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@theMarket: Investors Discover Value Stocks
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Value stocks, those equities that have fallen out of favor, have made a comeback this week. These underpriced orphans have become the new darlings of Wall Street, while high-flyers (think software and some tech) have sold off. What does this say about the markets?
The short answer is that we have more room to run. It means, in my opinion, that we will reach and break historical highs in the U.S. averages and that we should have fairly smooth sailing into October. If, at that point, there are breakthroughs in the trade issue and the Federal Reserve Bank cuts interest rates, we could see the markets continue climbing. If, on the other hand, Trump trashes Chinese exports again and/or the Fed disappoints, than be prepared for a rout.
Now, let's handicap this binary event. If one asks Corporate America what's the chances of a deal, some 65 percent of Chief Financial Officers would tell you there is no hope of a deal over the next six months. That was the results of a CNBC Global CFO Council survey released on Friday. The survey included some of the largest public and private companies in the world.
This echoes what has become consensus among investors. The Chinese will wait until after the elections next year before striking a deal in the hopes that Trump loses the election. As a contrarian, that bothers me, so I started looking for what could go right in this area.
This week the White House floated an idea, first denied, and then confirmed. Trump is considering an "interim" trade deal with the Chinese. To me, that makes sense. It allows the president an escape hatch in a trap of his own making. He can claim a shallow victory (but more than anyone else has been able to win from the Chinese) by announcing a deal before the elections. Yes, it may simply be the same deal that the Chinese offered him a year ago, which begs the question of why he didn't take it a year ago and save investors and the world so much anguish? In any case, the tariffs could then be set aside, allowing companies and the economy to recover from a burden they have been under for the last two years.
Of course, President Trump (and everyone else) would rather get a whole trade deal with China, but why not settle for half a loaf and worry about the rest after the election next year? Several additional actions this week support my argument.
First, the president announced he would delay the imposition of tariffs on another $250 billion in Chinese exports "for two weeks." In response, the Chinese Ministry of Commerce, headed by Beijing's hard-liner, Minister Zhong Shan, said it will exempt U.S. agricultural products, such as soybean and pork from additional tariffs. These products have been added to 16 other types of U.S. imports that will be exempt from tariffs.
Does anyone sense a deal in the making?
As for the Fed, I expect at least a 25 basis-point cut in the Fed Funds interest rate. Now that the European Central Bank announced a new stimulus program this week (see yesterday's column on the event), the pressure is on for our central bankers to at least act a bit more dovish.
But back to value stocks and their recent outperformance. Recently, the price divergence between value and momentum/growth stocks has been greater than at any time since the 1990s. The same holds for small-cap companies versus large-caps. The darlings of the investment world, the FANG stocks, for example, have carried the stock market higher for years. A rotation into the sectors that have largely been ignored by investors makes sense to me.
As such, the averages that most investors use to gauge performance may not be telling the whole story. Basic materials, industrials, small cap, even commodities, may outperform, while the growth and momentum names could underperform, at least in the short-term until they catch-up to the markets in terms of valuation.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Europe Throws in the Towel
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The European Central Bank (ECB) announced a major new stimulus package on Thursday. A key interest rate was reduced, and a new bond-buying program was announced, amounting to $22 billion per month. In the past, those efforts would have been enough to boost the European economy, but will it be enough this time around?
It is not as if we haven't seen this before. Through the years, ever since the Financial Crisis of 2009, the ECB, as well as other central banks around the world, have stimulated their economies to avoid recession, or something worse. The problem is that monetary policy can only do so much before central banks find themselves "pushing on a string."
The ECB is wrestling with deflation. The effective inflation rate in Europe is a little more than one percent, while the bank's target is twice that at 2 percent. At the same time their economy is slowing. Interest rates are already yielding a negative return, so a 10-basis point cut in Europe's main deposit rate to -0.5 percent. (which is a record low), probably won't do much to stimulate lending or growth.
The asset purchases program is hefty and will likely provide support to Europe's bond market, as well as its equity markets, at least in the short-term. The issue is whether it will do anything to improve economic growth, which is now forecasted to slow to a measly one percent.
What struck me most about ECB President Mario Draghi's statements was the acknowledgement that monetary policy has done all it can do over the course of the last 6-7 years. He reminded the world that the ECB was largely responsible for any improvement in Europe's economic growth and employment. It was time, he said, for Europe's governments to address the fiscal side of stimulus if they hoped to improve their economic fortunes.
His warnings have been echoed repeatedly by central bank officials worldwide (including our own Fed) throughout the past several years. And yet, global governments, divided by ideology, have refused to pick up the challenge, preferring to leave the responsibility to bodies of appointed officials who can't be voted out of office.
No sooner had the ECB announced its program than the Euro plummeted against the dollar This immediately evoked a tweet from our president, who blamed the Fed for allowing it to happen: "And the Fed sits, and sits, and sits."
Draghi also pointed out that his central banks view of the world was fairly optimistic, since the committee did not include the possibility that Trump's trade war would worsen. It also assumed that there would be no hard Brexit. If those events took a turn for the worst, the ECB's forecast for future growth in Europe would need to be adjusted downward again.
What lessons can we draw from the actions of the ECB? In our own country, growth is slowing, thanks to Trump's trade war, geopolitical turmoil on several fronts, and unpredictable domestic and foreign policies. Congress is so divided that the chances of getting any kind of fiscal stimulus through Washington is thought to be non-existent.
As a result, the powers to be are relying entirely on Jerome Powell and the Federal Reserve Bank to save the U.S. economy, right every wrong, and control our currency, which, by the way, is under the control of the U.S. Treasury, and not the Fed.
The markets, the president, and the media are all expecting the Fed to cut interest rates next week by 25 basis points at a minimum. They also expect the Fed to embark on some milder version of the ECB's new stimulus program. My own advice would be entirely different.
President Trump should announce a trade deal with China now, while working with both sides of the aisle in Congress to launch a large, simulative infrastructure project in this country. If that were to occur, I don't think we would need the Fed to save us.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Markets Break Out of 3-Month Trading Range
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Investors received a bucketful of good news this week. Brexit got a reprieve, Hong Kong authorities caved in to protestors demands, and another round of trade talks is set for October between the U.S. and China. Welcome to September.
As of Friday, the S&P 500 Index was less than 2 percent from all-time highs. The other indexes are close as well. And while September is historically not a good month for the markets, this time around, September is starting off with a big bang. Can it continue?
Yes, in my opinion. We could see all three averages break out into new, all-time highs before all is said and done. While traders and computers trade on the headlines, I am more interested in looking underneath the hood to see if these gains are justified and can be sustained. So far, I'm betting they can.
Last week, I advised investors that the markets would remain in a trading range until some new tweet or announcement on trade changed the dynamics. Thursday night's revelation that trade talks would resume in October at the ministerial level between the two countries was the catalyst we needed to break out of a three-month, 100-point trading range on the S&P 500 Index.
Earlier in the week, we also had some good news when Hong Kong leader, Carrie Lam, announced the withdrawal of an extradition bill that would have allowed Hong Kong's citizens to be extradited to China for trial. Whether that will appease the thousands of protestors remains to be seen, but for now it was a positive development and removed one brick in investors' wall of worry.
Over in the U.K., Brexit took a bizarre new turn. Boris Johnson, the prime minister, was handed several defeats this week, culminating in what can only be called a palace coup. His no-deal Brexit departure, scheduled for Oct. 31, went up in smoke as both the opposition parties, as well as members of his own party, rebelled. They not only overturned his strategy, but insisted on an extension request from the EU if Johnson could not work out a deal by Oct. 14.
In response, Johnson called for snap elections, but no decision has been made (and won't be) until at least next week by the parties in Parliament. Investors took these developments as a positive, both for the UK as well as for the European Union.
In the meantime, readers may have noticed that I have resisted joining the "recession next year" crowd. Despite all the angst generated by the inverted yield curve and what it may or may not portend, I have not seen enough evidence to convince me that recession is knocking on our door.
There is no question that areas of the economy, notably manufacturing and possibly farming, are faltering, but services, which largely represent consumer spending, seems more than healthy to me. I will blame Donald Trump for the present woes in agriculture thanks to his tariff war. Manufacturing, despite our president's rhetoric, it continues to slump.
Linking "Making America Great Again" to a new American-led age of manufacturing has been a dismal failure. Manufacturing jobs are still leaving. Companies are still fleeing and this weeks' Institute of Supply Management report (ISM), which measures the health of the nation in manufacturing and non-manufacturing sectors, continues to tell a tale of two sectors.
The manufacturing sector took another nosedive in August, with employment falling from 51.2 percent to 47.4 percent. Fortunately, the America we live in today does not depend on manufacturing jobs to grow the economy.
Instead, consumer spending is the engine that drives our economic growth. The release on Thursday of the ISM report on the non-manufacturing sector showed continued growth that was 2.7 percent higher than July's number. As long as the consumer stays healthy, I believe, so will the economy.
As for the markets, I am looking for the rally to continue with fits and starts for the next week or so. At that point, all eyes will be on the Fed and a possible interest rate cut of 0.25 percent.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Business Roundtable's Change of Heart
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Now that the media is on to more interesting topics, the August announcement by the Business Roundtable deserves further examination. Afterall, it is not every day that a group of the nation's most powerful chief executives redefines the goals of American corporations.
The maximization of shareholders' profits, above all else, has been the motto of the Business Roundtable (BRT) since the 1980s. Critics claim that this attitude has led to all kinds of negative consequences for society overall. The environment, the individual worker, suppliers (think underage Bangladesh garment workers), consumers and local communities have been needlessly harmed by this myopic view of a corporation's purpose.
It is probably no accident that the modern age of inequality coincided with the establishment of this guiding corporate principal. Boosting their return of capital and generating as much profit as possible was "good for business," as was shipping American jobs overseas to cheaper labor markets like China.
The membership of the BRT is made up of the CEOs of America's 192 largest companies. They are paid to be smart, to be far-ranging thinkers who can be expected to steer their companies through future challenges. As such, all of them are keenly aware that the nation is in the throes of a heated debate over exactly what are the responsibilities of corporations now that they are considered equal citizens under the law.
Should Walmart, for example, take the lead and cut back their gun sales, since no one in Washington has the courage (or ability to create a compromise) that would lead to a solution in curbing the almost-daily massacre of innocents throughout the nation? Should CEOs and other managements voluntarily cut back their compensation, which has grown by almost 1,000 percent since 1978, versus the 12 percent worker compensation, during the same time period?
The rise of the millennial workforce makes taking corporate workers for granted no longer an option, nor is paying women less than men for the same job. More and more younger employees want their companies to stand for something other than profit. And in this age of historically low unemployment, it is getting harder and harder to recruit young talent (especially in the tech world) if the greenback is the only thing that companies offer.
In national politics, both Republicans and Democrats are increasingly targeting the business community as the cause of many of society's ills. A line of Democratic candidates is demanding that businesses start acting like good social citizens or be penalized for ignoring the needs of said society. Both parties are attacking the medical and health sector on everything from drug pricing to the escalating costs of health services and insurance.
As the incidence of data hacks intensifies and impacts millions of Americans, companies in the financial, retail, and other industries are under fire for failing to protect consumers from data theft. The rise of social media leaves every company vulnerable to damaging social campaigns on issues as diverse as chemical poisoning to greenhouse gas emissions. They can create public relations firestorms that cannot be controlled or managed.
The move by the BRT was a wise move, in my opinion. For the most part, it was an exercise in catching-up to some individual members who have already taken the initiative to make far-reaching investments in employees, communities and the broader society.
It does not mean, however, that shareholder value will now only be an equal consideration with another stakeholder's interests. It only acknowledges that shareholder value is no longer their sole business. In a country where capitalism has morphed into a system that favors corporations over individuals, and the rich over the poor, this is simply a first tiny step in recognizing that reality.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: The Summer of Financial Discontent
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As we close out the summer, investors have had anything but a sleepy three months. The volatility caused by the Fed's actions, Donald Trump's tweets, Brexit, and tariff threats had markets gaining and losing billions — if not trillions — of dollars in assets on a weekly, and sometimes, daily basis.
The question you might ask is "Will it continue?" The short answer is yes, at least into October, unless a trade deal is signed. And what are the chances of that happening? Not very high, if you listen to the experts who profess to know and understand China.
A respected Deutsche Bank economist, Yi Xiong, wrote in a recent report that China has made up its mind to play the long game, something I have been warning investors might happen. Rather than come to the table, China will look to strengthen their domestic economy, while enduring any tariffs the Trump Administration might inflict upon them.
In order to understand their decision, you need to realize that China has been working for almost a decade to transform their economy from an export-led economy to a consumer-driven domestic powerhouse. As a result of this transition stage, China's GDP has been cut roughly in half from 12 percent annually to 6-6.5 percent today. The government hopes to complete the transition by 2025 or so.
As such, external trade makes up a small portion of their economy, no more than 20 percent of GDP and this percentage keeps shrinking. Contrary to the rhetoric you may be hearing or reading on Twitter, the majority of that trade is not with the U.S. As much as 80 percent of China's exports have gone to other countries, rather than the United States.
As a result, the trade impact thus far on China has barely dented economic growth, contrary to claims made by others. While the overall economy has slowed, most of the decline can be accounted for by China's own actions. In their stated desire to reduce national debt, government investment has declined, as has consumer spending, which accounts for most of the shortfall in their economic growth.
In response to the expected levy of U.S. tariffs on all their exports, China plans to adopt measures to grow their domestic economy. Additional spending on infrastructure and measures to boost domestic consumption have already been announced and are being implemented today.
At the same time, the government is diversifying its supply chain. It is accelerating efforts to open up their economy to other countries, while reducing reliance on the U.S. over the longer term. And as for combating the tariff hit to the price of their export goods to the U.S., China will most likely continue to devalue their currency, the yuan. This last month, the yuan has lost about 3.7 percent against the greenback, the biggest monthly decline since 1994.
What will all this mean for our markets and economy? More of the same, in my opinion. Without a trade deal, U.S. companies will continue to put off investment, which will, in turn, slow our economy (and earnings). Most other regions of the world are already in worse economic shape than we are, so don't count on any spill-over in growth from elsewhere. Interest rates should continue to slide, sparking more and more calls for an imminent recession.
Our side will continue to raise, and lower hopes of a deal (most of which will be simple fabrication), while blaming the Fed for any shortfall in growth. The president will deny that his tariff war has any impact on the economy, while desperately seeking ways to shore up the economy by more tax cuts, etc. If he fails, I expect he can always blame the Fed.
The only saving grace out of all of this may be the central bank and what it decides to do in two weeks. If they cut rates (and by how much), it may give the financial markets some support. In which case, you could see a big spike up as a result. Otherwise, expect more volatility while being trapped in a wide trading range.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
