Trump and the Carrier Deal

On December 3rd, I spoke with Neil Cavuto, Kennedy and Charles Payne on Fox News concerning President Elect Trump’s action after Carrier, a division of United Technology, announced that it was going to move 2,100 factory jobs to Mexico. The president-elect announced that he would make them keep the jobs in the U.S. The initial claim for the negotiations the Trump had with Carrier was the 1,100 jobs would be saved, but at this point, it looks like around 300 of those jobs were white collar positions that were never going to Mexico in the first place. The total number of jobs remaining in the U.S. is expect to be around 800.

In order to keep those 800 jobs in the country, Carrier was granted about $7 million in tax breaks paid out over 10 year, which means $875 per worker per year. That’s a pretty small number when comparing the cost of labor in the U.S. versus Mexico.

A more plausible story is that some discussions were had concerning the $6.7 billion in federal contracts held by Carrier’s parent company, United Technologies. While I’m all for reducing taxes and regulation, making the U.S. a more competitive place for companies to do business, I’m not too happy to see the power of the White House used to force a company to do something that it originally believed was not in the best interest of its shareholders.

Mornings with Maria

Mornings with Maria

On Friday October 21st I was on set with Maria Bartiromo, Kat Timpf and Dagen McDowell with a variety of guests. Here are a few clips from those three hours on set… with only one bathroom break… starting at 6am… and a lot of coffee…know my pain.

We spoke with JMP Securities President Mark Lehmann on the stocks to watch in the tech sector and the election’s impact on the markets.

Screen Shot 2017-01-26 at 2.27.56 PM

We also spoke with Alan Dershowitz, author of ‘Electile Dysfunction,’ on the impact of WikiLeaks on Hillary Clinton’s campaign. While I’m not a fan of lawbreakers, and hackers certainly count amongst those, these days the electorate is reasonably mistrustful of those in power and these hackers are giving us confirmation that we are correct to mistrust …which is one of the reasons I am in favor of smaller government. The more power government has, the more opportunities there are for graft, and the bigger the temptation to give into such. I prefer smaller government out of respect for the frailties of human nature. I’m in good company here with James Madison who explained it best in Federalist Paper #51.

It was a long chat with Mr. Dershowitz…

As a proponent of the free markets, which also means free trade, I’m a fan of Donald Trump’s plans to reduce taxes, but not a fan of his threats to significantly reduce free trade and to use the power of the presidency to force private companies to bend to his will. As the second largest exporter in the world, our economy needs a healthy level of international trade. We spoke with political economist Andy Busch on Donald Trump’s and Hillary Clinton’s competing plans.

Finally we spoke with S&P Global Market Intelligence’s Rich Peterson concerning the outlook for M&A activity, particularly given the current political environment. As we discussed earnings results so far, I brought up my concerns that the improvement in earnings per share really doesn’t tell the whole story, as companies have been buying back their own shares at record levels. This means the denominator, shares outstanding, keeps falling which makes EPS look artificially stronger than it actually is. I call this the spanx-and-push-up-bra strategy, whereby things may look better from afar, but fundamentally they really haven’t improved.

Foreign Leaders Nervous About Trump

On March 8th I spoke with Neil Cavuto about how many foreign leaders, particularly those in Europe, are getting nervous about Donald Trump’s statements. Living a good portion of my time in Italy I am able to have a richer perspective on how the rest of the world views what is happening in the U.S., and while I agree that the U.S. ought not chose its policies based on the preferences of other nations, it is always a good idea to at least listen to our friends and neighbors, just as we do in our personal lives.

The United States has the largest economy in the world and the most powerful military, so naturally the rest of the world has a vested interest in what happens here. Our entertainment industry is also the most impactful in the world, so that American cultural shifts are often rippled throughout the globe. What happens here, doesn’t stay here.

For most Americans alive today, World War II is something we read about in the history books. We don’t sense that it impacted our culture in any meaningful way, at least nothing like the way 9/11 has. In Europe there is a very different memory, one filled with great trepidation over those leaders that seek to use the military in ways that are outside of the law. Donald Trump’s repeated comments concerning how he is confident that the members of the military would defy their oath to uphold the law in order to obey his demands strike an alarming cord in Europe, where leaders in the past who used the military that way brought devastation to a continent.

Perhaps Trump is simply using the type of hyperbole that he found worked so well to garner attention for his reality TV show, but hyperbole of that nature on the global political stage, from a man who could be the commander-in-chief of the largest military in the world, in understandably cause for concern.

Trump's Tax Plan

On February 18th I spoke with Donald Trump’s son, Eric Trump, about his father’s tax plan while I was on Mornings with Maria.

One of the problems with Trump’s plan is that more than 50% of all households won’t pay any federal income taxes. That means that essentially over 50% of all voters won’t be taxed on the benefits and spending plans they support! That is one hell of a great way to ensure that federal spending continues to expand.

All politicians have to compete for voters. Those that promise more goodies are more likely to get votes, that’s why politicians promise goodies. The only thing that places a check on the promised goodies is the reality that those voting for the goodies will have to pay for them. If more than 50% don’t have to pay for the goodies, why not vote for them? Thus those that promise the most are more likely to get the votes, leading to an escalation in goody offerings by those on the campaign trail.

The U.S. is already facing a looming crisis from promised social security and medicare payments that it simply will not be able to afford with a reasonable level of taxation on the private sector, we certainly do not need to exacerbate this trend.

Risk On?

Risk On?

This morning I spoke with Matt Ray on America’s Morning News about the recent market action. Are we back to risk on? Here is a bit more detail on our discussion.

Equity markets have rebounded to an impressive extent after the recent correction, with the S&P500 less than 5% away from its all time highs, last seen in late May, while the VIX, the measure of volatility has closed in on a two-month low after having spiked up in August.

So were all those machinations between the summer and today much ado about nothing?  To answer that, we need to understand what drives returns.  The answer, like most things in life, is it’s complicated. Over the long-term, investment returns are based on fundamentals – ideally finding a company with an excellent management team that has products or services that are in high demand for a growing demographic with shares at an attractive price. But, in the short to medium-term, returns are all about risk – are investors seeking risk or withdrawing from it?

Today, the answer to the question of affinity for risk relies more and more upon bureaucrats, which makes the investor’s job an awful lot like a fortune-telling gazing into her crystal ball.



Who the hell knows what insanity will get blurted out next… particularly if Donald Trump has access to a mic or a twitter feed!

The Fed has now become a primary source of uncertainty, (contrary to what they claim is their intent) while politicians and bureaucrats muddy the waters in countless ways, such as when Hillary Clinton took to twitter to bash biotech pricing.  I understand her outrage, but in today’s world of instant communication via social media, a few words can have an enormous impact and countless unintended consequences.

We’ve seen high profile investors like David Einhorn with Greenlight, John Paulson, and Michael Novogratz of the flagship Fortress macro fund, (which is now liquidating) struggling to live up to their reputations as fundamentals are easily overwhelmed by bureaucrat commentary and the market’s tendency to try to read central bank tea leaves.

So where are we today?  The S&P 500 is again closing in on its all-time high, but if we look a bit deeper we see that 63% of the stocks in the S&P 500 are still below their 200-day moving average and credit spreads remain elevated. When I see lack of breadth like this, meaning that indices are moving up based on a small group of stocks, and we see credit spreads still indicating that investors aren’t running towards risk, I remain cautious.

If we look at history to get an idea of probabilities, the S&P 500 has found itself below its 200-day moving average with more than 50% of the stocks within it also under their 200-day -moving average 24% of the time.  Annualized returns when the market has been in this position have been 9.7%, which sounds pretty good, except the maximum interim loss during those times has been 50%! (Hat tip to John Hussman for his data) So you may get decent returns, but there’s a good chance you’ll lose your lunch in the process.

If we look at the economic fundamentals, we have more cause for concern:

  • Total US business sales are down 3.09% year-over-year
  • US capacity utilization is also down year-over-year, (we are using less of our ability to make stuff than we did last year)
  • Industrial production contracting in 8 of the last 9 months
  • The producer price index is down 1.1% year-over-year, not exactly a sign of impending inflation)
  • Retails sales fell yet again in September
  • The Federal Reserves GDPNow currently estimates 3Q GDP to be 0.9%, (not exactly an overheating economy)
  • This morning we also learned that China’s GDP growth rate slowed to 6.9%, which is the weakest since the Great Recession. That will hurt Germany (major exporter to China) which is already suffering from Russia’s slowdown (big exporter to them as well) as it tries to keep the rest of the Eurozone afloat.  Mario Renzi is doing his best to get Italy turned around, but give the man a break!

If we look at earnings so far with 58 companies having reported, it isn’t exactly inspiring either

  • The percentage of companies beating on earnings is above the average, which sounds pretty good until…
  • The percentage of companies beating on revenues is below average
  • This means that earnings beats are coming from cost-cutting and financial engineering with things like share-buybacks – no indicative of long-term growth
  • As far as valuations, today the forward price-to-earnings ratio is 16, which above the 5-year and 10-year average of 14.1, which means that despite the dour fundamentals, stocks are still rather pricey.
  • Within the S&P 500, nine companies have offered weak December quarter outlooks compared to only one that has raised expectations

With fundamentals not giving us much to go on, in the short-to-near term it is all about that risk, which means investors need to be focused on how will the major indices behave as they approach their 200-day moving averages?  If they blow right past the 200-day AND if we see credit spreads (the different between the risky stuff and the safer stuff) get narrower, then it is back to game on, likely through the rest of the year, regardless of what is happening under the covers.


Global Picture – What Trump Doesn't Know

Global Picture – What Trump Doesn't Know

Donald Trump has been making headlines lately with his rants over China’s currency, but there is a lot more to the global picture – What Trump doesn’t know…

A little over a week ago the Netherlands Bureau for Economic Policy Analysis reported that global trade shrunk in the first six months of 2015 at the fastest pace since global trade collapsed in 2009 following the financial crisis, down 1.5% in Q1 and another 0.5% in Q2.  This is big, very big, yet very few are talking about it! Which is why we are.  According to a report from the Economic Cycle Research Institute, the last time export price deflation was this intense every G7 economy was in a recession.  



The Eurozone’s growth wasn’t as strong as expected in the second quarter, with overall GDP rising by 0.3%, (barely above stagnation) and slower than the 0.4% in Q1.  The two largest economies in Europe disappointed with Germany growing 0.4% versus expectations for 0.5% while France didn’t grow a bit versus expectations for 0.2% growth. Italy eked out 0.2% growth versus expectations of 0.3%.  The Netherlands was similar with 0.1% versus expectations for 0.3%.

Despite the massive efforts by the Bank of Japan to get the economy roaring, Japan’s Q2 GDP didn’t give us much to cheer about either, declining at a 1.6% annual pace.  Brazil also surprised to the downside, its economy contracting by 1.9% versus expectations for 1.7%, the biggest contraction for the nation in over six years!

So what may be happening here? Well, about 45% of the world’s GDP comes from commodity producing nations, and commodity prices have been taking a serious beating as is illustrated in the next chart.  If a nation can’t sell as much of its own stuff (commodities), it isn’t going to be able to buy as much stuff from the rest of the world… pretty simple! (You can see a bigger version of the image below if you click on it)



Across the board, save for a few unique standouts such as tea, (traumatizing to your Irish author here) olive oil, (thanks to a nasty bug attacking trees throughout Tuscany) and uranium, (Japan is getting its reactors back up after the horrors of the tsunami) commodity prices are falling dramatically across the board.  Even the world’s biggest producer of diamonds, De Beers, announced on August 24th that they would be lowering their prices by 9%.  Apparently, diamonds are a little bit less of a girl’s best friend. These prices are down so much for two main reasons: the strengthening dollar and growth rates are well below historical norms, both here in the U.S. and abroad, which means commodity producers need to continue to cut back on production.

The slowing global growth story shows up in many places. While the US may be the world’s largest economy, China is second and it is the world’s largest goods-producing economy.  When it is slowing, that’s telling you a lot about global demand.  For one thing, all those commodity-producing countries aren’t buying as much stuff from the Chinese. Germany is a big exporter to China so when China slows, Germany feels it and that affects the rest of the Eurozone. The decline in oil prices coupled with sanctions has seriously hurt Russia, which in turn is hurting Germany as German exports to Russia decreased by almost 31% on an annual basis in the first half of 2015. Getting hit by declining demand from both Russia and China is putting a lot of pressure on Germany, the nation that has long been the engine of growth for the Eurozone.

Now what’s the story behind the dollar’s strength?  Remember all those quantitative easing programs?  QE1, QE2, QE3…?  For those the Fed bought up tons and tons of “longer-term securities issued by the U.S. government and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac” in an attempt to inject more and more money into the economy thinking that would spur demand and get the economy back on its feet.  The next chart shows the magnitude of the program.  From January 2003 to today, the Fed’s balance sheet has expanded 511% as it purchased trillions of Treasury bonds and mortgage-backed securities.  U.S. GDP today stands around $18 trillion, so this means the Fed tried to increase the amount of money in the economy by nearly 20%!  Yet we didn’t see crazy inflation, which at the time seemed a likely possibility.



Where did all that money go?  Mostly into asset prices…the ending of QE saw the dollar strengthening versus other currencies and the fall of commodity prices… with more likely to come.

While the Fed was buying up Treasuries in order to put more money into the economy, China was continuing its unprecedented reserve-accumulation exercise which, starting in 2003, amassed almost four trillion of foreign assets!  That is more than all of the Fed’s QE programs combined.  So what we really experienced on a global level was hyper-QE.

Today the story in China is a little different with the economy suffering from both a decline in exports due to the global slowdown and a shift from a primarily goods-exporting and manufacturing driven economy to a more service-oriented and internal demand driven one.  The nation’s economy has evolved into one in which about 20-25% of its citizens have a middle-class lifestyle while much the rest of the country lives more on par with Nigeria.  This is an untenable situation and Chinese leadership knows it, but is under a mountain of pressure from every angle.  Chinese state and private debt is estimated to be around 300% of GDP, if you can believe the GDP numbers.  If you think, like we do, that they are likely less than those reported by the government, then the situation is even worse.

So what’s all this about China’s crashing stock market kicking off the correction here?  The next chart shows the massive run up that China’s main index experienced, rising over 130% from last August to early June and the correction it’s suffered since those highs.  By August 26th, the Shanghai Composite had fallen over 43%. By the close of last week it had recovered a bit to be was down 37% from the highs.


The enormous run up in China’s stock prices over the past year was not due to improving fundamentals, as its economy has been slowing.This run up was based more on the assumption that the government would do whatever necessary to keep the market moving up combined with increasing use of leverage, (meaning people borrowed to buy more stocks).  Not exactly a unique phenomenon these days!

Understandably, Chinese officials took steps to rein in the use of leverage.  In January, they raised the minimum amount of cash needed to trade on margin, which would restrict the practice to wealthier investors.  They also took steps to punish companies that had been lax on enforcing the margin rules with their clients.  In April, Chinese regulators cracked down on “Wealth Management Products,” WMPs which are similar to U.S. money market funds, but in some cases WMPs were being used to generate funds that were then used to finance individual and corporate stock market investors at ratios of up to 10:1!  They also banned “umbrella trusts” which helped clients evade the margin trading limits. The market still went up.

Dissatisfied with the results of their tightening, on June 12th regulators then reduced the total amount of margin lending stock brokers could do, while also reiterating forcefully the ban on illicit margin trading through mechanisms like umbrella trusts. This time investors listened, the market bull run broke and the plummet began.

In early July regulators pulled an “Our bad” and did an about-face, reducing the amount of money required to open a margin-trading account.  Yep, first lowered this a few years ago and then raised it back up again in January and after watching a gut-wrenching slide in stock prices they reversed yet again!  Since July, the government has taken a variety of steps to try to pump the market back up.  Last week the market reversed its downward spiral only when the government announced it would engage in a large-scale asset purchase program in order to keep up stock prices.  The markets in China and around the world rallied on the news.  Then in yet another about face, (dizzy yet?) Sunday China announced that it had decided to abandon attempts to boost the stock market and will instead intensify efforts to find and punish those it suspects of “destabilizing the market” by “spreading rumors!”   Over the past two months, state-owned investment funds and institutions have collectively spent around $200 billion attempting to prop up the market, with limited success.

This weekend 197 people were arrested for “spreading rumors” and “false information” online about the recent stock market crash and the explosion in Tianjin, including a journalist and stock market officials. On August 24, Wang Xiaolu, a leading journalist at one of China’s most widely read financial publications was arrested, and admitted to causing “panic and disorder” in a public confession aired on state television. Unsurprisingly, the Committee to Protect Journalists has condemned his arrest and subsequent “confession”. I thank my lucky stars every day that I was born where I am free to say what I think.  Those who know me have assured me that I’d likely be six feet under if I’d been born under a different regime!

One final thought on China’s economy. When we take a deeper look, we see that according to official figures, gross fixed investment was 44% of gross domestic product in 2014. While figures for investment are more likely to be correct than those for GDP, does it really make economic sense for an economy to invest 44% of GDP and yet grow at only 5%? We think not! Talk about horrible returns. If these figures are to be at all trusted, investment could fall sharply going forward. That would mean further weakness in demand from China for commodities used to the enormous infrastructure projects for which it has become famous.

We’ll wrap up with China’s yuan and currencies across the world.  As we mentioned in our May issue, China is attempting to be included in the International Monetary Fund’s Special Drawing Rights, which means it needs to let its currency float more freely.  Earlier this month it took another step towards that end by loosening its hold on its currency, which resulted in the yuan falling some 3-4% versus the dollar. The following chart shows the performance of a wide range of currencies from across the globe versus the U.S. dollar over the past year. (You can see a bigger version of the image below if you click on it)

Currencies one year


The one in red is China’s, (couldn’t resist!).  As you can see, almost every major currency in the world has dropped in value relative to the dollar over the past year.  Here are a few numbers to go with the chart above:

  • Australian Dollar down 31%
  • Canadian Dollar down 22%
  • Chilean Peso down 20%
  • Euro down 16%
  • Japanese yen down 15%
  • Indian Rupee down 9%
  • British pound down 7%
  • Swiss Franc down 4%
  • Chinese yuan renminbi down 4%

Keep these numbers in mind as you hear Presidential candidates tossing insults at one another and at other countries around the world. China isn’t the only nation whose currency has declined in value against the dollar.  Furthermore, if the argument is that China has been “artificially” keeping its currency cheap relative to the dollar in order to make its exports more attractive to the rest of the world, then why did its currency immediately decline in value the moment the government loosened its hold, proving that the government’s intervention has been keeping its currency higher than it would be were it allowed to float freely?  This also makes intuitive sense.  China pegged its currency to a band around the dollar.  The dollar has been strengthening significantly while China’s economy has weakened.  It is unsurprising that the market’s pressure is to push China’s currency lower.  Yet another example of how headlines and TV talking points are often misleading.

For a broader historical perspective, the next chart shows the performance of a slightly smaller set of currencies against the dollar from 2010 through the end of 2013.  The weakening of the dollar against these currencies is directly related to the various quantitative easing programs, the termination of which was announced when the Fed released the June 2014 FOMC (Federal Open Markets Committee) notes in early July 2014. (You can see a bigger version of the image below if you click on it)

Currencies three year


Here we see that during those three years it was actually the dollar that was falling relative to global currencies.  In fact, during this time China’s yuan actually strengthened versus the dollar by 11%.  You don’t hear any candidates ranting about how the dollar devalued versus other currencies for years! There is a lot more to the situation in China than is discussed in the popular media, and it is something that could have a very big impact on the global economy and if affects the Fed’s decision on raising rates.



Forget Snowden and Focus on the NSA

Forget Snowden and Focus on the NSA

The NSA works for us.  The power to govern lies with We the People and flows from us to the government, not the other way around.  The NSA does not dictate to us what the appropriate constraints on its activities ought to be.  It may suggest, but We the People decide what controls we want on our government.  When the governing violate the constraints imposed by We the People, without our knowledge, someone like Snowden needs to take the risk to let us know.

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” ~ Thomas Jefferson

2013-07-04 WhistleblowerListening to the pundits finger-wag and vilify whistle-blower Edward Snowden for the past few weeks has me in a serious lather.  I’ll admit that the recent heatwave in Genova, Italy (my part-time home along with San Diego, CA) and my upcoming trip from here to Las Vegas for FreedomFest probably has me even more fired up than normal.  You haven’t lived until you’ve had to drive in Italy in the heat.  I swear it makes an already anarchic driving society even more lunatic, but I digress.  I’m usually one to pshaw conspiracy theorists, but the vehemence of the vile attacks on Snowden’s character by those who have scant information to go on has even my eyebrows raised.  He may be an angel.  He may be a demon.  But why the hell is that even the focus?  That’s like finding the lost city of Atlantis in a tropical sea and obsessing over the clarity of your goggle lenses!

Snowden has been referred to as a “cross-dressing Little Red Riding Hood” in the Washington Post, a grandiose narcissist in the New Yorker, and Fox New analyst Ralph Peters and Donald Trump want to bring back the death penalty for Snowden.  Seriously people?  Talk about going off half-cocked and gunning for bear.

Where is the focus on the Constitutionality of the NSA’s spying?  Oh but not to fear, Jed Babbin of the American Spectator assures us that the NSA is “a whole lot more trustworthy than most of the rest of our government,” and isn’t like the IRS.  Oh that’s comforting, given the NSA’s track record.  For the love of Pete, in 1978 the Foreign Intelligence Surveillance Act was created specifically to limit the powers of the NSA after project SHAMROCK came to light, a project that Senator Frank Church claimed was, “probably the largest government interception program affecting Americans ever undertaken.”  That is until now of course.

Let’s not forget that the NSA is responsible for  the Gulf of Tonkin incident, reporting falsely that an attack had occurred on the USS Maddox, which ultimately led to the Vietnam war.  Ooops on that one too?

Now we’ve got National Intelligence Director James Clapper admitting in a letter to the Senate Intelligence Committee that his statement before Congress that the NSA did not have a policy of gathering data on millions of Americas had been “clearly erroneous”.  Right, you lied to the people you serve, but we’ll trust your judgment anyways.

A month after the Guardian broke this story, Snowden’s worst fears may be coming to pass, namely that nothing changes.  We have no Frank Church to lead the charge as he did in the 1970s, instead we have the likes of Cheney defending the NSA and calling Snowden a traitor.

The power of government must at all times be vigorously constrained because power will always end up being abused.  Perhaps we get lucky and have angels running the show for a while and we grant them all kinds of powers under the theory that they are there to protect us.  History has shown that angelic bureaucrats are a quickly fleeting dream.  Hell, if the NSA is so good at making sure this data doesn’t get into the wrong hands, how did Snowden get it?  Doesn’t look like he is exactly their poster child!

Liberty comes at a price.  Living in a society in which individuals are free to live their lives as they see fit, rather than living in a one-size-fits-all world comes at a price.  The more protection we ask for, the less freedom we have.  Keep this in mind.

All men having power ought to be distrusted to a certain degree.” ~ James Madison