Trade and Impeachment Uncertainty Returns

Trade and Impeachment Uncertainty Returns

Today’s Big Picture

US equity futures point to a drop at the open and are being driven by two-weekend news items. First, on the impeachment front, a second whistleblower has come forward claiming first-hand knowledge of the allegations against President Trump. Second, reports are indicating Chinese officials are reluctant to agree to a broad trade deal as aimed for by President Trump and would likely exclude the reformation of Chinese industrial policy and government subsidies, two topics of longstanding U.S. complaints. 

This combination along with weak economic data out of Europe this morning is adding a fresh dose of uncertainty back into the market following Friday’s supposed Goldilocks September Employment Report, and raises questions…

Read more here

Bad news for Tesla, auto OEMs killing hybrids to focus on EVs

Bad news for Tesla, auto OEMs killing hybrids to focus on EVs

At the heart of our investment themes here at Tematica we tend to find a structural change underway. There are several embodied by our Cleaner Living investing theme with one of the more recognizable happening in the auto market as consumers look for non-gas powered solutions. This began with hybrid models, which in hindsight were a baby step or two away from all-gas powered engines that allowed them to meet regulatory mandates. We are, however, seeing an acceleration in the shift toward electric vehicles (EVs) as both General Motors and Volkswagen close out their hybrid efforts to focus their formidable resources on the EV market.

As we can see below, GM in particular is looking to move in the EV market in a meaningful way over the next four years. As we’ve seen in our Digital Lifestyle investing theme with Netflix, a company can enjoy an early mover advantage for a period of time but as the market opportunity presents itself others, like Disney, Apple, Comcast and others, will look to tap into that growing market.

The same holds for Tesla, and the question investors will need to ponder is how it will fare in a far more competitive EV market? Legacy auto makers like GM, Volkswagen, Ford and others are well versed in the competitive auto market. This will be new ground and an new battle ground for Tesla and Elon Musk, and it doesn’t have a legacy car business to help it out.

Auto makers for two decades have leaned on hybrid vehicles to help them comply with regulations on fuel consumption and give customers greener options in the showroom. Now, two of the world’s largest car manufacturers say they see no future for hybrids in their U.S. lineups.

General Motors Co. and Volkswagen AG are concentrating their investment on fully electric cars, viewing hybrids—which save fuel by combining a gasoline engine with an electric motor—as only a bridge to meeting tougher tailpipe-emissions requirements, particularly in China and Europe.

GM plans to launch 20 fully electric vehicles world-wide in the next four years, including plug-in models in the U.S. for the Chevy and Cadillac brands. Volkswagen has committed billions to producing more battery-powered models, including introducing a small plug-in SUV in the U.S. next year and an electric version of its minibus around 2022.

Last week, Continental AG, one of the world’s biggest car-parts makers, said it would cut investment in conventional engine parts because of a faster-than-expected fall in demand—yet another sign the industry is accelerating the shift to electric vehicles.

Source: GM, Volkswagen Say Goodbye to Hybrid Vehicles – WSJ

What Investors Need to Know About the Implications of Trump’s Tariffs

What Investors Need to Know About the Implications of Trump’s Tariffs

 

A couple of days ago, I shared my view that President Trump’s tariff overtures are more than likely a negotiating tactic as he looks to tackle yet another of his campaign promises – international trade. The resignation of Gary Cohn on Tuesday, President Trump’s top economic adviser and the head of the National Economic Council, have certainly fanned the flames that this might not be a bluff by Trump — either that or Gary Cohn was unwilling to play the game.

I continue to think Trump is following the negotiating strategies he laid out in his 1987 book, Art of the Deal. But as an investor, we have to game out the potential outcomes so we can assess the potential risk and position ourselves accordingly. 

 

Should Trump enact the seemingly unpopular trade tariffs on steel and aluminum, what then? 

For starters, with an increase in the cost of importing from other countries and a lack of price pressure on American suppliers, steel and aluminum will become more expensive to U.S. companies. No big surprise there. The companies impacted will be wide, ranging from manufacturers of aircraft, high-speed rail, cars, trucks, construction equipment, motors, satellite dishes, smartphones, tablets and appliances. And let’s not forget cans, which will impact the price of food, soda and beer, as well as a variety of other products.

What this means is the cost production for Boeing (BA), Ford (F), General Motors (GM), Navistar (NAV), Paccar (PCAR), Caterpillar (CAT, Deere (DE), Cummins (CMI), Apple (AAPL), Dell, Whirlpool (WHR), Coca-Cola (KO), PepsiCo (PEP), Molson Coors (TAP), Anheuser Busch (BUD), and numerous others will rise. 

 

Will those companies look to change to domestic suppliers? 

Most likely, but that will take not only time, but require more domestic capacity to come on line. As we’ve seen in the domestic oil industry, it’s not as easy as flicking a light switch – it takes time, and more importantly, it takes people, the right people. That’s right, the skill set to work in a steel or aluminum plant is not the same as working at McDonalds (MCD), the Gap (GPS) or an AMC Theater (AMC).

What we’re likely to see amid a rise in demand for domestic steel and aluminum is rather similar to what we are seeing in the freight industry. The currently capacity constrained domestic truck market has led to sharp increases in freight costs cited by a growing number of consumer product companies ranging from Tyson Foods (TSN) to J.M. Smucker (SJM) and Ross Stores (ROST). 

The same materials constraints is poised to happen to homebuilders this spring, given the current lumber shortage… and yes the current truck shortage could mean a double whammy for homebuilders like Toll Brothers (TOL), D.R. Horton (DHI), Lennar Corp. (LEN) and the rest of the industry, both public and private, as they truck materials to new building sites.

We’ve talked quite a bit about how rising home prices due to low supply have likely priced out a number of prospective buyers. Let’s also remember the rising level of consumer debt and lack of wage gains for the vast majority of workers that Lenore Hawkins, Tematica’s Chief Macro Strategist, and I have been talking about on the Cocktail Investing Podcast and writing about. What this probably means is more consumers will be priced out of the housing market as homebuilders look to offset rising costs with higher prices. Basic economics. 

Getting back to the impact of the proposed Trump tariffs, while they would help potentially level the playing field for steel and aluminum companies like AK Steel (AKS), Steel Dynamics (STLD), Century Aluminum (CENX), Arconic (ARNC) and other, in the short to medium term they will more than likely lead to higher prices. 

While companies may look to offset those rising costs, the reality is that in today’s world where a public company must at a minimum meet the bottom EPS expectations lest it’s stock price get crushed, odds are they will raise prices to minimize the hit to the profits and the bottom line. We’ve seen this time and time again over the years at Starbucks (SBUX) with a nickel here and there price increase with its latest in September ranging from 10 to 30 cents on a variety of menu items. 

To use the lingo favored by the Fed and economists, we run the risk of inflation. Yes, folks, I said it, inflation, and as we know over the last few weeks that word has become a focus for investors as they look to gauge how far and how fast the Fed will boost rates in 2018 and before too long 2019. We know in watching these higher prices will weigh on the buying activity of Cash-Strapped Consumers and most likely others as items become less affordable. Not sure, consider the median U.S. income last year was all of $31,685 compared to $31,248 in 2000 – over 18 years an income gain of just $437! 

This is where I remind you that the U.S. consumer is a meaningful contributor to the domestic economy, (with consumer spending accounting for nearly 70% of GDP) and Lenore would kick me if I didn’t remind you how far along we are in the business cycle. The combination of rising prices and questionable consumer demand also runs the risk of profit and EPS pressure that would likely weigh on stock prices. 

Boiling it down, the question is does Trump want to run the risk of torpedoing the economy and the stock market, two of his much tweeted about barometers for his presidency?

My thought is probably not.

I do, however, expect Trump and his ego will continue down this negotiation path, ultimately compromising for a better trade deal than the current one. And yes, my fingers are crossed. 

Will it be smooth sailing to that destination? Not likely and we can see last night’s resignation of Gary Cohn, President Trump’s top economic adviser, as a sign the waters will be more than choppy over the next few weeks. 

 

The Response from the EU and Its Potential Impact to the Fed and Interest Rates

Upping the ante, this morning the European Union shared its response to Trump’s proposed metals tariffs saying it would take the case to the World Trade Organization and coordinate its actions with other trade partners that are also against the proposed tariffs from the U.S. The EU went on to share a “provisional list” of U.S. products that would see higher tariffs from the EU, if Trump moves ahead with the import tariffs. The full list has yet to be made public, but among its speculated $3.5 billion impact will to items such as peanut butter, cranberries and oranges. Perhaps EU officials have been busy reading Trump’s Art of the Deal? 

What all this looks like… or at least I hope it is… is a good ol’ fashion game of chicken — international trade negotiation style.

Like most games, there tends to be a winner and a loser, and while it’s possible that Trump comes out ahead on this, the risk he runs will impact the American consumer, the domestic economy and at least certain stocks if not the overall market. 

Remember also that the next monetary policy meeting by the Fed is in two weeks. At its January meeting, the Fed was beginning to shake and bake tax reform implications into its outlooks, and I suspect the Fed heads are likely doing the same with a potential trade war. Do I feel bad for new Fed Chief Jerome Powell? Let’s just say that I wouldn’t want his job, but then again given my pension for calling it like I see it they probably wouldn’t want me. 

 

The Rise and Fall of the Middle-Class Part 1

The Rise and Fall of the Middle-Class Part 1

[podcast src=”https://html5-player.libsyn.com/embed/episode/id/5951354/height/90/theme/custom/autoplay/no/autonext/no/thumbnail/yes/preload/no/no_addthis/no/direction/forward/render-playlist/no/custom-color/88AA3C/” height=”90″ width=”470″]

Download Episode

The Economic Impact of the Expanding Global Middle Class

This week, Tematica’s investing mixologists Chris Versace and Lenore Hawkins walk through the global impacts of the Rise and Fall of the Middle Class, focusing in Part I of this series on the Rise portion of this investing theme. The expanding global middle class will account for nearly half of all consumption in the coming years, but as we discuss the where and why behind this new middle-class is reshaping industries and business models at Amazon (AMZN) and General Motors (GM) to McCormick & Co. (MKC) and many, many more.

For over 90% of the past two millennia, China and India dominated the global economy, generating over half of the world’s GDP in terms of real purchasing power. The end of the 17th century saw a seismic change with the start of Europe’s Industrial Revolution, which later spread to the New World. From 1820 to 1950 Asia’s share of GDP plunged from just under 60% to 16 percent and by the middle of the 20th century the West had come to dominate global growth with the United States generating over a third of world GDP by the end of World War II and when combined with Western Europe, accounted for nearly 60% of global GDP. However, this would not be permanent.

Asia’s return to its multi-millennial dominant role began in the 1950s and started accelerating in the 1980s to rise from 16% to over 30% by 2000. Today Asia’s share of global GDP, excluding the Middle East, has reached a 160-year high of 43%. During that time, the share of the United States and Western Europe has fallen to a 166-year low of 33%, with the U.S. share cut to half its mid-20th peak and Western Europe losing nearly one-third of its share just since the start of the 21st century — all part of the story behind the Rise portion of our Rise and Fall of the Middle Class as the west loses its dominance while emerging economies come into their own.

The incredible volume of sales generated by Alibaba (BABA) over the weekend for Singles’ Day illustrates the reemergence of that economic power and the convergence of our Rise and Fall of the Middle Class with the Connected Society as a stunning 90% of the transactions were done via mobile, which we discussed here earlier in the week. As the center of gravity for middle class households shifts from west to east, it will open up new opportunities for those companies that adjust their strategies accordingly, generating tailwinds for growth. Those that miss this tectonic shift will face challenging headwinds.

Along the way, our mixologists talk about which sectors and companies are poised to prosper from the emerging middle class in the East as well as giving an assessment of the recent moves in the markets.

 

Companies mentioned on this podcast

  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Ford Motor (F)
  • General Motors (GM)
  • Home Depot (HD)
  • McCormick & Co (MKC)
  • Samsung (SSNGY)
  • Target (TGT)
  • Wal-Mart (WMT)
  • Whirlpool (WHR)

 

Resources for this podcast:

Books we’re currently reading:

Cocktail Investing Ep. 25: Petya with CEO of Alert Logic, GM’s got the blues, Blue Apron’s IPO

Cocktail Investing Ep. 25: Petya with CEO of Alert Logic, GM’s got the blues, Blue Apron’s IPO

In this week’s program, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins discuss the week’s economic data, relevant political happenings and share where they have spotted a few of the latest Thematic Signals. We then have a fascinating discussion with the Chairman & CEO of Alert Logic, Gray Hall.

In this week’s program, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins discuss the week’s economic data, relevant political happenings and share where they have spotted a few of the latest Thematic Signals. We then have a fascinating discussion with the Chairman & CEO of Alert Logic, Gray Hall.

A few highlights include:

  • Tuesday the U.S. Dollar experienced its worst day in three months after European Central Bank President Mario Draghi gave an optimistic speech on the state of the Eurozone economy, citing improving political tailwinds and a reemergence of reflationary pressures.
  • While the Eurozone continues to show signs of acceleration, this week’s Durables report showed an economy stuck in slow gear with both core shipments and orders falling 2 percent month-over-month versus expectations for an increase of 0.4 percent. While that doesn’t sound too good, digging deeper we found something more concerning for those high-flying technology stocks.
  • Big U.S. banks plan to increase their dividend payouts and share buybacks to their highest level in years after the Federal Reserve on Wednesday approved capital plans for all 34 firms that took part in its annual stress tests. While this may provide some lift for bank stocks, we discuss why this doesn’t necessarily translate into optimism for the economy overall.
  • We discuss the level of complacency we see all around as the VIX volatility index has dropped below 10 more times in 2017 alone than in the 22 years prior to 2017.
  • While GM had issued a cut to its 2017 auto forecast — surprising no one at Tematica and we’ve all seen the same pain in the oil sector — analysts are doing little in the way of revising earnings for the rest of 2017. Considering those ripple effects, it’s quite the head scratcher as we head into 2Q 2017 earnings.
  • Finally, while the mainstream financial media keeps up expectations for accelerating growth in the back half of the year, the bond market is telling a different story.

 

In our discussion with Gray Hall, Chairman and CEO of Alert Logic, we gained valuable insight into the cybersecurity landscape and the rising need for Security-as-a-Service as more companies move to the cloud. We covered such topics as:

  • How cybersecurity needs and providers are evolving along with technology platforms such as Amazon Web Services, Microsoft’s Azure and Google Cloud.
  • Where hacks typically initiate and what that means for your company or those you invest in
  • How Alert Logic defines its customers in a way that is very different from most cybersecurity firms… and why they are likely ahead of the pack in thinking this way
  • Why advanced analytics such as machine learning is mission critical for cybersecurity’s road ahead as the cloud is poised to continue its rapid growth vs. on-premise solutions.
  • The evolving landscape for cloud platforms, and much more.

 

 

Companies mentioned on the Podcast
  • Alert Logic
  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Blue Apron (APRN)
  • Facebook (FB)
  • General Motors (GM)
  • Microsoft (MSFT)
  • Oracle (ORCL)
  • Snap (SNAP)
  • Twitter (TWTR)
  • Whole Foods Markets (WFM)

 

Resources for this podcast:
Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist