Trump, tariffs, trading

There’s no solid connection among the three topics above, but the title gives me the chance to write about three only-sort-of connected ideas in one post.

The crazy up-and-down pattern of recent stock market trading in the US is being triggered, I think, by Mr. Trump’s tweets about trade–and about tariffs in particular.  I think a lot of the action is being caused by computers trading on the President’s tweets themselves, or some derivative of them–likes, media mentions, reflexive response to stock movements (or a proxy like trading volume).

my thoughts

–it’s hard to know whether the misinformation Mr. Trump is spewing about tariffs is art or he simply doesn’t know/care.

Tariffs are paid to US Customs by the importer.   In some small number of instances, a Chinese exporter may have a US-based, US-incorporated subsidiary that imports items from the parent for distribution here.  In this case, a Chinese entity is paying tariffs on imported Chinese-made goods.  To that degree. Mr. Trump is correct.  Mostly, however, the entity that pays a tariff on Chinese goods is not itself Chinese.

This is not the end of the story, however.  The importer will attempt to recover the cost of the tariff through a higher price charged to the US consumer and/or through a discount received from the Chinese manufacturer.  In the case of washing machines, which I wrote about recently, for example, all US consumers ended up paying enough extra to cover the entire tariff  …and some paid more than 2x the levy.  The prime beneficiaries of this largesse were Korean companies Samsung and LG.

–one of the oddest parts of the current tariff saga is that Mr. Trump has decided not to work in concert with other consuming nations.  In fact, one of his first actions as president was to withdraw from the international coalition attempting to curb China’s theft of intellectual property worldwide.  The Trump tariffs are only bilateral, so there’s nothing to stop a Chinese company from shipping a partially assembled product to, say, Canada, do some modification there and reexport the now-Canadian item to the US.

The administration has been artful in selecting intermediates rather than consumer end products for its tariffs so far.  This makes it harder to trace price increases back to their source in Trump tariffs.  However, the fact that the administration has taken pains to cover its trail, so to speak, implies it understands that tariff costs will be disproportionately borne by Americans.

 

–in trading controlled by humans, a lot of tariff developments should have been baked in the cake a long time ago.  Continuing volatility implies to me that much of the reacting is being done by AI, which are learning as they go–and which, by the way, may never adopt the discounting conventions humans have employed for decades.

 

–I think it’s important to examine the trading of the past five days (including today as one of them) for clues to the direction in which the market will evolve.  Basically, I think the selling has been relatively indiscriminate.  The rebound, in contrast, has not been.  The S&P and NASDAQ, for example, are back at the highs of last Friday as I’m writing this in the early afternoon.  The Russell 2000, however, is not.  FB is (slightly) below its Friday high; Netflix is about even; Micron is down by 4%.  On the other hand, Microsoft and Disney are 1% higher than their Friday tops, Paycom is 2.5% up, Okta is 5% higher.

No one knows how long the pattern will last, and I’m not so sure about DIS, but I think there’s information about what the market wants to buy in these differences.   And periods of volatility are usually good times for tweaks–large and small–to portfolio strategy.  This is especially so in cases like this, where the movements seem to be excessive.

One thing to do is to confirm one’s conviction level in laggards.  Another is to check position size in winners.  In my case, my largest position at the moment is MSFT, which I’ve held since shortly after Steve Ballmer left (sorry, Clippers).   I’m not sure whether to reduce now.  I’d already trimmed PAYC and OKTA but if I hadn’t before I’d certainly be doing it today.  I’d be happiest finding areas away from tech, because I have a lot already.  On the other hand, I think Mr. Trump is doing considerable economic damage to American families of average or modest means, with no reward visible to me except for his wealthy backers.  Retail would otherwise be my preferred landing spot.

–Even if you do nothing with your holdings now, make some notes about what you might do to rearrange things and see how that would have worked out.  That will likely help you to decide whether to act the next time an AI-driven market decline occurs.

liquidity and stock price changes

daily liquidity and price movements

Liquidity has a lot of different meanings.  Right now, though, I just want to write about what I think is making stocks yo-yo to and fro on any given day.

 

The default response by market makers–human or machine–to a large wave of selling of the kind algorithms seem to trigger is to move the market down as fast as trading regulations allow.  This serves a number of purposes:  it minimizes the unexpected inventory a market maker is forced to take on at a given price; it allows the market maker to gauge the urgency of the seller; the decline itself eventually discourages sellers with any price sensitivity, so the selling dries up; and it reduces the price the market maker pays for the inventory he accumulates.

A large wave of buying works in the opposite direction, but with the same general result: market makers sell less, but at higher prices and end up with less net short exposure.

 

From my present seat high in the bleachers, it seems to me the overall stock market game–to make more/lose less than the other guy–hasn’t changed.  But we’ve gone from the old, human-driven strategy of slow anticipation of likely news not yet released to violently fast computer reaction to news as it’s announced.

Today’s game isn’t simply algorithmic noise, though.  Apple (AAPL), for example, pretty steadily lost relative performance for weeks in November, after it announced it would no longer disclose unit sales of its products.  Two points:  the market had no problem in immediately understanding that this was a bad thing (implying humans were likely involved)   …and the negative price reaction continued for the better part of a month (suggesting that something/someone constrained the race to the bottom).  As it turns out, decision #1 was good and decision #2 was bad.  Presumably short-term traders will make adjustments.

my take

On the premise that dramatic daily shifts in the prices of individual stocks will continue for a while:

–if investors care about the high level of daily volatility, its persistence should imply an eventual contraction in the market PE multiple.  Ten years of rising market probably implies that this won’t happen overnight, if it occurs at all.

–individual investors like you and me may have more time to research new companies and establish positions, if the importance of discounting diminishes

–professional analysts may only retain their relevance if they actively publicize their conclusions, trying to trigger algorithmic action, rather than keeping them closely held and waiting for the rest of the world to eventually figure things out

–the old (and typically unsuccessfully executed) British strategy of maintaining core positions while dedicating, say, 20% of the portfolio to trading around them, may come back into vogue.  Even long-term investors may want to establish buy/sell targets for their holdings and become more trading-oriented as well

–algorithms will presumably begin to react to the heightened level of daily volatility they are creating.  Whether volatility increases or declines as a result isn’t clear