*TRUMP SAID TO PICK TILLERSON ( AS SECRETARY OF STATE): NBC NEWS

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Exxon Mobil Corp. Chief Executive Officer Rex Tillerson has emerged as the leading candidate for secretary of state in President-elect Donald Trump’s administration, according to two people familiar with the matter.

Mitt Romney, who was the 2012 Republican nominee for president and a critic of Trump during this year’s campaign, remains on the short list of candidates, according to the people, who has asked for anonymity because the discussions are private. Trump has said he will make an announcement next week. – Bloomberg

*SAUDI MINISTER SAYS COUNTRY TO CUT BELOW LEVEL AGREED WITH OPEC

*IRAN OIL MINISTER SAYS NON-OPEC WILL CUT BY ABOUT 600K B/D

*SAUDI CUT BELOW 10 MLN B/D WOULD BE LOWEST SINCE FEB. 2015

*SAUDI ARABIA’S FALIH: POSSIBLE THAT DEAL MAY END IN MID-2017

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Khalid Al-Falih says at press conference in Vienna that country will cut substantially from Jan. 1.

Saudi Arabia agreed to production limit of 10.058 mln bld,
a cut of 486,000 b/d from Oct. levels.

Russia and several other non-OPEC nations pledged to curb oil production next year at a meeting in Vienna, joining forces with the Organization of Petroleum Exporting Countries to end a global glut that’s crashed oil prices and shaken energy-rich economies.

The pact — the first between the two sides in 15 years — involves a reduction of 558,000 barrels a day from non-OPEC countries starting in January, Iraq Oil Minister Jabbar Al-Luaibi said on Saturday after the meeting ended.

The agreement represents the strongest effort yet by oil-rich countries, from giants such as Saudi Arabia and Russia to tiny producers including Bolivia and Equatorial Guinea, to end a market share war that has shaken investors, hit energy companies and damaged economies. – Bloomberg

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Breaking: Third Quarter GDP in at 3.5%

Annual GDP growing 1.9%

Q4: 2.6%*
Q3: 3.5%
Q2: 1.4%
Q1: 0.9%

*Per Atlanta Fed from Dec 16, 2016

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Yesterday, the lame duck Congress was able to avoid the annual government shutdown risk surge, there were less games – more action.  Ultimately, the big showdown is next year at the start of Donald Trump’s presidency.

Trump Tax and Foreign Policy: Winners and Losers

Stocks, Bonds, Currencies and Commodities Since the Election*

Russell: 21%
Russia: 18%
Brent: 17%
Copper: 14%
Mexico: 8%
S&P 500: 8%
EuroStoxx 600: 6%
Brazil: 5%
Nasdaq 100: 5%
Emerging Markets: 5%
China: 4%
Dollar DXY: +4%
FANG Stocks: 0%
Treasuries: +65bps in yield, US 10 year
Gold: -9%

*Bloomberg data, from the November lows near election day, FANG = Facebook, Amazon, Netflix, Google

*SENATE PASSES STOPGAP U.S. SPENDING BILL, AVERTS FUNDING LAPSE

The Senate passed 63 to 36 a stopgap spending bill, funding the government through April 28, averting a shutdown but putting off a long list of decisions on bills to finance the rest of the fiscal year through October.

That lawmakers are heading toward a potentially time-consuming fight over spending in the spring that could test the limits of newfound Republican unity with Trump and eat up valuable time, delaying other legislative priorities.

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Today’s Federal Budget Deficit is Substantially Greater than those Found in the Bush and Clinton Economic Recoveries

The deficit as percentage of GDP has come down considerably over the Obama years. Of course, when Obama took over the White House the economy was in a recession.  Naturally government deficits rise and GDP falls in economic downturns, which makes this number more negative (-10.2% in 2009 above).  However, over the Obama years deficits have been lower as the recovery took hold.  Trump and his aggressive pro-growth plans will likely reverse that trend, until the growth follow through offsets it.  We’ll see a return to supply side economics in the years to come, Trump wants to use tax cuts to stimulate growth.
Percentage of US Government spending on entitlements and debt
interest payments:

2015: 71%
1965: 26%
CBO

In 8 years of the Obama administration, the U.S. didn’t achieve one year of year over year +3% growth.  That has not happened in nearly 100 years.

U.S. Real Year over Year Annual GDP

2016: 1.8%
2015: 2.6%
2014: 2.4%
2013: 1.7%
2012: 2.2%
2011: 1.6%
2010: 2.5%
2009: -2.8%
2008: -0.3%
2007: 1.8%
2006: 2.7%
2005: 3.3%
2004: 3.8%
2003: 2.8%
2002: 1.8%
2001: 1.0%
2000: 4.1%
1999: 4.7%
1998: 4.5%
1997: 4.5%
1996: 3.8%
1995: 2.7%
1994: 4.0%
1993: 2.7%
1992: 3.6%

• Above 3% year over year growth is in blue

Bloomberg, CBO data

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The Trump administration and Congress of 2017 have a colossal collection of goals for their first 100 days; a) filing and (Congress) approving Cabinet posts, b) a Supreme Court vacancy, c) corporate and individual tax reform, d) replace and repeal of Obamacare and reversing a long list of regulations issued by the outgoing Obama administration in its final months. Adding the need to fund the entire federal government makes all of those objectives even more difficult.  As you can see above, the Federal deficit is near unsustainable proportions.  The U.S. needs far more than 1.7% GDP growth to support this debt load.

U.S. Federal Spending as a % of GDP

16: 35%
10: 33%
00: 29%
90: 32%
80: 30%
70: 29%
60: 23%
50: 19%
40: 14%

Arthur Brooks, CBO, Treasury data

“The Federal Reserve’s decision to raise interest rates is a warning sign to government budget watchers. The combination of rising debt levels and rates will lead to soaring interest payments, putting a strain on U.S. purse strings. A measure known as net interest costs — which balances what the government receives in interest payments against what it pays on debt — is already set to nearly triple by 2026, to $712 billion, or 2.6 percent of gross domestic product, according to the Congressional Budget Office forecasts from August. That figure soars to nearly 6 percent of GDP by 2056.”

Bloomberg, December 2016

Tax Reform and Side Effects

Front and center, corporate tax reform tied to infrastructure, will be priority number one in our view. The prospect of tax reform and a lower rate have already played a big role in equity market returns. The Russell 2000 is up 17% year-to-date and 11% since the election. The S&P 500 is only up 8% year-to-date and 3.1% since the election. Many mega-cap S&P companies have already used tax shelters such as Ireland, which has a corporate tax rate of 12.5% (vs 38% in the U.S.). The market is now rewarding companies who will see the biggest nominal effective change in the reduction of their corporate tax rate.
FANG stocks, who have been famous for using other countries as a base in order to pay less in taxes, have been punished relative to domestic retailers and energy companies who have very high effective tax rates.

See the report below, click on the link.

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