Trump talks a tough game. He is confident, speaks from a position of great strength, declares rightfully that the US has less to lose than all others as we run huge trade deficits, and he also considers himself a great negotiator.
Unfortunately, time is running out as business and consumer confidence can ebb very quickly if trade skirmishes escalate into full-blown trade wars offsetting all the benefits of his tax cuts, reduced regulations and his pro-business, pro-American agenda. Is that what he wants going into fall elections, tarnishing his legacy? Definitely no.
We believe that some of our trading partners have already reached out to Trump and his administration offering significant reductions in trade tariffs and subsidies creating a more level playing field. Is Trump willing to accept a substantial reduction in tariffs and subsidies or is he stubborn enough to hold out for everything that he wants? And, of course, he will insist on protecting our IP everywhere. We will learn much more over the next few weeks as Trump and his team meet with representatives of the ECB and the new government of Mexico. Let’s see how good of a negotiator he really is! We will know soon enough. We remain optimistic that some trade deals will be reached.
Trump needs a trade deal here, as his critics seem to be winning the PR war over his loyalists even within his own party and business community. Many Republican Congressmen are looking for ways to reign in his authority and ability to impose tariffs without oversight from Congress. He can’t afford a rebellion within his own party going into elections as he runs the risk of losing control of Congress not only impeding his ability to govern but also increasing the real threat of impeachment proceedings against him. He’s smarter than that and has too big an ego to see the economy and markets stop rising when on the cusp of great things.
We keep asking ourselves where would the market be selling when/if the trade issues are resolved or even simmer down? After all, we have a great economy, sensational earnings, low interest rates, rising bank liquidity and the best may lie ahead. Herein lies the rub for an investor. We can easily see an immediate 10+% pop in the market when/if trade issues calm down; but if we continue down this road of escalating trade skirmishes, then we see near term risk.
What would Buffett do? Clearly he would take the long-term view and use any market weakness as a great opportunity to add to his portfolio. Did you notice that Buffett/Munger changed their own stock buyback guidelines such that they could buy in Berkshire stock anytime they deem it intrinsically undervalued? Remember that Berkshire is a holding company owning a cross section of American industry. Clearly they have an eye on the longer term. We do, too!
Trump should adopt Kudlow’s view that a strong dollar is good as it means a strong economy and it will keep inflation low. He should recognize that short-term rates are rising here due to the success of his agenda and failure overseas as their economies are stuck in the mud. Widening interest rate differentials are the reason for a strong dollar as we predicted. However China may be the exception as the yuan is tied to the dollar, so it should be rising rather than falling. Could China be manipulating its currency to make a statement to Trump? Absolutely!
Our Fed has done the right thing lifting the Fed funds rate moving towards normalization. We would caution them to move slowly at this point rather than risk a flattening or even inverted yield curve that would be a big red flag to many. Powell acknowledges that business is worried about escalating trade conflicts and could quickly slow hiring and capital spending. He acknowledges that growth overseas has slowed too, although we see a pick-up overseas moving forward benefiting from a weak euro and yen. Even the G-20 acknowledged this weekend that continued global growth is at risk due to trade concerns. The Fed should go slow here running the risk of an overheating economy rather than a slowdown.
Trump needs a trade deal here such that global trade concerns ebb. If so, global growth would reaccelerate, global interest rates would rise along with all financial assets and commodity prices. Ironically, the dollar would weaken on that news. It’s time for Trump to walk the walk and make deals.
It is clear that we need to open our borders with Canada and Mexico as tariffs are hurting our own companies as well as our consumers. Clearly some adjustments to NAFTA are in order. Listen to the Alcoa’s conference call. Alcoa built plants in Canada as energy costs were much lower than here. Right now the US imports well over 50% of its domestic needs ,and it will take our producers years to build enough capacity here to meet all of our domestic demand. Tariffs will cost Alcoa over $15 million per month to supply our basic needs. Is that what our government wants? Give Alcoa and other aluminum producers the time to reopen or build new facilities before extracting tariffs from imports from Canada. Alcoa stock got pummeled last week as it reduced its guidance to a level still far ahead of what analysts forecasted at the beginning of the year and up over 50% from 2017. The stock sells at less than 3.5 times EBITDA, has less than a billion dollars in net debt and will institute a stock dividend along with a buyback before the end of the year. Yes, it is significantly undervalued as an investment but maybe not as a trade.
Steel is another story. Here tariffs make sense as the US has enough domestic capacity once reopened to meet domestic demand. Did you see Nucor’s earnings and listen to their conference call? Earnings will exceed $7.00 per share in 2018 and we expect a year end extra dividend as well as a stock buyback. Buffett should add NUE to his portfolio of owned companies. It truly is a remarkable company increasing its dividends for over 38 straight years while always investing for the future.
Our future is indeed bright if we resolve our trade issues before escalating any further. The US economy is on the cusp of great things. Just listen to all of the conference calls and you will hear firsthand how business has strengthened and our companies continue to enhance their global competitive position. Microsoft and Honeywell stood out last week. We own both.
The bottom line is that our market is tremendously undervalued unless trade skirmishes escalate out of control. We only want to own the best of the best companies in the world with strong managements with business strategies to succeed in a globally competitive marketplace while enhancing shareholder value. Try to tune out all of the noise. Trump’s comments about interest rates and currencies are nonsense. His tweaks are his means of negotiating. He should quiet down and stop offending so many. It’s time that we all work together with a common objective of open and fair trade protecting everyone’s IP.
We remain optimistic that trade barriers will be lowered in the years ahead and global trade will accelerate benefiting all, not just the US. We continue to expect a surge in domestic capital spending due to changes in our tax and regulatory system and low cost supplies of energy. Trump deserves credit here. It’s now time that he sits down with all of our trading partners and negotiates a fair trade deal for all lowering tariffs and subsidies across the board.
The markets hate uncertainty. Trump needs a victory here that will provide momentum for all other trade deals. Hopefully it comes sooner rather than later.
Our portfolios continue to concentrate on the financials, global capital goods and industrials, technology, industrial commodity companies including domestic steel and aluminum, healthcare and special situations. We have added a number of new names that have been overly hit by trade concerns like Boeing.
Change remains an overriding theme in our portfolio as corporations adjust to a more globally competitive marketplace and the need to enhance shareholder value. The number of companies selling off under-performing assets or spinning off businesses that are not correctly valued in the marketplace is increasing geometrically. Our portfolios are filled with these stocks.
We remain short bonds and long the dollar but change may be in the air here too. By the way, we believe that industrial commodity prices are way too low and below the marginal cost of production in many cases that will limit any future capital spending plans which is a positive longer term for higher prices.
Review all the facts; pause, reflect and consider mindset shifts; look at your asset mix and risk controls; do in-depth first hand research and…
