The Retired Investor: Markets Ignore China Sanctions
During the past few weeks of this presidency, both the Trump administration and Congress have levied additional sanctions against the People's Republic of China. Financial markets and U.S. corporations have largely ignored those efforts; here's why.
Investors have learned over the past four years that tough talk on trade tariffs, blacklisting and other threats were largely ineffectual in curtailing the world's second largest economy. The facts are that U.S. tariffs on Chinese goods have been a failure. Our trade deficit with China is higher now than it was before the trade wars.
China's trade gap with the U.S. was 43 percent bigger in September, for example, than when Donald Trump took office. The surplus overall is 18.86 percent higher than a year ago and the trade gap between the two nations is on track to exceed $600 billion by the end of this year. That would be the highest since 2008.
The only difference investors could see in all this expended energy is that U.S. corporations (and consumers) have had to pay more for some imported Chinese goods. Aside from that, our farmers lost billions of dollars and had to be compensated by additional tax dollars for losing market share to Brazil and other nations in certain agricultural products like soybeans.
Last week, on the financial front, the delisting of Chinese companies under the House passage of the Holding Foreign Companies Accountable Act, looks good on paper, but not so much once you read the fine print. The act would require U.S. regulators to review the audit books of all U.S.-listed Chinese companies. If they refuse or fail to come into compliance under U.S. acceptable accounting standards, they will face delisting.
Conveniently, the bill's authors failed to mention that U.S.-listed Chinese companies are already audited by the largest U.S. accounting firms. The "Big Four" accounting firms (PWC, Deloitte, Ernst & Young, and KPMG) apply the same standards in auditing these Chinese companies as they do in auditing companies in the U.S. and Europe, as well as their clients around the rest of the world.
In addition, the Securities and Exchange Commission (SEC), which is charged with enforcing the act, has already made quite a bit of progress in developing a workable framework that would solve these issues. The SEC proposes having Chinese companies listed in the U.S. audited and reviewed by firms located in jurisdiction that are accessible to U.S. regulators.
The China Securities Regulatory Commission (CSRC) appears to have no problem with that solution or the act. The CSRC already assumes that Chinese companies listed on U.S. stock exchanges follow U.S. laws and regulations for financial reporting and information disclosure. From Chinas' point of view, anything that can help regulate and identify the few bad apples among thousands of listed Chinese companies is a welcome addition to their own regulatory efforts.
For Wall Street, the delisting threat may, at most, create some minor short-term sentiment that could pressure Chinese stocks, but there is simply too much at stake to see a wholesale delisting of Chinese stocks. There is almost $2 trillion of U.S. money invested in Chinese equities today. Companies such as Alibaba, Baidu and JD.com have become as familiar to Americans as IBM and delisting the lot would throw the financial markets into chaos.
The U.S. strategy of blacklisting certain other Chinese companies such as telecom giant, Huawei, plus dozens of other companies, has done as much harm as good to the U.S. and its corporations. Our semiconductor sector, for example, has experienced severe supply dislocations and costly business interruptions because of the Huawei crackdown.
Dozens of other firms that the Commerce Department has added to its "entity list" have caused unexpected repercussions as well. Many of these Chinese firms are accused of either helping to spy on China's minority population, the Uighurs, or of having ties to China's military. Many of them are customers of our own technology and cloud-based computing firms. Some U.S firms may have had joint ventures with these companies or garnered a substantial portion of business from these companies.
From my perspective, the incoming Biden Administration gives the U.S. a chance to re-examine the direction our country has taken in answering the "threat of China." If Director of National Intelligence John Ratcliffe was right when he said last week that "the People's Republic of China poses the greatest threat to America today," then we better up our game in ways that may not make great headlines, but instead protect our interests far more effectively than they have in the past.
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@theMarket: Markets Bet on Stimulus Sweepstakes
The first week of December saw all three major averages climb to minor new highs. The trigger was more good news on the delivery timetable of the coronavirus vaccines. The expected speedy distribution of the first batch of wonder drugs encouraged investors, even while the number of COVID-19 deaths and cases nationwide continued to skyrocket.
In addition, a new dose of hopeium has infected investors on the stimulus front. The Democrats $2.2 trillion proposal has gone nowhere since July, thanks to the Republican-controlled Senate. The Democrats then reduced their price tag in an effort to forge a compromise before the election, but the Republicans refused to spend more than their initial $500 billion offer.
The House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, have dropped their offer once again this week. It now matches a new bipartisan proposal of $900 billion that could forge a compromise bill during the next two weeks. Friday's November non-farm payroll report may have clinched the deal.
Job gains were much worse than expected with U.S. employers adding 245,000 jobs versus 465,000 jobs that were anticipated. December's data could see the job gains disappear altogether. That might jeopardize the outcome of the January 5th run-off senate elections in red state Georgia for Republicans.
I see politics at play. Senate Majority Leader Mitch McConnell, while suddenly finding "fiscal responsibility" after four years of unbridled deficit spending, has been steadfast in his refusal to compromise on his $500 billion stimulus package. This is despite the pleas of the vast majority of governors, and state legislatures from both parties, for help from the federal government. Before the elections, even our lame-duck president had pleaded with the Senate to pass at least a $2 trillion stimulus package to no avail.
The Democrats' new willingness to compromise further can be credited to President-elect Biden, who indicated to his party leaders that some relief for the nation is better than no relief. This week's labor report places McConnell between a rock and a hard place. If he goes along with too much stimulus, he will risk the ire of conservative voters in Georgia. On the other hand, too little stimulus, and he will galvanize more Democrats to come out and vote in an already tight race.
The betting at present is that a deal will get done but investors have been burnt several times before in this stimulus sweepstakes. Regardless of the bickering, the clock is ticking, the COVID-19 deaths are mounting, and the cold weather has arrived. But I suspect the markets will continue to ignore the gathering storm clouds unless a real darkness descends, and investors get spooked.
As most American investors continue to focus on the U.S. stock market, a number of other equity markets are notching up some great gains. Emerging markets, which are typically resource-heavy nations, are enjoying both the benefit of a declining dollar, as well as price increases in natural resources.
My attention is also focused on equities in Southeast Asian nations such as Japan, South Korea, Taiwan, and Vietnam. Indonesia and Thailand may be next year's story. These economies are recovering quickly, thanks to a concerted effort to combat the spread of the coronavirus. Even China, despite the continued bashing from the U.S., is pulling ahead of us on most fronts and enjoying the benefits. I expect that next year we will see those markets continue to do well, and in some cases, outperform the U.S. stock market.
On the home front, investor sentiment continues to be frothy. The technical charts and other variables I look at indicate a building of overbought conditions as well. In the short-term, the certainty of a stimulus deal could be worth another 100 points or so on the S&P 500 Index before we get another pullback. What could cause a decline? The coronavirus numbers might finally freak out even the most bullish of traders or it could be some other excuse. If so, it won't be a devastating sell-off (more like 3-5 percent), but it could arrive just in time for the winter holidays.
In the meantime, I expect the cyclical and natural resource trades to continue, while technology takes a back seat. I would also look to add some precious metals to my portfolio during these next few weeks, if gold, silver, palladium, and platinum continue to fall. And for those speculators with a stomach for risk, Bitcoin also looks interesting to me on a pullback.
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The Retired Investor: Bitcoin Is Back
After a three-year hiatus, cryptocurrencies have returned and are attracting the attention of investors. Will this time be any different?
Readers may recall the Bitcoin craze that sent the largest digital currency to an all-time high of $20,000 in 2017 and spawned numerous copy-cat cryptos like Ethereum and Litecoin.
You may also remember that all of them came crashing back to earth and ignominy where they have languished, unloved, until this year.
This week, Bitcoin hit a new three-year record of $19, 857. If that is news to you, there is a reason for that. After the last buying frenzy and subsequent crash, the financial media has taken a more cautious approach in touting cryptocurrencies. Until recently, Bitcoin has barely been mentioned in the press.
Another big difference is the number of new Bitcoin. More and more companies, many of them traditional financial institutions, are taking an interest in using and trading Bitcoin, and other digital currencies such as Ethereum and Litecoin. JPMorgan Chase & Co., as well as several other Wall Street firms, have expressed more than a passing interest in owning and trading these currencies.
In addition, more and more firms are accepting Bitcoin as payment. As of mid-year 2020, more than 160 companies allow their customers to pay with Bitcoin, including such heavy hitters as PayPal, Microsoft, AT&T, and Shopify. And it is no longer just the retail investor and "hot money" guys who are buying and selling crypto. A growing number of institutional investors are dipping their toes into the arena in search of better returns. Simply parking their spare cash in a money market fund (where it earns next to nothing) is not an option for many.
In one recent famous incident, a public company in business intelligence, MicroStrategy Inc., announced in July a new strategy in which it would invest its substantial excess cash into various assets instead of low-yielding money market funds. They chose Bitcoin as one of those alternative assets.
At last count, the company held 38,250 Bitcoin with an aggregate cost basis of $425 million. It is worth more than $730 million today. As a result, many traders have used the company's stock as a proxy to play Bitcoin. The share price has often tracked the price of Bitcoin rather than the fortunes of the company's main business. Other investors are identifying listed companies with any exposure to cryptocurrencies. In some cases, traders are bidding up their stock prices by more than 100 percent.
The same thing happened on the last go-around with cryptos. So why is this time any different? Aside from the big bets that respected investors like Paul Tudor Jones and Stan Druckenmiller and other institutional players are making, the overall environment has changed.
Most risky assets are already at record highs. Low interest rates provide little to no return and, according to the Fed, will remain that way for the foreseeable future. Then there is the U.S. dollar, which is dropping like a rock, making lower lows almost very day.
Does that mean cryptocurrencies are somehow a better bet than they were three years ago? No. I expect the volatility that easily cut Bitcoin in half in a matter of weeks could happen again tomorrow. The digital currency markets, while maturing, are nowhere near stable, and won't be for a long, long time. It is not a market for the faint of heart. Over Thanksgiving and into Black Friday, for example, Bitcoin dropped more than 10 percent in 36 hours. It bounced back by Monday, but you catch my drift.
As for me, I have added cryptocurrencies to investments I will now follow daily, because I do believe that this asset class will become more meaningful over time. If you are itching to purchase, my advice is to wait for a pullback, which should come somewhere between $20,000-$25,000 Bitcoin. I would except a 20-30 percent decline, so wait for it!
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@theMarket: Market Cyclicals Take the Lead
It was a good week for investors, which is not surprising since Thanksgiving week has been kind to investors in the past. The question is, will December fulfill its role as one of the year's best months for stocks?
The short answer is yes, I don't see why not. My recent target for the S&P 500 Index is 3,800, but it is possible that I may be too conservative. An additional spike up to the 4,000 level might be in the cards sometime early next year, but one week at a time. What is the bull case for those lofty predictions?
I have long argued that a coronavirus vaccine was key to the economy and the market's future performance. We now have at least three vaccines with possibly more in the wings. That is a game changer, in my opinion. While distribution of these medical wonder drugs will take time, markets are discounting their successful distribution now, not when it happens in three to six months.
While I expect the present surge of COVID-19 will ravage the nation throughout the winter (as happened in the 1918 influenza pandemic), there is some hope that the government could come to the rescue in ways it has failed to do leading up to the election. Most observers around the world would give the U.S. failing marks in handling the pandemic. What is worse, there has been a notable vacuum in leadership in Washington since the election, even as deaths and cases skyrocket. That void in leadership is increasingly being filled by the president-elect by default.
Plans to combat the coronavirus and alleviate its worst impact on Americans, a viable and far-reaching program to distribute the vaccines, and the willingness to spend what it takes to accomplish that mission, have given the country and Wall Street new hope. Rather than Armageddon, which was predicted if Joe Biden and the Democrats won the election, the nation has been impressed by Biden's picks for cabinet positions this week. In addition, Janet Yellen's selection as U.S. Treasury secretary (the first woman to fill that post), has met with approval from the business and financial sectors.
It was Biden's election and his subsequent actions which has propelled the stock market to new highs in the past weeks. President-elect Biden's initial moves appear to have reassured Wall Street and many conservatives that his will be a moderate path forward. Until that proves wrong, the financial markets should continue to gain.
As I have been pointing out during the last two months, underneath the overall averages there has been a sea change occurring in the market's leadership. Technology, especially the large-cap leaders that have propped the market up in recent years, are relinquishing their leadership role (at least temporarily). In their place, industrial, transportation, materials, financials, and other cyclical parts of the economy have been given a new life, as reflected in their stock prices.
Basic materials, led by copper, a key ingredient of any worldwide economic recovery, have soared. Energy stocks, the worst performing sector of the markets by far this year, have seen double digit gains. The price of oil has lifted as traders anticipate additional demand by a world in economic recovery. Two casualties of this switch from tech to value and cyclicals has been the "safe haven" plays of the U.S. dollar and gold.
The dollar, as measured by DXY, an index that measures the value of the greenback relative to a basket of foreign currencies, is hovering just above a major support level at 91.75-92. A break below that would likely send the dollar a great deal lower. Gold has also fallen below the $1,800 an ounce level.
Normally, a declining dollar would be good for gold, since it is perceived as an alternative form of currency, but not right now. Investors believe that without the need for a safe haven, and with little to no inflation on the horizon, why hold gold? My own belief is that attitude is extremely short-sighted. I believe gold has a life of its own and fears of inflation next year could spark a resurgence. The precious metal may fall even further over the next two weeks, and if it does, I would be using that decline as a buying opportunity.
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The Retired Investor: Pandemic Has Been Good to Pet Industry
|Bill and Titus.|
Sales are increasing wherever you look in the pet sector. Toys, beds, grooming products, leashes, day care, you name it; the pet industry is experiencing double-digit increases in revenue. Better yet, there are few signs that consumer spending in this area will slow down anytime soon.
As readers are aware, the retail sector has been one of the hardest hit as a result of the coronavirus pandemic. The pet care industry is an exception to that rule. In the past, I have written extensively about how recession-proof the pet industry can be. In both the 2001 and 2008 recessions, pet care sales grew between 5-7 percent. Consumer spending on pets has grown 36 percent in the past 10 years (ending in 2017). Edge by Ascebtial, a market research firm, is expecting the overall industry to reach $281 billion in sales over the next three years.
The pandemic is only accelerating this growth. COVID-19 has made owning a pet that much more important to Americans, in my opinion. In the time of plague, I have found that aside from my wife and family, there is no greater comfort than the emotional attachment a pet offers. As it turns out, I am not alone. The initial stay-at-home, lock-down period in this country triggered many to seek the companionship of some kind of pet, usually a cat or dog.
Adoption and fostering rates soared, in some cases, by more than 100-200 percent nationally, according to Pethealth Inc. In New York City, application rates actually reached an unbelievable 1,000 percent.
What many pet owners discovered was that one of the benefits of working from home was that it allowed them much more time to care for a pet properly (as opposed to locking them up in a cage/crate all day). Plus, let's face it, there is nothing better than to get off a high-pressured, Zoom call with a client, or a domineering boss, only to receive a big lick, an offered toy, or the release of walking one's dog in the woods or park.
Naturally, these new-found members of the family sparked a wave of demand for pet-care products. Online sales of companies such as Amazon or Chewy exploded, while internet-based pet services of all kinds saw an enormous uptick. Sales of dog food lead the charge. The U.S. pet food market is predicted to grow to be a $13.3 billion market by 2023. In a recent example, Nestle, the Swiss-based food conglomerate, just reported nine-month earnings this week. It identified their Purina PetCare business as the number one leader in growth worldwide this year.
The pet industry is also working to identify and adapt to the latest industry trends to maintain their good fortunes. Proactive, healthy ingredients in pet food is a massive trend in the industry. Back in the day, when Titus, our chocolate Lab, was a puppy, I bought 50-pound bags of Purina dog chow on sale for $25 at Tractor Supply. Today, we are on automatic re-order of 26-pound bags of a protein-dense, grain-free, dry food for $63.67 every month from Chewy, plus we throw in a 12-can case of canned food for $48.28 (also nutritional). You do the math. Is it any wonder companies such as Chewy's have seen their stock price go through the roof?
Whether its vet bills, pet insurance, doggy day care, or pet grooming, the cost of owning that pet just continues to go up, but it doesn't stop us. More than half of all Americans own a pet and that was before the pandemic.
There are also trends that are less than healthy. For example, over half of all U.S. pets are obese, due to overeating and inactivity. But that is still lower than two-thirds of their owners, who are either overweight or obese. COVID-19 may have an impact on that trend as well.
More Americans, stir-crazy from sitting at home with little to do, are actually getting off the couch. They are putting on their sneakers, or hiking boots and exercising outdoors. Better yet, they are taking their pets with them.
As a pet owner and outdoor enthusiast, I have long argued that pets, especially dogs, need exercise and stimulation, as do their owners. Letting our pets out to do their business in the backyard does not qualify on either count. So, it warms my heart to see so many pets walking alongside their owners enjoying the great outdoors, despite, or maybe because of, the pandemic.
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