Clouds Lift

We entered the week with fear and trepidation around trade tariffs, upheaval in the White House, a reduction in monetary ease abroad, the Beige book, and a possible overheating job market. The pundits were raising red flags that the market was going to test its most recent lows so their recommendation was to hunker down.

By the end of the week, the pundits did a 360 saying that the clouds had lifted and we may have entered another up leg in the markets. That’s why we recommend turning your TV sets off and doing your own analysis. Once again, pundits are looking through that rear-view mirror, acting as Monday morning quarterbacks.

Before we go on, here is a question for each of us to reflect on. If you believe that the market will finish this year up 10% at least and that we won’t enter another bear market for at least two years as no recession is in sight but there may be several 10% corrections along the way, how would you play it?

An investor would stay put while looking for ways to upgrade his or her portfolio utilizing tools to enhance returns all the while reducing risk and maintaining excess liquidity to take advantage of those periodic dips. Paix et Prospérité trades 10% around our core portfolio taking some money off the table when there are large short term up moves in stocks but still below our longer term objective and we add to positions when there are short quick unfounded dips. We also use covered calls for a portion of our portfolio to generate added returns while reducing downside risk.

Last week in a “A Shot Heard Around the World” we supported Trump’s effort to create a level playing field for global trade. We mentioned that we had hoped that he would take a surgical approach targeting the real cheaters including China who transships all around the world with the U.S. as the final destination for their government subsidized steel and aluminum. Trump in the end excluded Canada and Mexico as well as any other trading partner who can justify their case. He also made Canada and Mexico’s continued exclusion of tariffs on the completion of a new NAFTA agreement fairer to the U.S.. Smart move!

Trump commented in his speech that he wants fair trade with equal reciprocal tariffs. For instance, Elon Must, a noted Democrat, tweeted that it was unfair that China charges a 25% tariff on U.S. cars delivered into China while the U.S. charges 2.5% for Chinese-made cars entering the U.S.. Same goes for cars into and out of Europe. Isn’t it about time that we do something about that to create a level playing field? We could go on and on, product by product discussing unfair trade policies.

Intellectual property is another area of unfair trade practices but Trump will deal with that problem shortly. Did you hear Trump continuing to praise Chinese President Xi Jinping? There may be a grand deal in the works. Was it just a coincidence North Korea leader Kim Jong Un invited Trump for one-on-one talks to reduce tensions, possibly ending nuclearization on the Peninsula?  Probably not! The NY Times sarcastically said it would be ironic if Trump won the Nobel Peace Prize.

Maybe it’s time that we give Trump some credit for moving the ball, shaking up the status quo and getting some movement where none has happened for many, many years. His unorthodox approach may be working to the chagrin of the Democrats and liberal media. Don’t be surprised if Gary Cohn returns to the White House in another capacity.

Let’s look at Trump’s first year and a half. He:

  • Passed major tax and regulatory reform unleashing corporate America
  • Is moving to create a level playing field with reciprocal tariffs on foreign trade
  • Has coerced both domestic and foreign companies to build plants here
  • Has implemented selective aluminum and steel tariffs that will lead to more domestic production making America safer
  • Is moving closer to a better NAFTA deal
  • Has a meeting coming up with the head of North Korea to reduce tensions in the area and with the rest of the world
  • Is clearly working closely with the head of China on multiple fronts including trade
  • Has left the Democrats in the dust on multiple fronts to the chagrin of the media

Trump, the “Great Negotiator,” is shaking up the swamp.

Let’s spend a few minutes on the other key financial events that occurred last week:

  1. Both the ECB and BOJ met last week and maintained their current policies of excessive monetary ease. It is clear to both that economic and financial results are continuing to improve meaningfully and that fears of deflation have dissipated although inflation is still well below their 2% targets. Strength in both the Euro and Yen impacts their decision making process to end monetary ease too soon. If both currencies weakened appreciably, we would expect a shift in policy by 2019.
  2. Exports surged in China last month so fears of a significant economic slowdown lessened considerably. The government is forecasting 6.5+% growth in the Chinese economy in 2018. We concur.
  3. The U.S. added an astounding 313,000 jobs last month with the two prior months revised up by 54,000. The unemployment rate did not budge as the labor participation rate rose substantially meaning more people are re-entering the work force. The key number reported was that average hourly earnings rose only 0.1% from the prior month and 2.8% from last year. Fears that a tightening labor market would lead to a sharp acceleration in wage inflation evaporated immediately. We really do have a goldilocks environment: accelerating global economic growth, low inflation and interest rates coupled with a surge in corporate profits and cash flow.
  4. The Beige Book supported an improving domestic economy. We continue to forecast 3% U.S. economic growth for 2018 and a near 20% gain in corporate profits.

We have not altered our positive view of the investment environment. While Trump’s methodology is clearly unorthodox, no one can argue with his results.

Byron Wien, my former partner, when asked, commented that the next bear market is many years down the road as there is no recession in sight. There is no reason for our Fed to veer from its path on 3 increases in the federal fund rate in 2018 and 2019 as global competition and technological advances will continue to hold down inflationary pressures. We also anticipate that productivity gains will meaningfully pick up holding down unit labor costs and inflation as capital spending for new plant and equipment accelerates dramatically in 2018, 2019 and 2020.

The bottom line is that the stock market remains undervalued today. We continue to emphasize the financials, industrial and capital goods companies, technology at a fair price, industrial commodities including domestic steel and aluminum companies and special situations. Beneficiaries of a surge in domestic capital spending are one of our key investment themes. We do not own bonds at all.

Remember to review all the facts; step back, pause, reflect and consider mindset shifts; analyze your asset mix and risk controls; do independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

Leave a Reply

Your email address will not be published. Required fields are marked *