This Week in Barrons – 7-1-2018:
“Tariffs lead to trade wars, and then to consumers getting screwed.”… Mark McKinnon
Thoughts:(rabbit – rabbit)
Let’s just say you knew that your country’s budget was operating at a very deep deficit ($1T) and your tax cuts are not helping cure the deficit. The most recent government estimates for increased revenues are falling short of plan, and your own GDP numbers were just revised downward. And let’s say elections are coming up, and your biggest fear is not being as powerful / re-elected. Your opponents are going to use the large deficits against you, so you need a way to raise $100B/yr. over the next 10 years – in order to offset those large tax-cuts that you just signed into law. When is a TAX not a tax – when it’s a TARIFF. A tariff is a tax in disguise – without the domestic friction.
As JT so aptly put it: Why wouldn’t you just call up your other dictator buddies and agree to slap a 25% tariff on their TVs, while they slap’s a 35% tariff on our auto parts. They will balance each other out and have a net zero effect on the balance of trade – but now BOTH countries get to collect more money. A tariff is essentially a tax under a different name, and gets a pass under the guise of national chauvinism. After all, ‘I'm getting tough with you bastards from across the ocean who are to blame for everything bad in my country’ – and my voting base loves it. They love it so much that they forget that I'm now taking $300 out of their pocket for every TV they buy.’ In fact, you could say that tariffs are better than taxes because they act like the proverbial Trojan Horse.
Can tariffs have the same impact as taxes? Examining the numbers below:
By imposing a 25% tariff on all imported automobiles, the government would generate approximately (5.1m * $36,200 * 25%) = $46B/yr. in additional revenue. Basically you get 50% of your tax deficit back with one ‘voter friendly’ swipe of the pen. And who is harmed – Germany is harmed the worst – by far.
But Germany (one could argue) has an economy strong enough to absorb the shock. Let’s not forget that we’re also harming both Japan and S. Korea – and both of their economies are substantially more fragile than Germany. And we have yet to put a dent into China.
Clearly the market and the world are watching the trade wars between the U.S., the E.U. and China. Our President was elected on the premise that our country's current trade deals were set up in a way that was detrimental to U.S. workers. Previously, the U.S. threatened countries with steel and aluminum tariffs, and over the past few months they have gone into effect. The E.U. hit back last week with billions in tariffs on U.S. products ranging from orange juice to bourbon to motorcycles. Harley-Davison said the new tariffs on bikes could cost the company up to $100m a year – so it’s packing up and moving some of its operations overseas. And as for China, the Trump administration said that they also aren’t playing fairly, and is wondering about ‘doubling-down’ on the country. China is saying: “Bring it on.” The stock market just wishes that we could all get along like we used to in ‘middle school.’ But now that countries are starting to play tit-for-tat, this trade war is showing no signs of stopping. Harley-Davidson's recent announcement (and GM saying that 25% of its cars are imported) is a sign that this could end up harming U.S. workers more than helping. So the next time you hear the word ‘tariff’ – think ‘tax’, and realize it could have less to do with trade and more to do with our growing budget deficit and winning re-election.
The Market:
GE turned me onto Andrew Ross Sorkin’s: “Demystifying the Blockchain.” In the article he high-lights: A new ‘so-called’ blockchain company that is selling virtualreal estate online with prices as high as $120,000 for a 10 X 10 meter parcel of virtualland. Decentraland raised $26m in 30 seconds so that you can buy a plot of virtualland in a virtual city. The investor’s money is NOT virtual– it is real. Mr. Sorkin describes the aura surrounding blockchain as like that of the dot-com bubble. And while 1999 marked what seemed to be a high point for the Internet before a precipitous fall, it proved to only be the first stage of the Internet’s assent. Blockchain will be fraught with failures, misspent money, and scams. But a decade from now, it will be embedded in our day-to-day lives in ways that we can’t imagine. New models of computing tend to emerge every 10 to 15 years: mainframes in the 60s, PCs in the late 70s, the Internet in the early 90s, smartphones in the late 2000s, and now blockchain. Blockchain goes about its business in a secure way so that every person who touches the data is trusted and everyone gets a copy of all the changes made – so there is never a question about what happened along the way. There aren’t multiple copies or different versions – there is only one trusted set of data and you can keep track of everything that’s ever happened to it. The advertising industry will use it to track ads; the music industry will manage songs; banks and mortgage companies will track the deeds of homes and all of the complicated documentation; shipping companies will track bills of lading, pharmaceuticals will use it to verify the drug supply chain, etc. Blockchain technology has the ability to bring a new level of trust to business and will also cut out the middlemen that have historically tracked (and profited) from the complexity of so many different systems trying to communicate with each other. Blockchain is about solving society’s ultimate challenge: trust – or rather, lack of trust. The biggest question is whether the hundreds of projects like Decentraland (using real money to buy virtual property) will undermine the trust in this emerging technology.
Crypto-Bytes:
- ICOs:have generated $13.7B in 2018 – nearly doubling 2017 numbers.
- Sweet Caroline: Nothing makes a 1% transfer fee seem outrageous – as a $290m Bitcoin transfer that cost 4 cents.
- Malta is beautiful: And increasingly attractive for blockchain leaders. Their Parliament passed three crypto and blockchain friendly bills to further solidify their status as a distributed ledger hotbed.
- FB is ‘on the move’: There’s a rumor goin’ round about Facebook acquiring Coinbase. FB would immediately have a significant (and profitable) foothold in the crypto-space, and Coinbase would have immediate access to billions of users.
- Blockchain is workin’ on it:Nasdaq shared some adoption figures that indicate most institutional-grade vendors are still taste testing the tech. Current adoption rates of various technologies are: (a) Blockchain: 5%, (b) AI: 35%, (c) Cloud Computing: 40%, and (d) Robotics: 70%.
- BlockTower’s Ari Paul expects institutional investors to ignite the next crypto-rally – occurring after new custodial solutions – i.e. September.
- Banco Santander’sblockchain pilot for the registration of stock warrant issuances cut processing time by over 70%.
- Goldman is smilin’:As Circle (their new acquisition) saw a 30% increase in their institutional-investor clientele last month – even while Bitcoin endured a 20% decline. Circle is handling 15 times more daily transaction volume than a year ago. And Circle is offering automated processes for institutional traders – guaranteeing clients with north of $100k purses a greater edge over less sophisticated players.
Info-Bits:
- Zon is ‘on the move’: Over the last few months, Amazon's been dipping its toes into healthcare with JPMorgan and Berkshire Hathaway, and last week it announced that it’s coughing-up about $1B for PillPack – a little known online pharmacy that ships meds right to your door. It's also starting a program to let people start businesses that would deliver Amazon packages. Unrelated? I think not. AMZN is forecast to rise by +30% as they make their push into the healthcare sector, and will further sizzle with the JPM and Berkshire bond.
- NARCO Playbook 101:Infiltrate the dealer, and then find the supplier. Last week Operation Dark Gold apprehended 40+ dark-web drug traffickers that used Bitcoin to sell narcotics on sites such as Dream Market, Alpha Bay, and oops: on Wall Street.
- Facebook’s ban: on cryptocurrency ads has been lifted – 5 months after Zuck dropped the curtain due to an overwhelming presence of deceptive promotional material on the cryptocurrency space across Facebook, Twitter, Google, and other prominent social platforms.
- Break open the Bubbly: Last week the DOJ gave Disney the OK to get cozy with 21st Century Fox. Some people thought anti-trust, but the DOJ said: ‘you have our blessing’ on the condition that you sell 22 of Fox's regional sports networks. But don't buy them a wedding gift just yet because Comcast is saying: 'It ain’t over, till I say it’s over.'
- Uber can drive around our city: ‘Let's see how things go,’ said London. As background: Uber used to have a CEO who gave zero sh*ts about what regulators thought, and consequently London didn't renew Uber's license to operate there. It labeled Uber as “not fit and proper"since it failed to report drivers' crimes and do background checks. Uber's new CEO promised that it would start doing those things, and London's saying, 'aright chap, ere's your ole license back – but we best review ‘er in a year.'
Last week trade tensions continued to weigh on global investor sentiment. Brad McMillan, the chief investment officer at Commonwealth Financial Network, said in a note, “We now find ourselves in what can reasonably be called a successful, growing economy. We are back to what we like to think of as normal. As we look into the second half of 2018, I believe that the economy will continue to grow, with healthy employment conditions, rising interest rates, and the reasonable prospect of rising markets. I expect growth to accelerate from first-quarter levels to levels closer to what prevailed in the 1990s and 2000s.”
This past week:
- Canada Retaliated with tariffs on U.S. goods. Also General Motors warned Washington that any tariffs imposed on imported vehicles could cost U.S. jobs.
- Tesla is in overdrive to meet its June production target. Panasonic, the exclusive battery cell supplier for Tesla’s current production models, is reporting occasional battery shortages. Tesla CEO Elon Musk said that his company should achieve its 5,000 cars-per-week target shortly.
- Nike is back on track after 3 quarters of falling revenues. Revenues rebounded 13% year-over-year to $9.8B.
- Music streaming giant Spotify will break new ground. Everything is going well for Spotify (up 16%) since the company direct listed its IPO last April. In a few weeks, Spotify will push further into video as part of their expanded services.
- GW Pharmaceuticals is the first cannabis-based drug company to secure a U.S. health regulator’s approval. Its drug Epidolex is used for epilepsy treatment. U.S. FDA Commissioner Scott Gottlieb said, “This approval serves as a reminder that advancing sound development programs that properly evaluate active ingredients contained in marijuana can lead to important medical therapies.” With this latest development, the cannabis industry is now open to mainstream pharmacies and medical practitioners.
This coming week, investors are advised not to panic amid the intensifying trade tensions. There remains: (a) a tight labor market, a healthy consumer, and a rebound in business investment enough to sustain domestic economic momentum; (b) a gradual increase in rates by the FED, (c) slower but persistent global growth, and (d) a greater balance between strong fundamentals and policy risks. The jobs report comes out on Friday – so the week should remain volatile up until the report.
Last week, a market bounce was overdue, and Friday was the last trading day of the month, the quarter, and of the first half of the year. Some ‘window dressing’ was in order as fund managers who didn’t do well this quarter, rushed to buy up the big names like Amazon, so that their quarterly statements reflected their superior foresight and vision. At one point the DOW was up 250 points, but instead of closing with a big gain of 250 points – the DOW ended the day up just 55. The S&P which had been up over 23 points, ended the day with a gain of just 2 points. So in this past week, we saw two very interesting fades. On Wednesday, the DOW was up 285 early on, and closed RED by over 160 points. And on Friday, when we were up 250, and barely held on to 55 points.
I can come up with quite a few excuses as to why this market feels so heavy: (a) trade wars, (b) rising rates, and (c) emerging markets rolling over. After all, the emerging market MACI index is down 14% year-to-date, China is down 20%, Hong Kong is down12%, and Germany’s DAX is creating a pretty bearish pattern. But there’s another angle that I’d like to ponder. On Saturday, a rather large bond redemption took place. This is an event where the Treasury actually has to cough up money, and in the past 8 of these events, the stock market took a hit. Yes, 7 of them took place during the work week, and this one is on a weekend – but that could that be part of the issue here. If the Treasury is busy buying back bonds, it can’t use that money to prop up stocks.
In general terms the last couple days of the month, and the first couple of the new month – are positive days. One would think that with the financials falling for 13 days, the DOW under its own 200-day moving average, and the S&P struggling to stay over its own 50-day – that they’d have pushed harder. This market feels like it’s dancing over a trap door, and any day that door could open and down we go. Yet, we’re still higher than the February lows.
I said many months back, until the S&P breaks out over 2800 or breaks under 2600 we’re in a no-mans-land kind of chop. One day, one of these levels will give in and a trend will develop. Most want it to trend higher, but until something happens, keep your trades small and don’t be shy about taking profits.
Tips:
Bitcoin Price Action: This past week, Bitcoin faced a lot of selling interest as it declined below the $6,000 level against the US Dollar – trading below the $5,800 level and testing the $5,650 support. A low was formed at $5,654 and the price moved back above the $6,000 resistance – trading with a bullish bias. It then cleared the 50% Fib retracement level of the last decline from the $6,832 high to $5,654 low. More importantly, there was a break above a key bearish trend line with resistance at $6,280 on the 4-hr. chart. At the moment, the price is consolidating gains near the $6,400 level and the 100-day simple moving average (4-hr. chart). A break above the 61.8% Fib retracement level is needed for buyers to gain traction. The next hurdles on the upside are at $6,500 and $6,600. The price is showing a few positive signs above the $6,000 level; however, it must break the $6,500 resistance and settle above the 100-day simple moving average. If not, there is a chance of a bearish reaction back towards $6,000, and below that it will most likely retest the $5,800 support area.
Top Equity Recommendations:
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC)
Options:
- McDonalds (MCD) – SOLD Jul 20, -160 / +157.5 Put Spread for $1.50
- Netflix (NFLX) – BOT Jul 6, +402.5 / $05 Call Spread for $0.60
To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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