Monthly Archives: January 2017

how do tariffs affect selling prices?

January 9, 2017 By in economics, foreign trade, tariffs, Uncategorized Tags: , , Leave a comment

The purpose of tariffs on imported goods is to discourage their use and to encourage the development of domestic substitutes.  It sounds good in theory but may not work in practice.

A recent example of the latter is the imposition of tariffs by the Obama administration on truck tires imported from China.  The tariffs made the Chinese tires affected noncompetitive in the US.  But US tire makers regarded this market as not lucrative enough for them to enter.  So trucking companies began to import more expensive tires made in Thailand.  Economists estimated at the time that because the tariffs raised the cost of doing business for truckers it lowered their profits and overall cost the country about 3,000 jobs.  And then, of course, China retaliated by placing an import duty on poultry source in the US, hurting that industry as well.

The key points:

–tariffs raise the cost of doing business for the industries affected.  That extra cost must either be absorbed by the buyer of imported materials or passed on to the customer.  Theory says that if the end product is unique, the burden will be mostly borne by the end user;  if it’s a commodity, the importing company will have to absorb most of the extra expense.  An interesting case in this regard is toys.  Most of the toys bought in the US are made in China.  A tariff on run-of-the-mill imported toys (which probably means 90% of them) would mostly raise the price to consumers, in my view.

–tariffs may not promote domestic industry, and may do significant net damage, as the truck tire example shows.

–in addition, decades of protection against foreign competition did little to protect US carmakers from the long-term threat of imports.  On the contrary, Washington’s protective umbrella shielded shoddy manufacturing and lack of innovation that ultimately ended with two of Detroit’s Big Three declaring bankruptcy.  To be sure, government action forced foreign carmakers to establish manufacturing operations in the US.  However, the sad case of General Motors, which controlled 40% of the US cara market at one time, makes it hard to argue, I think, that government protection of domestic industry against foreign competition is the best thing to do.

 

Employment Situation, December 2016

January 6, 2017 By in employment, Employment Situation report, Uncategorized Tags: , , , , , 1 Comment

The Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation  this morning at 8:30 est.

According to the release, the economy gained 156,000 new jobs in December, more than enough to absorb new entrants into the workforce.  Revisions to October figures were -7,000 jobs, to November’s, +26,000, meaning the net revision to the prior two months’ data was +19,000 new positions.

While this is a so-so result, we should consider how much may be due to random statistical variations in the data and, more importantly, how much comes from the difficulty employers are apparently having in finding qualified candidates who are currently unemployed.

More evidence that the latter is becoming a more significant issue comes from the rising trend in average hourly wages the BLS is also reporting.  for the 12 months ending in December, wages have been increasing at an inflation-beating 2.9% rate.  If we, methodologically incorrectly, take the December wage gains alone, the year on year increase is 4.6%.

The bottom line:  good news, and evidence the Fed will likely take as prompting it to raise the Fed Funds rate again sooner rather than later.

January and the Trump rally

January 5, 2017 By in January effect, Strategy, Uncategorized Tags: , , Leave a comment

The first couple of weeks in January are usually bad ones for stocks.  Taxable investors typically start their annual portfolio revamping by selling their losers near yearend but they tend to nurse their winners into the following tax year.  From the first trading day in January on, they aggressively prune or jettison profitable positions they no longer think will outperform.

As a result, stocks usually go down in early January.

(An aside:  December losers, especially small caps selling for below $5 a share, tend to bounce back sharply from late-year lows in January.  This is called the “January effect.”  I don’t think it will play an important role this year.)

Not so, so far in 2017.  Instead, the upward movement in the S&P 500 triggered by the surprise election of Donald Trump as president has continued.

Two key differences between today and the last two months of 2016:

–the US$ has, at least for the moment, stopped rising, and

–the market seems to be rotating away from putative Trump administration beneficiaries into left-behind sectors like IT and REITs.

What does this mean?

I think it says that the initial rally on the anticipation of possible pluses from an end to dysfunction in Washington–corporate tax reform, infrastructure spending, and a more normal monetary policy–is getting long in the tooth.  Yes, economic growth appears to be accelerating and consumer confidence is rising.  But potential winners from a Trump administration have advanced by, let’s say, 20% since the election, while more defensive issues have fallen.

Investors are shifting from being driven by concept to being motivated by valuation.  They think, correctly in my view, that the leaders are looking a bit pricey and laggards are looking like relative bargains.  So they’re moving from the first group to the second.

What happens next?

Absent new information, or new inflows of money to equity managers, the market is likely to stall and then sag a little.   The most important factor here is the consensus expectation that the S&P 500 is likely to rise by about 5% for the year as a whole–which would imply there’s severely limited upside, at least until we get further concrete information about the economy or about Congress.

My guess is that the next major move is up.  If so, it will be triggered either by surprisingly good economic data or by bold action to stimulate the economy from Congress.  We should be watching carefully for either.

In the meantime, we can deepen our analysis of Trump beneficiaries, especially, I think, in the Energy sector.  My sense is, day traders aside, there’s no reason to sell (of course, I’m bullish by disposition, so this is my default position).

 

 

 

 

market rotation: two types

January 4, 2017 By in market rotation, sector rotation, Uncategorized Tags: , , , Leave a comment

market/sector rotation

Market rotation, sometimes also called sector rotation, is a shift in the pattern of sector outperformance in the stock market.  In 2016, for example, the S&P 500 favored defensive sectors over aggressive ones.  2016 produced the opposite result.

why

The market rotates for two basic reasons:

—change in economic circumstances.  In early 2016, for example, Wall Street began to believe that the price of crude oil, which had been in free fall for two years, finally hit bottom at around $26 a barrel.  So oil stocks began doing better.  Similarly, investors now believe that the election of Donald Trump as president, meaning both houses of Congress and the White House are all Republican, signals the end of Washington dysfunction.  This implies a significant turn for the better in the US economy.  As a result, the most economically sensitive areas of the stock market have been doing better since Election Day.

—valuation.  Professional investors often say that “trees don’t grow to the sky,” meaning that at some point sectors that are enjoying an economic tailwind become too expensive relative to those being buffeted by temporary headwinds.  At such times, they will begin to buy stocks in left-behind sectors almost entirely on the idea that as financial instruments they are relative bargains.

short/shallow vs. long/deep

Sector rotations based on valuation tend to be much shorter and shallower than those based on a change in economic circumstances.

the 2015 -16 example

In 2015,  the Healthcare sector rose by +5.2% and Energy fell by -23.6%.  The difference in performance between the two was a whopping 28.8 percentage points.

In 2016, Healthcare fell by 4.4% and Energy rose by +23.7%.  The performance difference between the two was 28.1 points.

what about today?

To me, the extent of the outperformance of the most economically sensitive sectors since the election has been so strong as to invite a market rotation away from them.  My guess is that this will be based mostly on relative valuation.  If so, the turn away from current market leaders will be relatively brief and the correction in these sectors relatively shallow.

For day traders, this will be a big deal; for you and me, not so much.  Our main concern will be the buying opportunity in cyclicals a correction in them will present.