The Pundits Go Flip-Flopping Again

Ten days ago the pundits or so-called experts on CNBC, Bloomberg, Fox News and other media outlets were predicting that the 10-year treasury was going to breach 3.15% and that the price of crude was going to push through $80/barrel… but no longer. Literally a week later, last week, their new target for the 10-year treasury was 2.75% as yields fell beneath 3.0% and oil would fall beneath $70/barrel. Come on now! What changed that inspired them to do a 180 in a week? Was it:

  • Tied to Saudi Arabia and Russia discussing plans to increase production to offset the loss of production from Iran and Venezuela?
  • The global economies and inflation peaking?
  • Trump cancelling talks with North Korea, which may still be on?
  • Trade talks with China faltering?
  • A trade war brewing with Europe and Japan over auto tariffs?
  • The Fed notes signaling a change in policy?
  • Italy exiting the Eurozone and defaulting on its debt?

Or, was it possibly that various markets were correcting after major moves and nothing substantive has changed? We believe the latter!

Stop thinking as a trader; don’t be influenced, correct that, fooled by the sound bites. Review the facts for yourself and consider any mindset shifts remembering to maintain excess liquidity at all times to be in position to benefit from such foolishness. In other words, do the research and then invest accordingly!

Change is about creating new multi-year investable trends both on the long and short sides of the markets. However, all regions, industries and companies are not equal. Maintain a global perspective with an open mind, as the past is not prologue.

The truth is that Trump and his administration are major disruptors much like Amazon and Alibaba. He continues to follow through on his agenda, which is pro-business, pro-growth, America first, including major shifts in trade flows, and reduced regulations. Isn’t it time to believe him as he is clearly walking the walk? We may not like his delivery or some of his social views but we certainly appreciate his business agenda.

By the way, President Xi Jinping has embarked on a new direction for China as well. You just need to focus on these two great nations to formulate a profitable investment portfolio for the next few years. Don’t overthink it. It is right in front of your face. Of course, patience is a necessity, as change does not occur overnight. But the rewards are well worth the wait. We still are confident that these two leaders will find a way to bridge the trade issues including, most importantly, protecting our IP.

Invest where the government is the wind behind your back and sell/short where the government is in your face. This view has ramifications not limited to investments only in the States. For instance if Trump and his team are pushing for open, fair and reciprocal tariffs, it is pretty easy to identify the winners and the losers. If there are tariffs and/or quotas on imported aluminum and steel, buy Alcoa and Nucor, the best in class, as multi-year investments. Not too difficult, right? What happens if there are equal tariffs globally on cars? Why shouldn’t that be the case? Just look at what China is proposing. The winners and losers are clear-cut then too!

Changes are occurring throughout the world caused by the actions of Trump, the disruptor, and his team.

Let’s now respond to those issues currently bothering the pundits/experts that we mentioned above:

1.) Oil prices have risen substantially over the last few years as OPEC reduced production, including Russia, while global demand continued to rise. Political problems in Venezuela contributed to the global shortfall. We always expected Saudi Arabia to support lower production and higher prices to justify the value of its Aramco public offering scheduled now for 2019. The US embargo against Iranian oil has only served to exacerbate the production shortfall, which led to a spike in prices to $80 dollars/barrel. It is believed that Trump has personally asked Saudi Arabia to increase production along with Russia to stop the rise in prices, as it would penalize global growth if it rose much further. While we believe that is true, we don’t believe that Saudi Arabia, Russia and other OPEC members want the price to decline much below $75 dollars/barrel. Russia and other OPEC members need the revenue and Saudi Arabia desperately wants a successful IPO of Aramco. Stay tuned!

2.) Global growth has slowed in some areas and accelerated in others. It is not surprising that a strong Euro and Yen over the last 9 months have penalized growth in Europe and Japan, both export dominated, while growth in China and the US has been stronger than anticipated. The dollar is once again on the move as domestic growth accelerates, trade patterns shift and domestic energy production increases.

We have not veered from our forecast for 3.9% global growth this year and next with inflation slowing rising. Even if energy and industrial materials prices stall out at these levels for a while, the gains over the last year have been substantial supporting higher inflation in the months ahead. We do expect productivity gains to improve as the capital spending cycle moves into gear. We would not be surprised to see industrial commodity prices continue to march upwards as the producers are NOT increasing capital spending/production, as they normally would have done at this point in an economic cycle. We expect BHP and RIO to continue to increase their free cash flow, hike their dividends and increase their stock buybacks.

3.) Trump’s on again, off again talks with Kim Jong-un appear to be moving forward once again. North Korea appears earnest in its desire to improve the standard of living for its people modernizing its nation much like its South Korean neighbors.

4.) Wilbur Ross is off to China to put some meat on last week’s trade talks in DC. While we recognize that this is a huge endeavor, we do expect progress to be made, sanctions to be postponed and further talks to ensue. Clearly it is in the best interests of both nations to work together and collaborate on many levels.

5.) We are more concerned over our trade talks with Europe and Japan than with Canada, Mexico and China. Nevertheless, we believe that it is appropriate that their auto tariffs be fair and reciprocal much like China is proposing. Both regions count on the US for their national defense and much more so we remain hopeful that a fair resolution will occur.

6.) The Fed notes came out this week and were just as we expected. The Fed will most likely hike rates two more times this year unless our economy slows down meaningfully, trade conflicts escalate, the dollar strengthens too much or inflation moderates much from today’s level. We continue to believe that the Fed will remain one step behind and let the economy run hot with inflation exceeding 2%.

7.) We don’t see any way that Italy leaves the Eurozone and defaults on its debt.

So where does all of this leave us?

We believe that the pundits/experts continue to look in the rear-view mirror and remain one step behind, much like the Fed. There is basically no change in our view and look at the recent counter-trend moves in the stock market as an opportunity to add to our core positions on both the long and short sides of the market. We continue to buy those companies benefiting from economic growth, especially domestic capital spending, with pricing power and short those companies without pricing power hurt especially by the disruptors.

Our portfolios include financials; industrial and capital goods companies; technology at a fair price to growth; low cost, financially strong industrial commodity companies including domestic steel and aluminum; and special situations. We also remain long the dollar and short bonds.

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

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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