@theMarket: 100 Days Does Not an Economy Make?
Markets by their very nature are impatient. Every day they are open, something, somewhere has to be making traders money. Applying that behavior to either Donald Trump or the overall economy would be a mistake.
Nonetheless, it is what it is, Friday's first quarter GDP data, which measures the pace of growth in the U.S. economy, came at a dismal 0.7 percent. That was far less than expected. Most economists were expecting a number closer to 1 percent or more.
The response from Wall Street was "where's the beef," meaning that there has been little to no evidence that our new president has done anything whatsoever for the economy. But what about all the new hope corporations and investors are supposed to be feeling? Well, hope doesn't pay the bills or seemingly goose investment spending very much. Fixed investment in the nation's plants and equipment only expanded by a measly 1.6 percent.
To be fair, the first quarter in just about every year tends to be the weakest. Economists call it "residual seasonality." You can think of it as the after Christmas economic hangover when spending dampens down as the credit cards bill come due. Most traders know this, but hey, if there are suckers out there that are dumb enough to sell stock because of it then ... .
I'd rather listen to folks like Ben Bernanke, former Fed chieftain, who thinks that a combination of low inflation, low interest rates and global growth not only justifies the level of the stock market but may point to further gains ahead. Bernanke thinks very little of the market's rise is predicated on additional U.S. fiscal policies.
And now that our new president is reaching the 100-day mark, the temperature on Wall Street has cooled a bit. Many traders are beginning to temper their enthusiasm for "huge tax cuts" when the reality is that just because it's tweeted does not make it so, at least anytime soon.
If you were spelunking in Afghanistan or excavating mummies under pyramids in Egypt, you probably missed the administration's new tax proposals. The rest of us now know that Trump aims to reduce individual tax brackets from seven to three. He also wants to eliminate most of our tax deductions with the exception of charity gifts and home mortgage interest deduction. Tax-deferred contributions will also be spared the knife.
However, state and local taxes would no longer be deductible, which is a blow to those of us who live in the Northeast where taxes are high and so is income. It is also an area that was notably Trump-unfriendly during the election. But before you get your drawers in a tizzy, remember that this is only a broad proposal and the final legislation that is passed will be a lot different.
The stock market, however, seems to have taken all of this in stride.
I wrote last week that I was looking for the S&P 500 Index to breach 2,360 and remain there for a few days before I could give the market an "all clear." Thanks to the primary elections in France last Sunday night, that's exactly what happened. Since then the S&P 500 has traded above that level.
I believe the markets have been supported by a fairly good earnings season where the vast majority of companies are beating earnings expectations. What, to me, is even more important is that a growing number of countries are berating on the revenue number as well and giving improved forward guidance on sales. Since it is definitely more difficult to manipulate sales than it is earnings, I view this as an important development.
If you took my advice, you weathered a shallow pull-back of at worst 3 percent. My expectations were for a sell-off no worse than 5-6 percent. Now I expect markets to climb higher with the S&P 500 possibly tacking on another 50 point or so in this quarter.
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The Independent Investor: World's Bread Basket No More
The recent controversy over dairy trade policies between the Trump administration and Canada is only the tip of the iceberg. While Trump is selectively picking on one particular product, the truth is that the United States is losing its competitive advantage in many areas of agriculture.
Government subsidies to the agriculture industry worldwide have always been a thorn in the American side. That's not to say that our farmers have gone without. We, too, subsidize our farmers. Taxpayers are expected to pay at least $87 billion to help farmers over the next dozen years. And for decades, we have been spending billions each year to protect them from lost income and crop failures.
The difference between then and now is that, despite other countries' farm subsidies, we were still No. 1 worldwide in a great variety of food stuffs. So we didn't care as much. Today this nation's market share for commodity such as wheat, soy beans and corn are shrinking rapidly. Exports of wheat, for example, have declined by over 50 percent since the 1970s, while countries like Russia have expanded wheat production by over 60 percent in just the last 10 years. As a result, Russia now dominates global wheat production.
And Russia is not alone. Countries in South America, specifically Brazil and Argentina, traditional agriculture countries, have also increased production, thanks to investment, technology, year-round growing seasons, and new planting methods. Four years ago, Brazil overtook the U.S in soybean exports (now the world's largest exporter) and will be the second-largest corn exporter after the U.S. this year.
How did Brazil accomplish it? Brazil embarked on its agricultural expansion forty years ago. The government enticed farmers to develop vast sweeps of unproductive lands in the north (called the Cerrado) where today over 500 million acres are now growing crops for exports.
There are any number of reasons why we are losing market share, but a lot simply has to do with increased worldwide production. For example, if U.S. crop production remains the same, while other countries produce more, then our market share slips. At today's prices for wheat, for example, American farmers are expected to plant 10% fewer acres this winter season because it is less profitable. Other countries will be happy to take up that slack.
And then there is the strength of the greenback. The U.S. dollar has been stronger than both the Russian and Brazilian currencies. Since most crops are priced in dollars, it makes our exports more expensive compared to theirs. Lower energy costs has also helped our competitors because it is now much cheaper for an Eastern European exporter like Ukraine to ship wheat between Europe and the Middle East and still make a profit. It is a similar situation wherever you look.
And don't think that our foreign competitors are still farming with wooden hoe and bags of apple seeds. State of the art satellite-guided combines, genetically-engineered seeds from the top global producers, and computer programs that can dictate the price of harvested crops months in advance are all tools of the trade now.
What could change this balance would be some kind of natural disaster somewhere outside of the U.S. to turn our competitive position around in the short-term. Over the longer term, as costs in competitor countries for labor and land begin to climb, and the worth of the dollar falls back to earth, our comparative advantages should help us regain market share. However, the day when we could call America "the bread basket of the world" appears to be in our rear view mirror.
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The Independent Investor: Should College Be Free?
Recently, New York became the first state to offer a tuition-free college education to middle-class students at two- and four-year public colleges. Tennessee, Oregon and the city of San Francisco have also given similar benefits to students attending community colleges in their states. It's about time.
The headline of this column was taken from a series of articles I first published six years ago. At the time, I argued that the benefits of a college education today were about equivalent to the worth of a high school degree back in the 1940s and 1950s. Back then, graduating from high school opened the door to a good job, while creating a population of largely, law-abiding citizens (and guaranteed educated cannon fodder for the country's military in time of war).
Back in the day, when Thomas Jefferson first suggested creating a public school system, he and others like him argued that a free and common education would create good citizens, unite society and prevent crime and poverty. It took decades before that concept became law but, once implemented, it worked as the founders expected.
However, as society changed, a high school education was no longer sufficient. The computer age ushered in different educational demands and skill sets that students could only acquire in a higher-education environment. For all intents and purposes, college (and vocational schools) has replaced high school as the entrance ticket to the "American Dream." As such, I reasoned that since public high school education is free in the United States, why then should Americans pay for college?
Under the New York legislation, tuition will be free for residents who earn up to a specific income cap, which will be phased in over the first three years. Families who earn less than $100,000 a year would qualify for free tuition. Over the next two years that income level will rise to $110,000 in 2018 and $125,000 in 2019. The other tuition-free initiatives in Oregon, Tennessee and San Francisco have made tuition free for residents at all community colleges, regardless of income.
New Yorkers are required to take 30 credits a year, although students who encounter hardships can pause and restart the program or take fewer credits per semester. College will still cost money. The cost of fees and room and board, for example, are still the student's responsibility and could cost as much as $14,000 a year.
In announcing the program, its author, Gov. Andrew Cuomo, said "Today, college is what high school was — it should always be an option even if you can't afford it."
State officials estimate the program will cost $163 million in the first year with 200,000 students' eligible for the new program. Now, Rhode Island is considering a similar law that would make two years of public college tuition-free.
Criticism of the program largely centers on the cost. Higher education has gotten so expensive through the years that some form of government assistance already picks up the tab for half of the nation's education costs through a maze of loans, credits and whatnot. It appears that government has recognized that "pricing out" education for a growing portion of the population might not be such a good idea.
Others question the worth of a college education if it is free. What is the incentive to excel, to find a good job afterward if you pay nothing for it? They argue that so many young people today "hide out" in college, majoring in the easiest subjects possible (regardless of job market demand), while partying half the night and every weekend.
They have a point. My suggestion: while tuition may be free, to receive it you must excel in the entrance exams and have maintained good grades in a variety of subjects in high school, if you don't, than pay your own freight. What are your suggestions?
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The Independent Investor: Tense Times in Trumpland
The geopolitical landscape is heating up. U.S. relations with Syria, North Korea, China and Russia are in turmoil as the Trump administration flexes its military muscle. None of it bodes well for the stock market.
War cries and wealth are like water and oil. They don't mix well. For investors, there are far too many unknowns, especially when U.S. warships are steaming toward the Korean Peninsula. In Syria, American troops were spotted alongside Jordanian Special Forces troops along the border, despite our president's assurances that boots on the ground are out of the question. Actually, that isn't quite true, since U.S. Special Forces have been operating alongside our Syrian allies for some time.
Then there is Secretary of State Rex Tillerson's visit to Moscow. This diplomatic venture is a followup to last week's U.S. surprise tomahawking of one of Syria's airbases. Tillerson will be using America's new-found, willingness to use military might in order to further our diplomatic ends. In this case, to convince Putin to sever ties with Syrian dictator Bashar-al-Assad.
In hindsight, all that media speculation about President Trump's cozy relationship with Vladimir Putin seems somewhat far-fetched, given that Tillerson (who was also thought to be buddies with Vlad) is reported to be pursuing a hardline against Putin's failure to reign in its client state.
On yet another front, it appears President Trump has had enough grief from the "Fat-Boy" — chubby Kim Jong-un, grandson of the nation's founder, Kim II-sung, In a duel of tweets, the dictator warned of "catastrophic consequences" from any U.S. military action, while "The Donald" warned that "North Korea is looking for trouble" and that we would "solve the problem" with or without Chinese help.
Both sides have backed up these words with firepower. The U.S. response, in the form of an aircraft carrier and three guided-missile destroyers, is heading for North Korea while China has amassed 150,000 troops on its border with North Korea. In addition, Chinese medical and backup units have been stationed on the Yalu River in support of the People's Liberation Army.
Most military strategists believe that April 15 might be the day when things could heat up. It is the 105th anniversary of Kim Long-un's grand pappy. It could be an auspicious date too for "the Fat-boy" to brandish the puppet state's military might.
While all this is going on the markets have grown increasingly restive. The threat of war is normally a time when investors seek safety. Safe-haven plays such as gold, U.S. Treasury bonds and the U.S. dollar benefit from these concerns. They have done so this week. About the only good thing that can be said for these tense times is that they don't last too long.
If tension escalates, stocks usually fall fast over the course of a few days. If, as has happened in the past, geopolitical events resolve themselves, markets recoup their losses in an equally short time. Since the new administration appears to be trying to remove two thorns in our side simultaneously, the chances of further tension seem high. My advice is not to panic. Hang in there and remember that this too shall pass.
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@theMarket: Uncertainty Descends Upon the Markets
Pick your poison — U.S.-Syrian strife, weak employment numbers, China-U.S. relations — those are just some of the issues investors had to contend with this week. Despite these potential roadblocks, the averages hung in there, losing little ground as the week closed.
There was even more bad news, if you include the latest minutes of the Federal Reserve Bank's FOMC meeting. There was much discussion among the members and a chorus of assent to begin the delicate task of reducing the Fed's $4.5 trillion balance sheet later this year. Recall that the Fed bought mountains of U.S. Treasury bonds over the last eight years in an effort to keep interest rates low (and stimulate the growth of the economy).
Now the bankers feel it may be time to start selling those bonds back into the market.
They reason that the economy and the gains in employment are strong enough to weather such a move. Since this effort would be in addition to the two or three rate hikes already planned for later this year, investors are worried that even higher rates could provide an obstacle to further stock-market gains.
I remind readers that it is the path of interest rates this year, and not the success or failure of the Trump agenda that will worry me most. And speaking of the Trump agenda, Paul Ryan, the speaker of the House, cautioned investors (just before taking a two week recess) that cutting taxes may take longer than expected. That did not play well on Wall Street either.
As the week's uncertainty continued to build, President Trump's meeting on Thursday and Friday with his Chinese counterpart, Xi Jinping, had everyone biting their nails. Would there be a trade war? Would China agree to reign in their client state, North Korea? Of course, in predictable fashion, the psycho who runs that country, Kim Jong Un, chose this week to shoot missiles into the sea off the coast of Japan.
And just when Wall Street thought tensions could not get any higher, "The Donald" drops 59 Tomahawk missiles on top of a Syrian airbase in retaliation for the gassing of innocent people by that country's resident psycho, Bashar al-Assad. This U.S. strike took place in the middle of Trump's state dinner with Premier Xi. Talk about drama!
Overnight, stock index futures took a drubbing, but regained almost all of their losses by the time the markets opened in the U.S. on Friday morning. But then, the non-farms payroll report was released. Only 98,000 jobs were added in the month of March, while economists' estimates were in the 175,000 jobs gained vicinity. That took the wind out of the bull's sails once again.
Yet, here we sit with only minor declines on the day once again. That tells me two things.
That the pullback I predicted several weeks ago is still working its way through the markets.
That is a good thing. We could still drop another 2-3 percent from here. All-in, I have been expecting a 5-6 percent decline. To date, we have only experienced about half of that.
Number two, it bolsters my belief that the market's shallow decline will be followed by more upside. The markets have had every excuse to "crater" this week, but each time they fell, buyers appeared. There has been no panic, no sell-at-any-cost price orders that might indicate a more serious decline.
Both the bulls and the bears are hoping for more downside right now. The bears want to be vindicated in their belief that the markets are overvalued and overdue for a correction. My sense is that even the bears only want to make a little money, close their shorts, and then "go long" stocks. The bulls simply want to add to their existing positions, preferably at a cheaper price.
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