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Quick Market Outlook (November 9, 2018)

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It was a rough October. And although this week saw a massive rally, we ended the week with the S&P falling 0.9% and the Nasdaq 1.65%.

What’s Happening?

There’s a quality-of-earnings problem.
Of the companies that have reported earnings:

  • Revenues above estimates: 59% (a low number)
  • Avg. revenue surprise: 0.8%
  • Q4 Guidance: 63% have guided down

Growth has peaked.

The stock market is concerned.

In one month (October) stock market annual growth has shuddered to a halt: from a 15% rate to 3%.  Not gradual.  Sudden.

Why it’s happening.

It’s risk off for stocks.

Fundamentals and liquidity are combining to push down stock prices.

  • Economic growth is set to slow:  China and Europe were already slowing. But tariffs have added enough uncertainty that trade has slumped harder, and there’s more blowback coming through to the U.S. economy.
  • Higher rates make stocks look pricey.

I still haven’t seen a good explanation this newfound volatility downward. I still am not certain about the catalyst. And that’s a problem for me.

Let’s go with the idea that the market is prescient and is pricing in something close to a recession. That still doesn’t explain the suddenness of the drop.

I’m left with the view that the September Fed hike made investors finally sit up and notice.

The Fed fund rate hit 2.25% and the economy is set to slow to ~2.5% in 2019. The Fed is talking about adding another 100 basis points (bps) – equivalent to a full percentage point – to bring the rate to 3.25%.

That implies negative real growth. This is making money managers nervous. Why raise rates as growth is slowing?

I happen to think the tide shifts again this month. Here’s my prediction:

I think China will blink. The Russian collusion nonsense will finally be closed. And the Fed will start to signal that 2019 rate hikes may be slowed.

This will be good news to the markets.

For this week, expect the market to grope for a catalyst for growth.


Andrew Zatlin

Editor of Moneyball Economics

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Don’t Worry – The Bull Market Is Still On

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No Change to the Bullish Playbook

So far, the economy is moving as we expected:

  • Fed raised rates and remains hawkish (aka more rate hikes coming)
  • Trump’s economic sabre rattling is working. Canada folded this weekend and re-negotiated the NAFTA deal. That makes new trade deals with South Korea, Mexico and Canada. Even China started to show a little flexibility with some tariff reductions. The E.U. & China are playing for time: they want to see what happens after the elections. I don’t think this is the right strategy because the Canada deal provides Trump with all the ammo he needs to keep Congress in line with his trade approach.
  • Manufacturing and other aspects of the economy are very bullish.  We saw the release of some business surveys (PMI, ISM) that underscored ongoing strength.

That’s the background for earnings releases in this upcoming quarter.

However, there are reasons for concern. So let’s review the bricks in the “Wall of Worry” – how the market climbs without getting overly exuberant.

  1. End of tax cut benefits.  The tax cuts drove up EPS and some investors may be looking out to Q1 of 2019 and wondering what comes next.
  2. Rising costs of business: From higher interest rates to costlier steel and oil, margins are getting squeezed.
  3. Peak Housing: A major wealth driver and contributor to the economy is the wealth effect from the housing boom.  There are clear signs that the top is in. Let’s face it: interest rates have risen enough that affordability has dropped.  And with rates likely to rise a further 100bps (or 1% point) in the next year, housing will just continue to slow.
  4. End of the auto boom. Autos have been holding 17 million annualized units and not more for years. This means flat demand for aluminum, steel and other key components.

The key takeaway is the Federal Reserve is removing their punch bowl exactly when housing and autos are weakening – the two key drivers of the U.S. economy.

I would suggest the tariffs will offset a lot of the softness because they are driving on-shoring of manufacturing and related business. That is, the auto sector may not pull the economy forward, but other segments will pick up the baton and run with it.


Andrew Zatlin

Editor of Moneyball Economics

The Trade War Is About To Heat Up

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Tariffs Will Be A Main Driver Of Volatility

Things are about to get rocky. The market still continues to try and price in tariffs and sanctions.

This is high-stakes poker.

Trump opened with a big raise.

China hesitantly called. They slowed purchases of U.S. goods and agricultural products.

Soy and other farm prices dropped. Trump then raised again. The call was offering farmers billions to offset their losses. His raise was to schedule higher tariffs.

Then came the flop (in poker terms, a round of cards that get dealt prior to more betting).

Bad news for China: African Swine Flu has struck and it is decimating Chinese hogs.

That means demand for U.S. hogs is rising, and undermines China. Pork is the #1 source of protein in China.

U.S. hog prices are down ~10% from last year, but so is the yuan. That’s before the impact of ASF takes hold.  In other words, Chinese consumers are more likely to see food inflation than not.

In the China/US poker game, China did not pull a card it needed.  But the US did.

The next move is Trump’s and he is well-positioned.

Both the selection of goods and the timing work are in his favor.

The first round of tariffs hit products where China is exposed. But the U.S. private sector is not.

Specifically, (1) no U.S. consumer products were targeted and (2) only products where buyers had sufficient alternatives (where Chinese suppliers have less than 20% market share.)

The next round is where consumer pain will be felt.  Smartphones, air conditioners, and so on. Apple will have to decide whether or not to absorb the cost (put differently, Apple needs to decide if they make $50B in profit next year or $48B.)

Here is where timing is Trump’s friend.  The next round of tariffs really won’t affect this holiday season, so smartphones are relatively safe.  And the US consumers won’t notice much of an impact on air conditioners until April or May.

Trump has managed away consumer pressure for now. Corporate pressure is also not a threat for now.

So far, the tariffs have benefited the U.S.  Not everywhere, but overall.  That’s true both anecdotally (steel makers loooooove Trump.) And also economically: GDP is surging and payrolls are strong.

You can also look at this in terms of pure politics.  With manufacturing on-shoring, the Rust Belt is booming: these States voted for Trump.  High-tech hardware companies (Cisco, Apple, HP, etc) are about to get hit but they are based in California, which did not vote for Trump.

Silicon Valley companies tended to lead the anti-Trump charge (yes, Meg Whitman and John Chambers are Republicans and were leaders at HP and Cisco, respectively, but the companies themselves tend to adopt pro-Dem positions.)

To summarize, public opinion is not against the tariff moves and companies that will suffer don’t matter to trump. Even better for Trump, he has them in a lose-lose position.

In fact, when Apple mentions that tariffs will hit their profits, Trump’s response was: then build in the U.S.  And that’s the ultimate goal here: more on-shoring.

My experts say Apple’s $1000 phone’s bill of materials would rise ~$10 per phone if Apple used U.S labor and production.  Sure, that adds up. Apple loses ~$1B in profits and the U.S. gains 10s of thousands of jobs.

This puts Apple in a tough spot.  The public will see Apple forced to make a choice: either support the American worker OR continue to build offshore to earn billions of dollars of profits that they keep offshore and not pay taxes while giving executives billions in payout (Tim Cook just got $120M in compensation).

Apple is screwed one way or the other.  And they have no leverage.

To keep it simple: Trump has time and politics on his side.  And he has crafted his approach to maximize his leverage.

So what is China’s move?  Likely they want to wait until the mid-term elections pass and the political winds are clearer. But I suspect that Trump will be in a good place insofar as domestic politics are concerned as they impact trade.

China could try and weaponize their stock market holdings.

Everyone is afraid China could dump their massive dollar holdings. But that hits all of China. I think a better move would be for China to force their conglomerates to sell U.S. holdings of real estate and stocks. You get the middle class attention when you unleash a bear in the 401ks and property markets. This leaves the most of China unaffected.

This would result in about 8 weeks of turmoil in the stock market as the game continues to unfold.

But underneath it all: a stronger U.S. economy.

Stocks that have international exposure are problematic.  They face a rising dollar and less Chinese consumption.  Avoid these stocks.



Andrew Zatlin

Editor of Moneyball Economics

September 6, 2018: Financial Survival Network – It’s All About Trump

Trump Is Winning The Trade War

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Market will rip on a Mexico/US Deal

Trump continues to throw the U.S.’s economic weight around.

He has picked fights with pretty much every major trading partner: Europe, Canada, Mexico and China.

Any movement in his favor means major economic boosts in the form of greater exports and domestic production. The stock markets have already concluded that he holds the winning hand.

Here’s Trump’s strategy: flip the smaller economies to get to the bigger economies.

In addition, negotiate directly instead of through trade bodies; trade bodies protect the weaker members in a strength-in-numbers environment.

Under this approach, Trump went after NAFTA first (Mexico and Canada are the small fish) and he is negotiating separately instead of under a pan-NAFTA banner.

In this game of dominos, Mexico will topple first and next will come Canada. But the real prizes are the European Union (E.U.) and China.

The Counter Strategy: A Waiting Game

Tariffs and trade are the domain of the President of the United States, which means that Congressional mid-term elections don’t have direct impact. But they do matter because a shift in Congressional power in favor of the Democrats will force compromises in general but will also lead to more attacks on, and distractions for, Trump.  A distracted and/or weaker Trump undermines his leverage.

With that potential political shift, China and E.U. are playing the waiting game.

However, this approach will fail.

First, because Trump will only harden his position if Mexico compromises – it validates and vindicates his efforts. (Or, put differently, he’s a shark who smells blood in the water).

But more critically, Trump is forcing the Democratic party to support him or risk being on the wrong side of the upside benefits of winning trade wars and the spoils it brings.

Politics matters. But not in the sense that China and the E.U. believe.

They think a Democrat controlled House of Representatives matters to slowing the Trump Tariff train. That’s wrong because Dem’s have to get on board that train or risk losing popular votes.

What will happen? We’re about to find out.


Andrew Zatlin

Editor of Moneyball Economics

Is Bitcoin The New Safe Haven Trade?

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Bitcoin Is Becoming The New Safe Haven Trade

Emerging markets are continuously using bitcoin (BTC) as a way to get their money of their respective countries.

Crypto currencies are attractive to individuals in less developed economies for a few reasons:

  • Transaction costs are the same as gold.  BTC’s higher price volatility is offset by gold’s higher conversion fees
  • Liquidity favors BTC
  • BTC only requires access to the internet
  • Easier to transport and hide $20,000 of BTC offsets gold’s bulkiness

As recent events in Turkey and Iran show, hard currency and precious metal confiscation is a very real threat.  Crypto is now a very real alternative.

Turkish citizens flocked to bitcoin as the Turkish lira continues to plummet. The lira is down nearly 40% this year alone. An insane drop for a currency.

In dollar terms, gold continues to trade lower as bitcoin catches a bid.

Here’s a chart of bitcoin demand from within Venezuela

The Emerging Markets can be grouped into two categories: those that are adopting BTC and those that are panic buying.  Russia is an example of a late adopter.
Examples of panic buying: Argentina, Chile, Columbia, Hungary, India, Mexico, Peru, Philippines, Russia, Venezuela.
Here’s Chile.
Here’s Columbia:
Here’s Hungary:
Here’s India:
Here’s Mexico:
Here’s Peru:
And here’s the Philippines:


Interpreting the BTC Currency Signal
One signal coming from BTC: indication of underlying economic/capital strength.

It’s still a bit too early to assign a definitive value for regional BTC demand. But the fact that millions of people around the world are flocking to bitcoin is a sure sign there is a value of it.


Andrew Zatlin

Editor of Moneyball Economics