Republicans’ failure to get a healthcare bill through the House is a clear ‘shot across the bow’ of our bullish outlook. Importantly, ‘repeal and replacement’ of the Affordable Care Act has not been a core part of our bullish investment case. However, we now believe that GOP dysfunction places other ‘pro-growth’ measures at significant risk — the most important of which is tax reform. We are not turning outright bearish at this time, because global growth has positive momentum and the Washington policy situation is likely to remain very fluid. However, if it appears that tax reform is going to go the way of healthcare reform, we will have no choice but to downgrade our optimistic outlook for both the economy and equity markets.
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The most recent companies with a CEO change include: HRG Group (HRG), Yahoo! Inc. (YHOO), LKQ Corporation (LKQ), American International Group (AIG), Advanced Drainage Systems (WMS), Weatherford International (WFT), CSX Corporation (CSX), CoreLogic (CLGX), DDR Corp (DDR), Popeyes Louisiana Kitchen (PLKI), White Mountains Insurance Group (WTM), PRA Group (PRAA), ServiceNow (NOW), Third Point Reinsurance (TPRE), Teleflex (TFX), Interface (TILE), Macy’s Inc. (M), CSX Corporation (CSX).
The FASB recently passed a new standard that will change how pension cost is recorded in the income statement. The new rule will effectively require a disaggregation of pension and OPEB cost, whereby non service-cost components of the cost would be reclassified ‘below the line.’
Over the past two weeks, we’ve increasingly heard concerns about Fed hikes, stagnating confidence, small-cap underperformance, and falling oil prices. We’d be more concerned if economists hadn’t just started to upwardly revise their 2017 expectations. Inside the beltway, the policy situation is generally playing out in-line with our expectations. We expect heated debates to continue with respect to health care, regulation, taxes, etc. At the end of the day, we believe that GOP members realize that they won’t be ‘running the show’ forever that most of the ‘pro-growth’ agenda items favored by investors will be passed later this year in some form, including significant tax cuts for corporations and individuals.
Sealed Air (SEE) is said to be in exclusive talks to sell Diversey Care Unit, the cleaning and chemicals systems division, to Bain Capital for approximately $3-4 bn, according to a Reuters report. The deal could be announced before March end. Most likely if any negotiations fall through, Sealed Air will revert back to the initial plan of spinning off the unit. On a pro forma basis, the Diversey Care Unit generated $4.2 bn in sales and had adjusted EBITDA of $826m.
Our quarterly earnings quality (EQ) score is an objective way to identify potential accounting related short ideas and as a risk tool to avoid potential blow-ups in the portfolio. We strongly believe that the balance sheet and cash flow statement are forward indicators of potential income statement problems and that management teams may mask deteriorating business fundamentals through various accounting maneuvers (e.g., cookie jar reserves, cost capitalization, aggressively recognizing revenue, changing depreciation policies, etc.).
In last week’s note, we discussed our bullish outlook for the U.S. banking sector and how accelerating credit growth is likely to play a key role in driving the U.S. economy out of secular stagnation, with the underlying trend in real GDP rising to 3%+ in the quarters ahead. We also argued the case for bank stocks to outperform, despite having ripped roughly 35% since the market’s bottom before the election. Given banks’ very strong run in recent months, we weren’t shocked to receive a significant amount of pushback against our bullish call.
CEO Changes. The most recent companies with a CEO change include: American International Group (AIG), Advanced Drainage Systems (WMS), Weatherford International (WFT), CSX Corporation (CSX), CoreLogic (CLGX), DDR Corp (DDR), Popeyes Louisiana Kitchen (PLKI), White Mountains Insurance Group (WTM), PRA Group (PRAA), ServiceNow (NOW), Third Point Reinsurance (TPRE), Teleflex (TFX), Interface (TILE), Macy’s Inc. (M), CSX Corporation (CSX), Columbia Banking System (COLB), Forum Energy Technologies (FET).
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