$30 billion in new tariffs–implications

Yesterday Mr. Trump announced by tweet that he intends to impose a 10% duty, effective next month, on all US imports from China that are not yet under tariff.  That’s about $300 billion worth, which would produce an extra $30 billion in tax revenue for the government, were imports to continue at the pre-tariff rates.

What’s different about the current move is that tariffs will be predominantly on final goods, that is, stuff that’s completely made and ready for sale, things like like toys and everyday clothing.  For the first time, tariffs won’t be disguised.  Up until now, they’ve been mostly on raw materials or parts, where the connection between the tax and price increases of the final product is obscured–the political fallout therefore milder.   The new round will be more visible.


Standard microeconomics will apply:

–the cost of the new tax will be borne in part by US companies and in part by consumers, depending on how much market power each has

–over some period of time, companies and consumers will both look for lower-price substitutes for items being taxed.  Firms will, say, offer lower quality merchandise at the current price point; consumers will either buy fewer items or shift to cheaper merchandise


The new tariff amounts to a subtraction of about $250 from family discretionary income, meaning income after taxes and all necessities are taken care of.  That’s not a big number.  As with the other Trump tariffs, however, average Americans will be disproportionately hurt.  The bottom 20% by income have less than nothing after necessities now, so they will be the worst off.  Residents of the poorest states–eight of the bottom ten voted for Trump–as well.  So too anyone on a fixed income.


Netting out the positive effect of the 2017 income tax cut, the only winners are the top 1%, traditional Republican voters.  Other Trump supporters appear to be the biggest losers, although far they don’t appear to have connected the dots.  Nor does anyone in Congress seem to be questioning the administration rationale that national security does not require better infrastructure and education but does demand more expensive t-shirts and toys.


The stock market selloff underway today doesn’t seem to me to be warranted by the new tariff.  And it’s not exactly news that Washington is dysfunctional:  we’re led by a man who thinks our independence was won by controlling the airports; the leading opposition candidate somehow mistakenly thought his businessman/repairman/car salesman father was a laborer in the Pennsylvania coal mines.  So the most likely explanation is that in August human traders/portfolio managers head for the beaches, leaving newspaper-reading robots in control of Wall Street.

If that’s correct, the thing to do is to look for stocks to buy where the selloff appears crazy, getting the money from clunkers, which typically hold up in times like this or from winners whose size has gotten too big.











a rainy Friday in August in New York

August is the month when many senior portfolio managers are away from the office on vacation.  So big decisions on portfolio structure tend not to be made.

Friday is the day of the week when short-term traders’ thoughts turn to flattening their books so they won’t carry risk over the weekend.

It’s raining, which sparks thoughts in traders of sleeping in or leaving work early.

Add all that up, and the heavy betting should be that US stocks will likely move sideways in the morning and fade off toward the close.

That means this is a good day to stand on the sidelines and size up the tone of the market.


In pre-market trading, tech is up and bricks-and-mortar retailing (on the earnings miss by Foot Locker) is down.  …nothing new about this.  At some point there will doubtless be a fierce counter-trend rally.  But the negative earnings surprises are still provoking severe selloffs.  So I don’t think today is the day.

Pundits are speculating about the damaging effects on his political agenda of Mr. Trump’s apparent defense of neo-Nazis in Charlottesville.  …but the Trump trade has been MIA since January, with the US a laggard among world stock markets during Mr. Trump’s time in office so far.  Yes, there may be residual hope for corporate tax reform from the administration, which this latest demonstration of the president’s ineptness as a executive could arguably undermine.  My guess is, however, that he is already well understood.

Two questions for today:

–will the market perform more strongly than the season and the weather are suggesting? This would be evidence that there’s still an untapped reservoir of bullishness waiting for somewhat better prices to express itself.

–should we be buying in the afternoon if it’s weaker than I expect?  My answer is No.  I think there is a lot of untapped bullishness, but we’re in a slowly rising channel whose present ceiling is less than 2500 on the S&P 500.   That’s not enough upside for me.  I’m also content to wait for any incipient bearishness to play itself out further.

It will be interesting to see how today plays out.


timing the stock market

In its simplest form, timing the stock market means trying to figure out when stocks are either very expensive or very cheap and acting on your conclusion by selling stocks at the high points, holding cash for a while and backing up the truck to buy them again when prices are at their lows.

Two problems with market timing:

–it’s risky.  Historically the bulk of the positive returns from owning stocks occur on about 10% of the days.  Missing them can be devastating.

–it’s difficult to do.  In fact, in almost thirty years in the business I’ve never met a successful market timer.  I’ve encounter lots of unsuccessful ones, though.

There are professionals who are good at calling market tops.  Some are good at calling bottoms.  But I don’t know anyone who can do both.  More typical is the portfolio manager who “helps” his clients by raising a ton of cash on his view that the market is toppy, is psychologically unable to admit his mistake as stocks continue to rise and whose successor gets the task of cleaning up the resulting performance mess.


I have no idea where the strong negative emotion driving stocks lower globally is coming from.  So I think it’s best to stay on the sidelines until the craziness burns itself out.

Still, I noticed a couple of things about yesterday’s trading that suggest a bottom may be approaching.

–the S&P 500 broke through support at 1865 or so at the open and in short order found itself at the next support level of around 1815 at lunchtime.  The market made an immediate reversal and closed right around (just below) the former support.

The next support below 1815 is at 1870 or so.  We’ll see in the next few days whether the S&P can either recover above 1865 or hold above 1815.

–some stocks that I don’t hold but which are on my screen went crazy yesterday.

SCTY fell by -12% in the morning but closed up by almost +9% for the day.  That’s a 20% intraday swing.

LC fell by -9% in the morning but closed up by +8% for the day.  That’s a +17% intraday swing.

Yes, these are speculative stocks.  And they’ve been pummeled during the market downdraft.  But wild intraday swings like this are most often found at market turning points.

What to do?

I’m starting to comb through my portfolio for stocks that have held up well during the downturn to date and thinking about switching them for more interesting stocks that have been slammed over the past couple of months.  I’m not doing anything yet.  And I’m in no way contemplating making basic changes in portfolio structure.  But there may be an opportunity developing to upgrade at reasonable prices.




Marc Faber says stocks are going up–a bullish sign

who is Marc Faber?

I first encountered Mr. Faber when I began studying the Hong Kong market in 1985.  He was an early practitioner in that market of what one might call the “infotainment” wing of the institutional brokerage business (something that has now morphed, in a much less sophisticated form, into the financial channels on cable TV and radio).  

Mr. Faber was/is perpetually bearish.  That’s his stock in trade.  When I knew of him, he would prepare reports and make presentations to institutional clients, always arguing that a devastating financial collapse was imminent and that one should sell both stocks and bonds.

He was apparently a witty and intelligent debater.  Institutions would invite him in to present as part of their general due diligence process.  They’d listen, poke holes in his arguments, breathe a sigh of relief that the bear had no claws–and pay him, or the brokerage firm he might be working for, large amounts of commission dollars for his services.

Had you followed his advice to the letter, you would presumably have been in cash for at least the past thirty years.  …or maybe you would have held gold bars in a vault in your basement.

he’s always bearish…

He has a very strong financial incentive to stay in character.  That’s what gets him on TV and radio., That’s what sells his newsletter.  If he says anything bullish, he risks being reclassified into the general category of investment strategists–where he’d be just one of a gazillion people trying to time the markets.

…except for right now.  

If you go to a car dealership and the salesman tells you a certain car is a spectacular machine and a great buy, you have no information.  That’s what he’s supposed to say.  If, on the other hand, he tells you not to buy now but to wait for lower prices in three weeks, you may have useful data..

The Faber prediction is just like that–except that a guy who earns money by being perpetually bearish is, at least temporarily, bullish.  

This probably means that markets are going up for  a while.

My take on the markets in Current Market Tactics tomorrow.

to raise cash or not

raising cash

I find myself raising 10%-15% cash in the taxable joint brokerage account my wife and I use to pay for much of our living expenses.  No change in our fully invested stance in our IRAs or 401ks, just the taxable account.

Thirty years of professional training and experience tell me this is always a mistake.  But I’m doing it anyway.

why pros don’t do this

The easy answer is that pros typically can’t.  Their contracts with pension funds routinely require that the managers they hire remain fully invested.  The idea is that the pension fund and its consultants control the asset allocation (thereby justifying paying themselves the big bucks) and parcel out various pieces of the overall portfolio to specialists.  If managers stray from the asset classes where they’re experts they risk mucking up the overall asset allocation strategy.

Although mutual fund charters usually offer much more leeway, the manager will be pilloried if he raises a large amount of cash and the market goes up.

More importantly:

–to make a significant difference in performance, you have to raise a ton of cash–30%-40% of the portfolio at least.  This turns the portfolio into a Las Vegas-like all-or-nothing bet.

–I’ve never met an equity professional who’s any good at timing the market.  People tend to either understand either market bottoms very well–when to invest aggressively–or market tops–when to become defensive–but not both.  So they either raise cash much too early, or they get that timing right and never put the money back to work.  In either case, the cash-raising exercise tends to backfire.

This doesn’t mean there aren’t any successful market timers.  I just don’t know, or know of, any.  And I’ve seen lots of managers punch big holes in the bottom of their performance boats by trying their hand.

–the desire to raise cash invariably comes at times of stress and high emotion.  Emotional decisions in investing are almost always bad ones.

what pros do (or should do) instead

Make the portfolio less aggressive, so it will perform better in a downturn.  Eliminate speculative, smaller-cap, or highly economically sensitive names.

Look harder for new names.  If everything in the industries you feel most comfortable in looks too expensive, broaden your scope to include other sectors.

Go on vacation.

If you absolutely have to sell something (for your own emotional well-being), do it in small enough size that it won’t do much damage.

why I’m ignoring my own advice

Several reasons:

–low interest rates have forced me into a very high equity allocation

–in this account, I’m more interested in having money on hand to pay bills than in beating the S&P.  So I’m willing to accept underperformance.

–history says that stocks go sideways to up during periods when the Fed is removing emergency money stimulus from the economy.  I think this should hold true again.  On the other hand, while stocks appear reasonably priced to me, the size of the interest rate raise now underway is about double the normal size.  So there is an uncharted waters aspect to this Fed move.

Also, the tone of the market seems to me to be increasingly set by short-term traders who don’t have the skill or temperament needed to analyze economic fundamentals.  Their behavior is harder to predict with confidence–just look at what’s going on in Japan.