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Strategic Insights

Volume 7, Edition 13 | April 2 - April 6, 2018

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The Definition of Insanity

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min


If insanity is doing the same thing over and over and expecting a different result, then golf fans must be ready to commit Sergio Garcia. But could the U.S. tariff policy come under the same criticism?

Market Review

Contributed by Doug Walters

U.S. equities ended the week close to where they started with lots of volatility in between. A notably low jobs figure on Friday was not helpful, but it was once again tariff discussions that drove most of the market action.

Double Bogey

Friday’s jobs report showed that non-farm payrolls increased by just 103K in March, down from the lofty 326K created in February. As we discussed last month, this is a highly volatile figure which needs to be analyzed in the proper context. Over the past year, the economy has created an average of about 190K jobs per month. That has been falling steadily from the 260K peak three years ago. As unemployment continues to trend lower, it is to be expected that job growth will be more difficult to come by, particularly with tightening immigration policies.

The more significant news story this week was once again trade, with the tit-for-tat tariff war with China elevating. While time will tell if any good comes from this economic battle, the stock market is clearly unsettled. Investors found themselves in the rough on Monday, with the S&P 500 falling 2.2% on escalating trade fears. After staying in the fairway mid-week, they landed in a bunker on Friday, as Trump upped the stakes with the threat of $100 Billion in additional tariffs. The S&P 500 ended the week down 1.1%

Trade wars have been tried unsuccessfully in the past, and the stock market is implying a negative impact on U.S. corporate profitability. So why would a sane country pursue them? Trump explains that our trade deficits with some of our trading partners are unfair. We look deeper into this in our Spotlight section.

Spotlight: Teeing Off on Trade Deficits

Trade and tariff talk is driving markets, so let’s take a wonkish minute to better understand the situation. First, a trade deficit is not inherently bad. In fact, historically, deficits correlate well with low unemployment. Mathematically, a trade deficit is a pure function of a country’s investment and savings rate. The U.S. invests more than it saves and as a result, has a trade deficit with the world. Tariffs will not change this (although they could act to shift some of the deficit from a country like China to another trading partner). What tariffs will undoubtedly do is raise prices, hurting consumers, which is what has the stock market concerned. So, what is the Trump administration’s purpose in escalating trade tensions? We see three potential explanations: they do not understand these dynamics (unlikely); they are pandering to their base purely for political gain (possibly); they are posturing against countries like China to make gains in other areas like intellectual property theft (hopefully).

Strategy Update

Contributed by Max Berkovich ,


Best in Trade

U.S. equities continue to ride the volatility rollercoaster, ending the week lower. Fixed income failed to capitalize much, despite the political worries and lower than expected job growth. Equity sellers may have fled to cash for refuge. If so, they could easily be enticed back when the coast is more clear. Speaking of trade…

  • A 2011 Economic Letter from the Federal Reserve Bank of San Francisco suggested that the trade deficit with China and other nations can be a highly unreliable measure. The letter makes the case that most of a trade deficit benefit goes directly to U.S. businesses. For example, if an imported good from China carries a retail value of $100, according to the letter, $55 will go to the retailer, rent, transportation, and other service providers in the U.S.
  • U.S. manufacturers that left the U.S. for cheaper labor offshore did not disappear. These companies evolved into stronger competitors around the globe and capitalized on the lower cost advantage to expand their enterprises in international markets.
  • We import a lot of products from China, such as Apple iPhones, Dell computers, Gap shirts, Nike sneakers, and Mattel and Hasbro toys. The U.S. consumer has benefited from lower prices for goods.


Seeing the Forest for the Trees

The Technology and Industrial sectors were the laggards of the week, while Consumer Discretionary found a way to rise above the rest. Speaking of the Discretionary sector…

  • Discount retailer Dollar Tree, Inc (DLTR) has been executing on its integration strategy of Family Dollar, which it acquired in 2014, but the debt load it took on to make the purchase has been an item of concern. The company had over $7 Billion of long-term debt in 2016. Last year the company retired 10% of its debt, bringing its debt load down to about $5.5 Billion. Dollar Tree took another step forward in tackling the debt this week by refinancing. The refinance activity consisted of $4 Billion of senior notes. The proceeds will be used to retire a 5.75% bond due 2023 and paying off outstanding bank loans.


What’s Inside

The Consumer Staples, Consumer Discretionary, and Energy sectors were bunched at the top while Technology was at the back of the pack, mostly due to…

  • Intel Corp. (INTC) received an unexpected dose of bad news when Bloomberg News reported that Apple Inc. (AAPL) would use its chips instead of Intel’s in Macs as early as 2020. An analyst from Stifel defended Intel by claiming less than 1% of profits would be impacted by this. A Bank of America Merrill Lynch analyst sighted a $40-$50 of material cost cut per iMac if Apple uses its own chips.

Week Ahead

Contributed by

Hoping for a SEMI-Calm Week in the Markets

Sentiment measurements from the NFIB and the University of Michigan Consumer Sentiment Index are expected to continue their upward momentum.

  • The NFIB Small business sentiment index stands at an all-time high, which implies that small business owners are optimistic and likely to invest in their businesses.
  • The Consumer Sentiment Index stands at a 14-year high.

Earnings season will officially start this week. Bank heavyweights have an early tee time Friday. Our focus will be on Equity Income holdings JP Morgan (JPM), BlackRock (BLK) and Fastenal (FAST).

  • JP Morgan (JPM) is expected to show 37% earnings growth while BlackRock (BLK) is estimated to grow their earnings by nearly 22% vs. the same quarter a year ago. Investment banks may also benefit from volatility in equity markets as higher trade volumes should result in higher transaction revenue from their trading desks.
  • Fastenal (FAST) will report its earnings on Wednesday morning. Tidbits from manufacturing and construction customers will be scrutinized.

Masters Tournament will wrap up this Sunday after a four-round battle for the green jacket in Augusta.

  • There is $11 million in prize money, with $1.9 million going to the champion.
  • Tiger Woods, playing in his first Masters in three years, has given an extra commercial boost to the tournament.

Inflation reading from the Consumer Price and Producer Price Indexes will be released next week.

  • The Federal Reserve’s emphasis on their 2% inflation target make these important data points for rate hike prognosticators.
  • Economists estimate the annual inflation run-rate for March to remain at 1.8%.

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