Trump and the new long/short environment

A Trump presidency, financially speaking, portents huge change. Maybe.

The bond market thinks it’s a definite maybe – US 10 years Treasuries have sold off the most sharply since 1991! This is no less than the end of the “new normal” being priced in.

The “new, new normal” currently anticipated is this:

• Fiscal policy in
• US stocks in
• US growth in
• Emerging markets out

This opens up significant opportunities for a new set of long/short, relative value trades.Some areas of interest to consider carefully:

• Leverage. Rates to rise on fiscal expansion suggests companies with more leverage face revised growth estimates. But in which direction? Macro growth plus leverage often equals out-performance. But consider the markets where the growth may not come or is patchy – including President-elect Trump’s own commercial real estate sector where maturity schedules coinciding with rate rises may be painful.

• Exports. A stronger dollar plus higher bond yields in the US is not great for emerging markets. Factor in potential tariffs, walls and quotas and it looks worse still. Take Mexico for example. Kansas City Southern railroad fell heavily on the election result given it generates nearly half its revenue from US-Mexico trade. If you believe that is a durable position it may be worth looking at why, since Mexico is the largest buyer of US corn, there has been a negligible impact of (presumably) lower animal feed costs on US companies like Tyson, Pilgrim’s Pride and Sanderson.

• Rotation. If fiscal expansion equals growth and that is why US Treasuries are selling off so dramatically it is worth asking why high dividend stocks are holding up so well. Rising bond yields should be hurting a lot more than they are.

• Energy. There are interesting opportunities between US oil producers and a variety of energy consuming industries. President Trump’s anti-OPEC rhetoric and pro-drilling policies state-side make it very hard to envisage any crude price increase manufactured by OPEC sticking. Traditional automotive, transport, travel (to mention but a few) are all potential beneficiaries.

These ideas, and others, can of course be tested under ArbMaker (see this video for more on how).