"Tax reform means: 'Don't tax you, don't tax me. Tax that fellow behind the tree'." -- Russell B. Long
The Senate Makes Its Move
Were you watching the markets Thursday night? You were watching the Dodgers, weren't you? All at once, equity index futures surged, U.S. dollar valuations popped versus the currency's rivals, and the floor of support fell out for U.S. Treasuries. The Senate had made their move. What the U.S. Senate did was adopt a budget blueprint for fiscal year 2018, largely along party lines. The measure passed by a count of 51-49; Republicans lost only one vote, that of Kentucky's Rand Paul, who is a deficit hawk.
This is merely a budget resolution, which means that the president's signature is not required, and what's inside is non-binding. Basically, this would be meaningless if it did not pave the road for future legislation. What this does is that it removes a major hurdle, and Republicans can use this to rewrite the U.S. tax code using simple majority rule, bypassing filibuster rules. This passage also allows the tax bill to lower projected revenues by $1.5 trillion over the next 10 years, which is primarily how they lost Rand's vote. Senate Majority Leader Mitch McConnell was plainspoken afterward: "Passing this budget is critical to getting tax reform done, so we can strengthen our economy after years of stagnation under the previous administration."
What I think is that of course I would love to see some tax relief. The ability of the Republican party to finally show some unity is key as well, key to getting a lot more done going forward. Just be careful what you ask for. Am I squeamish? Perhaps a bit. The economy has struggled for many years coming out of the recession that ended in 2009. That much I can agree with. Broad, national statistics have not done the middle, lower middle, and lower classes much justice at all over the last eight years. However, there has been obvious improvement across the broad economy, and not just since Jan. 20, or since election day in November. Growth had really started to show its face.
Now, we appear destined to play with fire. Will I cheer the chance to take home more dough? Of course I will. Will the economy grow faster? Again, of course. Will that (hopefully distant) day when fiscal deficits actually come to bite us on the tail as inflation, interest rates, and thus borrowing costs risen arrive? I'm no genius, but I can see that with a little more clarity than I can see a lot of other items that may or not may lie in our collective future. In the meantime, markets rally as thoughts of that broad economic growth dance in traders' heads. Understand that much of our earnings gains came on the back of a weaker dollar, though. That particular path now seems strewn with obstacles. Congress may vote on a final, binding budget as soon as next week.
The Next Fed Chair
Sitting Fed Chair Janet Yellen interviewed with the president yesterday in an effort to keep her position. The president as now met with all five of those that the media sees as the likeliest candidates to take up that job when Yellen's term expires this February. The president claims to like the current Chair very much. In fact, just this week the president has claimed to both like and respect all five, the other four of whom are current Fed governor Jay Powell, former Fed governor Kevin Warsh, Stanford University economist John Taylor, and current National Economic Director Gary Cohn.
Though all five would appear qualified, and all five enjoy the public respect of him at whose pleasure they would serve, one has emerged as a favorite, at least according an article published at Politico last night. That would be Jay Powell, which is interesting at least to me, because if you watched the October version of the monthly Trading Strategies round-table at TheStreet, Douglas Borthwick and I came to this conclusion almost three weeks ago.
Borthwick and I both favored his chances due to the fact that he is a Republican, making him rare in economic circles, and as Politico points out, he has experience in the private sector. That's something that we know this president values. On top of that, Powell is seen as more dovish than Warsh or Taylor might be. It doesn't take a genius to see that the economy has accelerated as the benefits of weaker dollar valuations have worked their way through trade facilities, and ultimately corporate earnings. Powell also seems to enjoy some support across the membership of Senate Banking Committee. Expect events to unfold somewhat quickly here, as the FOMC, and markets themselves, might have to start thinking differently if indeed a change were to be made. We are down to a mere four months or so.
Overnight commodities traders took WTI Crude down another peg on top of the losses seen in this space during the regular Thursday trading session. In the span of less than 24 hours, the battle for market pricing here has gone from that key $52 level down to fight around $51. The inability of the marketplace to hold $52 has to be seen as disappointing, not just for the commodity, but for the broader energy sector. Markets are still trying to price in the possibility of lesser demand out of China, as that nation's National Bureau of Statistics reported annualized GDP of 6.8% for the third quarter. Though this release did represent a slowing of growth from 6.9% in the second quarter, the print did meet expectations. Still, many traders feel that China is able to manage economic results and were looking forward to a "beat" in this space.
Even as traders try to price in the price in the prospect of lesser demand here, Michael Tran of RBC Capital Markets points out that exports of WTI are now nearly 2.0 million barrels per day, and he is confident. This is interesting, gang. Tran writes: " ... Shipments will remain strong over the coming months given the flurry of U.S. barrels slated to load in the coming weeks earmarked for Asia. The previous consensus expectation for export capacity was, as recently as earlier this year, pegged in the 1.2-1.5 mb/d range. This has left the market contemplating the upside potential for exports. Our figures suggest that U.S. crude exports are unlikely to reach a physical level of capacity constraint until waterborne exports approach 3.2 mb/d." That sentiment is certainly not being reflected this morning, though it would illustrate a good reason to stay long the space."
10:00 - Existing Home Sales (September): Expecting 5.3 million, August 5.35 million SAAR. Housing data, though not what I would consider weak after what we have been through as a nation, have become a bit sloppy. September Housing Starts disappointed this week. New home sales, which we'll see next week, have already missed expectations for three months running, and existing home sales (the largest slice of this pie) printed at their lowest level since last September this August. Projections are for that spate of weakness to be extended today.
13:00 - Baker Hughes Rig Count (Weekly): Last Week total 928-8, oil 743-5. For those keeping track, the state of Texas showed a drop of four oil producing rigs last week, as the area continues to show declining production in the aftermath of Hurricane Harvey. With WTI having fallen sharply from the $52 level Thursday morning only to once again find support around $51.25, this number on Friday is likely to have a sneaky kind of impact this late in the day. Stay alert for this one.
14:00 - Fed Speaker: Cleveland Fed Pres. Loretta Mester will speak on global finance from New York City. Mester is a well-known policy hawk, who will vote once again come the new year. She will take questions from both the audience and the media at this event.
19:30 - Fed Speaker: Federal Reserve Chair Janet Yellen is set to speak tonight from Washington, DC on the state of modern monetary policy. This event will be watched closely, as are all of Yellen's speeches. Yesterday, the Fed Chair interviewed with the president, and remains a leading candidate to continue on in her current position past February.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2578, 2571, 2563, 2557, 2548, 2541
RUT: 1521, 1515, 1508, 1500, 1492, 1484
Today's Earnings Highlights (Consensus EPS Expectations)
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