His number-one priorities will likely be immigration and tariffs, and the sequence of implementation is key to the growth and inflation impact. Tariffs act as a negative supply shock, increasing stagflation risk; I think the economy still grows, so maybe just lower growth and higher inflation rather than true stagflation. A full implementation — 10% on non-China, 60% on China — leaves no winners in a world of heightened trade uncertainty. It'll be worse for countries outside the US than for us. The transatlantic relationship will suffer; German stocks are already pricing it. Asia could be the hardest hit because China bears the brunt; if China slows they'll add stimulus, but trade slowing also hurts Malaysia, Vietnam, Cambodia, Laos — one joke in US manufacturing is that to get around tariffs China routes orders through Vietnam, relabeling steel. Beijing has cushion because they announced large stimulus; other countries may not. China's other tools outside stimulus: depreciate the currency (they'd have to tighten capital controls, since wealthy Chinese already move money out via schooling kids in Canada, buying property in Vancouver, precious metals or Bitcoin); and trade rerouting through other countries. India and Indonesia are better insulated — India buys a lot of fuel and could buy oil from the US to improve its negotiating position, and both do less trade rerouting with China.

Investment implications: higher inflation and a more hawkish Fed pose risks for fixed income, and the investments most at risk are low-dividend, high-duration bonds — bonds maturing after 2030 with three-to-six-percent coupons. When you run duration and convexity math, the bonds that sell off most have the longest maturities and lowest coupons. Someone told me "oh, I bought some 5% bonds from JP Morgan" — those will probably be okay, but if you go out to 2030–31 it doesn't matter that JP Morgan is always going to be around and trades at two and a half times book; those bonds will sell off in dollar price because they have a low coupon and higher duration than a 9% coupon bond maturing in 2028. Just because you're investing in a good company doesn't mean those bonds can't sell off more than the bonds of a slightly less safe company with a higher coupon and earlier maturity. If you're buying a bond with a 10–11% coupon maturing in three or four years, it's really not going to move a lot versus a 5% coupon maturing in 2032 — that bond moves about twice as much despite being a better company. That's why I'm focusing on very high-coupon baby bonds with short maturities — even if rates go to 5%, those bonds aren't going to move a lot. The perpetuals and lower-coupon ones might move; the floating-rate 11%-dividend ones won't move much as long as there's no probability of default. We can do a tutorial on duration and convexity on the next call.

It's not just yields going up — the US dollar is also strengthening versus other currencies, because of interest-rate differentials and more money coming into US assets. The Senate now has 52 seats versus the Democrats' 42, a huge lead. The House will likely be a minor lead of a few seats, so there may be more contentious voting, especially at a budget impasse or debt ceiling. Powell was diplomatic and said he's only focusing on the data and didn't care about the rhetoric. Kashkari came out on November 10th — today — and said tariffs could reheat inflation if they provoke a global trade fight. Powell can't say it because he has to be diplomatic and not look political, but Kashkari is saying if we do tariffs and other countries retaliate, it creates less globalization and higher prices — that's a real risk, and that's why there may only be a couple of cuts next year.

On the next page there's an infographic from Amundi, a buy-side European asset manager, top-ten globally, managing 2 trillion — their internal view of what various sectors can do. On energy materials, my view differs a bit: they say short-term positive for oil and gas linked to "drill baby drill," midterm mixed because increased supply could lower prices, which I agree with. My view is energy-service companies could do well because Trump might allow drilling on national land and increase tax incentives, wanting the US to be a global energy superpower; he's less bullish on EVs. But the US is already producing almost 14 million barrels a day — more than Saudi Arabia, more than Russia — so the oil market might price that in. Oil might be range-bound 60 to 70 next year. So I'm not as excited about energy companies as a whole, but more excited about midstream — I see a number of pipeline approvals, and you'll see growth in midstream after many years of low growth, with new projects and EPS growth getting priced in at higher multiples. I also think it's positive for LNG, because more natural-gas production builds export capacity. Trump is negative for lithium because if he rolls back EV subsidies — most EV companies sold off outside of Tesla last week. Trump has Elon's ear, and Tesla is at a scale where they don't need subsidies as much as newer companies like Rivian. I do think Tesla is wildly overvalued here and the market may be over-appreciating their relationship, but I wouldn't short something with all that momentum. Lithium and EV companies are going to be at a disadvantage; GM is already cutting back its EV program. If I ran a Fortune 500 auto company I'd focus on hybrids, not pure EVs.

On industrials: re-shoring is a big positive trend, positive for automation and robotics companies, and for companies with high domestic exposure, because Trump wants US manufacturers taxed at 15%. Corporate taxes could stay at 21% instead of going up to 28% under Harris, and you'd get even better treatment from 21% to 15% if you manufacture in the US — a huge incentive. That's why steel stocks ran so much: additional steel tariffs and lower taxes mean steel companies might be worth a higher multiple. It's negative for companies hit by labor shortages without automation — construction equipment, trucking, agriculture — and for manufacturers without China exposure but importing goods. Steel is now highly automated; you don't need a lot of union workers, so the tax benefit outweighs labor cost.

On financials: banks rallied a lot — JP Morgan hit all-time highs and got its first downgrade from a major sell-side firm last week, trading at like two and a half times book. It's not normal for banks to trade close to three times book. The reason they rallied is Basel III — a set of international banking regulations setting minimum capital, liquidity and stress-testing requirements, set up after 2008, with implementation supposed to end in 2024 and full impact in 2025. Trump might roll it back or push it back so US banks don't have to fully abide, letting big banks hold less capital — really positive for B of A, Citigroup, JP Morgan, Goldman, Morgan Stanley. Under Basel III there are three pillars; we're talking pillar one, minimum capital. There's a CET1 requirement of 4.5% (20× leverage), plus a 2.5% capital conservation buffer and a 2.5% countercyclical buffer — almost a 10% capital ratio, 10× leverage. Banks in 2008 were 40× leveraged, so we cut leverage 75% under Basel III. If Trump takes the two buffers down to two each, that's a full percentage point off the requirement — banks hold less capital and earn more on assets. That's why bank stocks rallied so much, and smaller banks too on less regulation overall.

On consumer, it's split. Amundi says restaurants do better on domestic focus and lower taxation; better for infrastructure and downstream suppliers that produce in the US, like tissue-paper companies — all the toilet paper we consume is made in the US. Negative for consumer stocks and retailers that import from China — Nike imports a lot of shoes from Asia, Home Depot, Target, a lot of their SKUs are from Asia, so margin compression. Consumer retail could do poorly for two reasons: one, they're drawing down their revolvers months early ahead of the holiday season and the elections — I've seen private retailers pull down revolvers — to buy in bulk from foreign textile, raw-material, clothing and toy providers because they can't import at the same prices next year if tariffs come. So they pay higher interest and take more risk to order early, and in the second half of next year they'll have higher import costs. If the economy slows they can't pass it on; if it doesn't slow they raise prices — negative for consumers via higher inflation. Either way you might see a hit to margins.

Healthcare is neutral to slightly negative: not affected by tariffs, but uncertainty on IRA appeal and likely pushback on drug pricing across both parties — US pricing is out of whack versus overseas; insulin has been around 50 years and shouldn't trade at a massive premium in the US. Trump won't be extremely friendly with pharma. Tech hardware and semis: mixed. Trump understands the importance of AI and semiconductor independence, so he'll push continued US foundry construction. But for companies that export to China, more negative impact — Trump might tell ASML, a European company, not to sell even its lower-quality lithography machines to China; Nvidia and AMD have specific lower-quality chips and GPUs they sell to China, and there may be more pushback to cut all ties with China, which could negatively impact certain companies within semis. Communication services and internet benefit from R&D credits and a refresh at the DOJ/FTC/FCC with Khan going away; some negatives around liability for publishing, censorship reversal, and a TikTok-ban reversal increasing competition. Utilities: a negative environment for clean energy, which is why we shorted TAN — even after it sold off on election day, solar stocks were down another 5% to the end of the week. Real estate: changes in asset-depreciation lives could stimulate, but higher rates offset it, so neutral.

Markets reacted by extending Trump trades. The ten-year Treasury jumped to a four-month high of 4.4%, the dollar index gained 1.7%, strengthening against the euro, Mexican peso, Australian dollar and Brazilian real. The S&P was up more than 2.5%, the small-cap Russell up 6%. Chinese assets took a beating — the Hang Seng losing over 2%, CNH depreciating 1.2% on Friday — after it became clear on November 8th that most of the China stimulus was just swapping out local-government debt for federal debt, like the US Fed swapping out municipal debt. Of about 1.4 trillion total, about 1 trillion went to swap out debt, discouraging local investors who expected bigger fiscal stimulus. We think Xi and local policymakers are waiting for the inauguration because they don't know the extent of the tariffs — are they 60%, do they start at 20%? Before a big fiscal program they're waiting for Trump to take office. Because the market expected more, you saw a moderate sell-off. We sold more than half of our Chinese tech after that massive rally, near the peak, but we're probably under-allocated versus the global indices now; after the inauguration, if we see a much bigger stimulus, we might increase exposure again, more for trade and a long-term allocation.

What do we expect from Trump? Powell mentioned his term lasts until May 2026, and without Congress Trump can't kick him out; the same applies to other FOMC members, several of whom have guaranteed jobs beyond 2030. That provided comfort to the market, because the cabinet and rhetoric have had mixed reviews. I personally don't agree with the insane rhetoric about getting rid of the Fed — that's where I strongly disagree with Musk and extremists. The Fed has a purpose; without the Fed put there'd be little holding up equities in a crisis. I think the Fed overreacts and should let markets do what they're going to do rather than protect the market after every 5% sell-off, but after the Great Depression the Fed played a very important role. So I was relatively happy Powell answered those questions tersely.

There are two dimensions to Trump's policies: the importance of a policy to the president, and the degree of resistance to implementation, primarily the need for congressional approval. With a red sweep, there's a high probability he gets approval on a number of things. Tax policies are at the core of the MAGA economic agenda — cut taxes for locals, partially paid for by tariff revenue. Immigration was the top election issue. If he prevents illegal immigration and deports people with criminal records and their families, that reduces the labor force and could put upward pressure on wages. But deporting is very expensive and complicated, and three large states already said they wouldn't allow it. The easier thing is to make it more difficult for legal immigrants to come in. Deregulation is important. His interference with the Fed's independence has only been a threat — I actually don't think he'll do it; it's back to his rhetoric from the prior term, so I'm not worried about that right now. On ease of implementation: most tariff and immigration policies can be executed by executive order, less susceptible to a split Congress; most tax cuts and increased fiscal spending need the legislative branch. Democrats will likely vote to extend the 2017 tax cuts, but lowering corporate tax from 21 to 15 percent will run into resistance unless we have the red sweep — which I think we will. So when I ask why US steel companies and banks and US-footprint companies are rallying, they're starting to price in this 15% tax rate for companies that employ and produce in the US.

So tariffs and immigration are top of the to-do list, after which tax and deregulation — the latter two very positive for long-term growth. The economic impact depends on scale and sequencing. Raising tariffs and tightening immigration first will result in negative supply shocks that hurt growth but raise inflation; it depends on how fast they're implemented and how much they're used as negotiation. I don't think deporting 1 million of an estimated 13 million undocumented immigrants happens quickly — that's over many years if it happens. Conversely, the fiscal proposal (tax and deregulation) is a near-term positive for growth and inflation. The market could challenge debt sustainability over time — the bond-vigilante and deficit risk. If yields go above 5%, all this positivity around lower taxes is offset by higher rates impacting smaller companies and small businesses. Deregulation will have offsetting impacts but is big and underappreciated by the market, across a number of industries; with the new DOGE body you also see a huge cut in government workers, which could offset the deficits from lower taxes. Initially I think we'll have a higher deficit because cuts take time, you pay severance and restructuring, and there's a risk of mistakes. Luckily the economy is running near 3% growth now. You'll likely see some negative growth stocks and retail-related stocks sell off — really interesting opportunities. AutoZone, Target, Walmart, companies that import a lot from China could see massive misses in guidance and margins, or you could buy their stocks 30 to 40 percent lower next year if the tariffs go into full steam. On the way, if tariffs are announced, you might get opportunities to short — even after they're announced, like this solar trade we put on after the election, which still has a way to go down. Marijuana stocks got obliterated right after the election. I think some solar stocks get completely wrecked over the next year as demand is lower than expected.

The spillover into Asia: the most consequential policy is tariffs, both larger and more far-reaching than 2018–2019. With retaliation, a trade war 2.0 could be an order of magnitude more damaging. China bears the brunt under a 60% levy — could shave 50 basis points off China's growth, in the base case maybe a full percentage point. China can cushion via negotiation (offering to remove tariffs on US goods, or tilting retaliation toward US dependencies like pharmaceutical components and rare earths), FX depreciation (bad for the rich in China; weakening the peg helps exporters — there could be a trade shorting the yuan), and trade rerouting. Besides China, Taiwan, Korea, Singapore and Malaysia could suffer; India and Indonesia are better insulated. Reorientation of global trade routes may benefit Mexico, India and Sri Lanka. For Europe, Trump's victory could push member states to strengthen defense cooperation — Europeans were spending around 1.2%, less than half what they need; Germany increased to about 1.8% and could go above 2%, positive for the US because we spend less protecting allies. More European defense spending could actually support the economy — Germany has been in almost a double-dip recession. Hungary is changing its infrastructure to import more US LNG instead of Russian oil, which is cheaper — positive for the US trade deficit and the US energy industry long term, as LNG companies like Cheniere benefit from European demand. European countries buying more US energy is a positive for the dollar and for the US as a reserve currency, which is why I think a lot of the negative dollar sentiment is misplaced in the short term. Long term there's still risk — our $36 trillion debt is going to $50 trillion soon, close to 150% of GDP — but near term you'll see more imports from the US. In Germany, the coalition dissolved after Chancellor Scholz dismissed the finance minister; you might see a conservative government that cooperates more with Trump, opening the door to revising the constitutional debt-brake rule and more defense spending — an interesting turnaround for Europe. So look for companies that benefit from higher European defense spend; there's a company we mentioned in the Discord last week that could benefit.

We'll have more interest-rate volatility, unfortunately. We've seen a very strong dollar, but if it continues I'd be a buyer of gold on the dips, because longer term we are going to inflate again. If tariffs are announced and gold sells off on the FX move, I'd use that to buy more gold, especially if cost-cutting at the federal level is slower than they want and we end up in 2025 with tax cuts without cost cuts. So we still lean toward adding gold — we didn't add fast enough; any pullback we'd use to add to physical spot or GLD. A stronger US dollar is positive for Japanese equities in the short term, because a weaker yen is positive for Japanese exports.

On FactSet earnings: 91% reported, 75% beat, earnings growth ~5.3% (revised down from 7–8%). Valuations are extended. Going back to the red sweep, Polymarket has a 97% chance of a full Republican sweep — that's why risk assets soared. It's eerily similar to 2016, when Icahn bought futures overnight and made a billion. The main difference: the S&P was trading at 16 times earnings pre-2016 versus 22.7 times today; the ten-year was 1.8% versus 4.3%; Fed funds 0.5% versus 4.75%; core PCE 1.5% versus 2.7%; unemployment above 4.8% versus 4.1% today. So we're much different — the market was weaker and cheaper back then, the economy is stronger and rates are higher, a different backdrop. In 2016 the Trump trades were short-lived: the market rallied strongly from November to December, then sold off after the inauguration. So a number of these Trump trades might continue to run into the January inauguration, but I'd start taking them off in December, because people will look at 2016 and take profits — we don't know exactly what Trump will say in office; his policies might be spread over years and the market's already pricing it in. In 2016 value led growth by nearly 5%, small caps rose about 20% after the election, emerging markets sold off about 10%, the ten-year rose about 80 bps and the dollar rose almost 7% — all in two months. As soon as January 2017 hit, these trades reversed. So be a little early; you don't have to catch the entire trade — that's why we sold half of GEO. Make sure that by the holidays you're out of a lot of the Trump trades, because these trades unraveled 10–15% by January and went back to pre-election levels by the end of 2017. It may not happen exactly that way this time — value can run, it's a lot cheaper than growth — but just be careful once we hit the holidays.

The rationale for the jump in stock and credit valuations is partly the removal of tail risk from higher corporate taxes and greater regulation. The S&P 500 and other large-cap indices remain in powerful uptrends, with a surge in breadth — the Russell 3000's 20-day highs near 55%, often followed by a bull market. The S&P is technically overbought, so some digestion could come near term, especially in January. But there's a troubling divergence: equities are pressing higher on valuation expansion alone, earnings growth is very low, and the S&P is at almost 22.6 times forward, near the 2020 peak or 1999 before that. Forward EPS for 2025 is 272 versus 277 in August. Credit spreads reached new cycle lows — high yield at just 305, IG at 60, below even 2021 — so credit is priced for perfection. Financial conditions have eased. The initial reaction was a repeat of 2016: cyclicals outperformed defensives, small caps outperformed large caps, yields rose, the dollar strengthened — but some moves lasted only a day, with reversals Thursday and Friday in the ten-year. The key to durability is whether DC policy over the next four years impacts the trajectory of fundamentals — if it's not going to impact earnings, it's not going to last. In 2017 stocks were strong anticipating a corporate tax cut, then traded weak in 2018 as tariffs were enacted and the Fed drained liquidity. This time tariffs could be enacted first while lower corporate taxes happen later, so you might see an initial sell-off in January–February and then a rally at the end of the year on the $4 trillion in tax savings negotiated later. Small caps rallied on a pro-growth, pro-cyclical narrative, M&A from deregulation, and a ~30% discount to large caps — with deregulation, names like Upstart up 300–400%, and Carvana charging 27% for auto loans (almost usury) because Trump won't regulate them, plus potential takeout candidates. But small caps have higher floating-rate debt and overall debt, making elevated rates a challenge; the Russell 2000's 2024 EPS estimate was cut from +10% to −22%, and the Street has 40% growth baked in for 2025, which I think is unrealistic and would require many more rate cuts than possible.

The Fed cut its policy rate 25 bps to 4.5–4.75%, noting risks to inflation and employment are roughly balanced though labor has eased and inflation remains above 2% — a cut with slightly hawkish commentary. Powell was evasive on the near-term path but committed to getting rates to neutral, contingent on the data. The data since September showed strength in consumers and weakness in housing and the last labor print (12,000). Long-term rates rose, steepening the curve — another reason banks rallied, since they borrow short and lend long. Applications for purchases are back to 20-year lows; housing purchases likely fall next month with 30-year rates well above 7%. Real industrial output has been flat for over two years — a global manufacturing recession — and last week's GDP showed commercial construction falling for the first time since 2021. You'll see flow graphs: flows into crypto reversing, the biggest inflows into small caps since July '24, the biggest weekly outflows in emerging markets since October '23, the biggest inflow into financial stocks since January 2022, the biggest outflow out of tech in four weeks, and the highest allocation to global equities in over two years. Q4 GDP growth estimate is still strong at 2.5% real.

Back to infrastructure equities. Aris, the MLP that recycles water for Permian drillers, beat earnings last week — the stock is up from mid-teens to about 23; we sold in the low 20s. GEO doubled; we trimmed around 24, twice, turning about 75% on it in total. The next two names are Piraeus and OCI; we'll talk about Piraeus today. It pays a 5% dividend yield — a European name. Ports are very important infrastructure assets globally, competitively advantaged by geography, water depth, surrounding infrastructure and environmental permissions — essentially regulated monopolies because only X ports are allowed per region and there's limited close-to-port real estate. It's hard to build a new port from scratch. The Piraeus port in Greece is publicly traded, ticker PPA. It's been recovering since 2012 and received a large investment from COSCO, and it's going from a capex cycle to a capital-return cycle, which is why it's interesting from an equity perspective. Piraeus is at the crossroads of Europe, Asia and Africa, the natural port of Athens and Greece's main Mediterranean gateway. It's the largest port for passenger traffic in Europe with 18 million passengers per year and the fifth largest in Europe for container throughput, and the first European port after the Suez Canal. The container terminal has a capacity of 1.1 million TEUs and can accommodate the largest container carriers, with a total quay length of 1,150 meters and a maximum depth of 20 meters — the size you need for an ultra-large container ship (15.2-meter average draft, 17 meters for the largest). Management says Piraeus is the only port in Europe that can handle four mega container ships simultaneously. The car terminal is one of the biggest hubs for transit cars in the Eastern Mediterranean, Black Sea and North Africa, with 650,000 vehicles per year. PPA has three passenger terminals, five dry docks, a 10,000-square-meter logistics center, and real estate assets.

The Greek government and PPA S.A. signed a 40-year concession in 2002, going to 2042, later extended by 10 years to 2052 — so 28 years left. PPA pays the Hellenic Republic an annual concession fee of 3.5% of consolidated revenue with a minimum of 3.5 million, which is nothing. In 2008 PPA wanted to upgrade piers two and three; after a competitive tender, PCT S.A., a Greek subsidiary of COSCO, one of the biggest shipping companies in the world, was awarded a 35-year concession to help build the port. In 2016 the Hellenic Republic Asset Development Fund entered a share-purchase agreement for a 51% stake for €280 million, valuing the company around €569 million; net of debt that was a €256 million equity value at €21 per share, plus a €293.8 million mandatory investment program. In October 2021 COSCO increased its stake from 51% to 67%. The company is required to invest €293.8 million of mandatory investments for the first period and €56 million for the second, with additional voluntary investments of €167 million over five years. By the end of 2023, €155.5 million of mandatory investments were made; €138.3 million remains, of which €103 million relates to the passenger-terminal expansion that's 95% funded by the EU. Management expects about €60 million of capex over the next three years funded by cash flow, but only €38 million net of EU funding. So the business is generating a boatload of free cash flow: the company did €55 million of operating cash flow in 2018 and €29 million of free cash flow; today it does €112 million of operating cash flow — doubled — and capex is tapering from €40 million this year to about €20 million in 2025. So €112 million operating cash flow minus €20 million is €90 million of free cash flow, on a market cap of €735 million — a 12% cash-flow yield for something as safe as a port, an extremely high free-cash-flow yield. In other parts of the world that yield could be less than half, meaning the stock could be a double from here. It already pays a 5% dividend, trades at about seven times earnings, and can afford to pay at least a 78% payout. More than 25% of the market cap is in cash, with minimal capex left, so they can comfortably raise the dividend or buy back. In Europe dividends are more common, so I expect the dividend to be increased. This is an infrastructure trade that could benefit over the next couple of years. OCI, which sold $11 billion of assets and is paying a €14.5 dividend, now trades at €10.80 at a negative ~€700 million enterprise value with all the cash coming in.

Let's go to some Q&A. On November 3rd, Jim asked about Carvana, Sweetgreen and Cava. There's no real catalyst — with the economy strong, you need a catalyst for them to sell off. Wingstop missed; Sweetgreen missed. Carvana could keep running: they're doing subprime loans and selling them to hedge funds, recording big gains on loans to consumers who can't afford cars; the only way Carvana blows up, with half their revenue from fees and lending, is for the consumer to get wiped out and unemployment at six or seven percent — you're not going to see that immediately. Sweetgreen and Cava sell $25 salads and $20 bowls to affluent consumers. Cava is trading at $60 million per store; the average store trades between one and eight million — multiples of any other store, implying people think they multiply store count five or six times over the next few years. I don't know how realistic that is, given how many US cities have a demographic that can pay $20–25 for a bowl. You need a catalyst for those shorts to play out.

Lowlander asks where the two-year tops out: in a split outcome I think we top between four and a half and five; with a red sweep we could easily go to five. On Estée Lauder (EL): it's still pretty expensive — one of the largest skincare, makeup, fragrance and air-care companies, a $23 billion market cap with $10 billion of debt minus $2 billion cash, so an $8 billion net, a $30 billion enterprise value at 15 times EBIT. The stock sold off sharply — last week it sold off by $20 a share; this was a $140–150 stock, it's now $60, fully down 70% from the peak. Their EBITDA at the peak was more than double where it is today. You could have an inflection in 2026, but a couple of bad quarters left this year. It might be a buy in 2025; where I think it's a buy without a recovery is around 12 times EBITDA, maybe under 50. EPS in 2022 was $7 a share, this year about 2.60, supposed to drop to 1.80. At a $63 stock on 1.80, if EPS recovers to 2.50 by 2026, that's a $64 stock on 2.50 — 25 times earnings. Should it trade at a premium to the S&P? I'd like to buy at a discount to the S&P. I may be being overly mean, but it could end up under 50, and that's where I'd look at adding. On the dollar, Nathaniel: with a red sweep and rates to 5%, the dollar could go up another 5% with higher rates and announced tariffs.

Altai: how does Trump's win impact Humana? Yet to be determined. EJW, three questions on the red sweep: could Fed funds go back up in 2025? There's a small chance — if Trump announces 20% tariffs with allies like Europe, that could create real goods inflation and we might need another rate hike, which would result in a huge revaluation across tech and small caps. Altai: given future inflation and deficits, do you expect gold and silver to rebound? Potentially, especially if we see deficits without cutting. Jojo suggests rates could fall as tax revenues go up due to market gains, as happened in the past — but I think we're in a much different situation than 2016; the economy has been propped up with government spending, so you'll see businesses invest more on lower taxes but spending come down with cuts to EV and solar subsidies. It's too early to bet on a tax-revenue surprise; we'd be in a better position in January–February when we know the actual plan. I don't have a view on Scott Bessent yet. Altai: is now a good time to buy a mid-cap non-tech index? We just had a massive rally in small/mid caps; maybe wait for a pullback — in 2016 you saw a big pullback into the January inauguration. If you're underexposed, some exposure isn't a terrible idea and you can add on the pullback. On Roivant (Vivek Ramaswamy possibly going into the cabinet, a forced seller): if he's in the cabinet, like past Treasury Secretaries (Hank Paulson sold Goldman stock and swapped into an index without paying taxes), there's an ability to sell. People thought this risk existed when he was running for president; it's existed for two years — that's why the stock is so cheap on a sum-of-parts basis. Could we see forced selling? Absolutely. So it might make sense, while near local highs, to keep selling calls or cut your position by half, and buy back after he sells. We can do the duration-convexity tutorial next call. Shiv asks about the effect on health-insurance codes — I'll come back to you. Mel: have you trimmed the gold-bar ETFs? I have not trimmed my gold exposure. Ideally, knowing the dollar would strengthen this month, we could have pulled back, but I was already thinking I was under-invested in gold — my medium-term view is our debt is going to 50 trillion, whether 2029 or 2035, and even if Trump and Musk cut costs, debt-to-GDP and the debt burden go higher. If that's true, other central banks buy more gold as a dollar replacement, so it's a good long-term hedge. I completely sold my Treasury exposure — a great trade — and bought some puts on long-term Treasuries, but I have not sold gold; I'm waiting for an opportunity to add, because all our portfolios are up this year and I feel like I have too much cash.

What do I think of Super Micro (SMCI)? We sold 10-strike puts and as of Friday made money on this trade. There's a small risk the stock gets delisted, but that would take place well after the second week of November, because on the earnings update they said they'll propose a renewal/extension to Nasdaq. Prior to 2018 they got a one-year extension. Nasdaq might be less or more willing to negotiate this time — these guys pay millions in fees per year. My view: the Ernst & Young news was bad, but on further investigation, E&Y was getting investigated itself by the PCAOB and has kicked out 84 companies in the last year, some of which did really well. The language in the letter was a little worse. Because the company grew so quickly and has related-party transactions, there's a chance, like 2017, they booked some revenues a little early. But last time it was something like $27 million of revenue versus billions — not a WorldCom ($3.5 billion of fraud) or an Enron, which became a hedge fund not doing its core business. With Super Micro you can track where all their sales are going — they built out the entire xAI supercluster; they have 75% market share in cooling racks, doing about 1,000 racks per month, 2,500 in a quarter, each rack selling for $1.7 million, with vendor financing from Nvidia and third parties; and they generate $300 million of cash. Slower growth actually helps them generate cash, because when you grow 100% a year you need to finance inventory — they did that by issuing a convertible bond, $2 billion of equity, and a billion of bank loans; they fully repaid the Bank of America loan in cash and extended the Cathay loan to December 31st. So they're working on a plan. I think the delisting risk for the end of next week is overblown; earnings were a slight disappointment but they beat on margins and missed on revenue, which let them generate $300 million of cash — theoretically more cash than debt. The biggest risk isn't that people can't trade the stock — they still can; last time they were delisted people still traded it and the stock rebounded — it's that the convertible bond's language is stricter than normal: if the stock is delisted or they prepay debt, holders can force repayment, which would reduce liquidity under $500 million, and they need at least $150 million by the Cathay agreement. It's a very risky situation — I wouldn't recommend more than a couple percent. Could they be delisted? Absolutely. But using public information, the CEO's call (he said rumors that Nvidia was pulling orders are false), the cash generation, and the new CFO (it's much harder to lie about cash than sales), I think they probably made minor accounting mistakes and will see slower growth because Blackwell shipments accelerate next year — but I don't think they're going bankrupt near term; if they were, the bonds would have sold off a lot more. I sold puts at extremely high vol (close to 300 at the peak) at 10, assuming the company isn't going to go bankrupt and isn't a total fraud — I think I'm probably right on both. With theta, we could make 50% on these puts before December 31st and close the trade. Even if not, I don't think the stock goes to 10, and we sold at a big premium, so we essentially made the stock at a nine handle. Institutions can't invest in a stock without an auditor until they publish their 10-K, especially if delisted, so it can stay cheap a long time — that's why we're not buying the common, just a small vol trade.

Hope you guys have a great trading week. We'll work on a couple of other ideas during the week and talk again next Sunday — though it might be Monday or Tuesday instead, since it's my girlfriend's birthday. Let me know how this time worked for you; some people liked the earlier time. Talk to you soon.