He’s on Donald Trump’s Business Advisory Council, and he had a great relationship with the Obama administration. He sucked up more government freebies than any welfare queen, and yet I think Elon Musk is a true American business hero/visionary.

Some call him a modern-day P.T. Barnum, but it turns out that Elon Musk is more of a combination of his namesake automobile company and Henry Ford.  

His company Tesla (TSLA) came up a little shy of the company’s year-end sales target, and the shares were slightly lower. However, the Street soon woke up to the bigger picture. 

In fact, this picture will eventually be a 5,000,000 square feet factory, churning out lithium-ion batteries. 

The industry is currently dominated by Asian suppliers, so this is a major breakthrough in a period when talk for competition revolves more around taxes and regulations rather than innovation and investments.  

With a third of the plant completed, 2,900 people are working to push out the batteries that will power more than transportation in the future.  Much is made of America’s antiquated power grid. Well, Musk is coming to the rescue with a backup plan for the grid and pure power sources for homes.

Getting America Moving Again

Consider the big news this week from Ford, who is investing $700 million for a plant to churn out autonomous vehicles and electric cars to the electric business that just raised $140 million on top of an earlier tranche of $150 million. It’s clear that the way we move is finally going to move into a higher gear.  

Every facet of our daily lives has come a long way since the invention of the car, which more or less is very much the same as the Model T, save for some fancy improvements. I want to see America at the forefront of the vehicle and the power revolution. The next ‘Industrial Revolution’ won’t just be on the information superhighway, but on a physical road as well.

Auto Sales

I came into yesterday’s session ready to play taps for the auto industry, whose fabled boom has now seen seven consecutive years of an unprecedented improvement in sales. It’s a mind-boggling achievement that belies the broader economic malaise that’s haunted the nation over the same period of time. It’s true that there have been extenuating circumstances:

• Sub-prime loans
• Aging automobiles
• Low-interest rates

Perhaps the party is just getting started as all those factors are still in place.

The average age of cars on the road hit an all-time high record of 10.5 years back in 2009. That same year, February saw a record low of 9.05 million sales. Coming into 2016, the average of cars on the road had actually leaped to 11.6 years.  Meanwhile, rates are still relatively low; with wages increasing, we could see fewer sub-prime loans.   

Auto sales hint at a breakout. Perhaps we could retest the monthly all-time record of 21.77 million back on October 2001.  One thing is for sure; the ‘peak car sales’ theory and subsequent crash look like folly now.

By the way, Jaguar Land Rover sales surged 31% last month, and the Maserati was up 58%; it’s probably a statement from the 1% that they’re ready to party in the Trump Era.

The Fed and Donald Trump

After years of lamenting over the fact that the fiscal policy never augmented or mirrored its monetary policy, the Federal Reserve Open Market Committee (FOMC) gathering was all about Donald Trump and his new approach to growing the economy. The fiscal policy was mentioned just once in the November meeting, and 14 times last month.  Essentially, the Fed is concerned about Trump’s administration pushing through policy proposals and campaign promises. 

The Fed is also connecting dots that point to a potential increase in consumer spending:

• Stronger employment
• Higher real disposable personal incomes
• Higher levels of household worth
• Increasing consumer sentiment readings 

There is a chance that the economy could grow too fast, forcing the Fed to become more aggressive. For me, reading between the lines, there seems to be a relief that the government will now be focused on growth rather than social justice and wealth redistribution.

Keep in mind that the Fed is hiking rates because the economy is on fire, which isn’t a bad thing or a death knell for the rally.

Retailers Derailed

After the close on Wednesday, Kohl’s (KSS) and Macy’s (M) offered negative sales updates for the Christmas period, with the latter announcing 10,000 layoffs. The news may not be a pure proxy for the consumer or the economy, which otherwise seems poised for takeoff.

For sure, I misread the early holiday season action for Kohl's, which saw a strong spike at Black Friday and the week before Christmas, but it otherwise laid an egg. The stock is getting smoked on lower guidance, and I am inclined to let the dust settle and take a loss. (We are not adding to the position- it’s certainly my first disaster of the year.)

The news was echoed at Macy's; not only did it miss on same-store sales, but it also announced massive job layoffs. However, their other consumer names are acting great, including our position in Disney (DIS) and Zumiez (ZUMZ), which posted same-store sales (+3.4%)  versus an -8.9% decline from a year earlier.

Overall, I think we need to continue to be overweight materials and focus more on the building blocks of the economy, including financials while waiting for newfound enthusiasm to reveal itself more in consumer spending. 

 

Breaking News

Disappointment continues for blue collar men as the 153,000 jobs in the ADP employment report misses consensus of 170,000 driven lower by a major swoon in small business hiring and goods producing jobs.  Men who work with their hands have been the biggest victims of the Great Recession and continue to struggle.

 Mining -6,000

 Construction -2,000

 Manufacturing -9.000 

 

This part of the ADP jobs report goes to the heart of the election and points to the challenges facing the new president and our economy.

The BLS jobs report tomorrow probably mirrors what we got from ADP this morning, but other parts of that report might lift above consensus.    As for today’s session, it’s clear the combination of retail news and subpar employment have let down investors.  There are additional data releases throughout the session, but it looks like we’ll have to wait another day for Dow 20,000.

 

 

 

Comments

Hi Charles not sure what's going on with retail, even AMZN missed last qtr. I was expecting it to bounce back quickly but it has not. Jay Little on 1/5/2017 9:15:13 AM

Business has erected a magnificent building beneath which the ground is moving. Unless they can put wheels or Teflon skids under this structure, it is going to collapse. Z on 1/5/2017 11:12:10 AM

Happy New Years, Charles! I see the ADP and Retail Sales Reports as a healthy dose of bitter medicine. A reminder that, while I remain incredibly optimistic about our economic prospects moving forward, the uncertainty of the EU economic structures, and navigating the minefield of Soviet style central planning domestically (over the last 8 yrs), will likely hamper us for the next 18 months. Go long on Domestic Stocks, but don't forget to pay your Put Premiums. J Scott on 1/5/2017 11:40:04 AM

Great point Scott but even drilling into retail sales and ADP underscores there are shifts in the way we shop and the limits of onerous regulations. The market will react to the knowledge things are getting better and use milestones like legislative gains to build the rally as unwinding more than 8 years of mediocrity doesn't happen overnight. Charles Payne on 1/5/2017 11:48:26 AM

On the matter of the Affordable Care Act and the potential for congressional action for a NEW legislative solution to the nation's healthcare....I heard one well-respected, conservative, radio, talk-show host suggest (yesterday) the following "solution" to getting congress to MOVE in the "right direction" on such reform: Place ALL CURRENT EXISTING MEMBERS OF CONGRESS ON OBAMACARE...and watch what happens. Ya know? It might just get CONGRESS to take some REAL action on this very important issue. James Warlin on 1/5/2017 1:03:12 PM

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