Carty Capital Management
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TKO

Good Morning,

 

That's what it felt like Friday right?  A TKO.

 

Can you believe this heresy? 

 

There is a President in the White House who is doing almost exactly what he said he would do when he campaigned. 

 

As they said in Roman times, "Off with his head!"

 

Uhh - wait, no - hold on a sec.  

 

Before I get started, let's be very clear - this is NOT a political statement. 

 

It's sad that I need to preface it that way - but hey, it's the world we live in.  The vitriol I get when I even mention the guy's name these days is - well - astonishing.  I cannot even imagine what would have happened to me had I used the same words towards our former President.  The point? 

 

As an investor - if one continues to mix up their political views with the reality of how markets work in the long run, I am concerned.  They set themselves up for:

 

a) one is in for a lot of frustration,

b) almost everything will be seen through the lens of politics and,

c) the unsubscribe button is at the bottom of the email. 

 

So, I repeat - what I am typing today is not a political topic - it's reality. 

 

Let's start with that TKO reference above:

 

Please note all the "extreme fear" readings now on the data dashboard.  Note also, the reading actually got to a "7" by the close of Friday as traders headed into the weekend - just as was hinted in your Friday morning notes. 

 

Ugly right?  No, it's very good if you are a long-term investor.  Guess what generally follows a bunch of red circles in dashboards showing emotional readings?  In relatively short periods of time - green numbers show up in the value readings. 

 

By the way, I just had to include the photo listed on the close Friday at CNBC.  Classic stuff - and if you did not know what you were doing, you'd take the wrong impression from it:

 

It's time we get a grip folks - for your interest

 

It is obvious now by market reactions, that investors were seemingly "taken by surprise" by Trump’s proposed tariffs on selected Chinese goods.  Maybe many forgot that he publicly listed his trade policies during a campaign speech on June 28, 2016.

 

Now as covered already, you may or may not like our President, but you have to give him credit for delivering on his promises - whether you like them or not.  Here was his checklist:

 

“A Trump administration will change our failed trade policy—quickly.

 

Here are seven steps I would pursue right away to bring back our jobs.

 

One: I am going to withdraw the United States from the Trans-Pacific Partnership, which has not yet been ratified. [Check.]

 

Two: I'm going to appoint the toughest and smartest trade negotiators to fight on behalf of American workers. [Check.]

 

Three: I'm going to direct the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers. I will then direct all appropriate agencies to use every tool under American and international law to end these abuses. [Check.]

 

Four: I'm going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don't mean just a little bit better, I mean a lot better. If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal. [Check.]

 

Five: I am going to instruct my Treasury secretary to label China a currency manipulator. Any country that devalues their currency in order to take advantage of the United States will be met with sharply." [Pending.]

 

Six: I am going to instruct the US Trade Representative to bring trade cases against China, both in this country and at the WTO. China's unfair subsidy behavior is prohibited by the terms of its entrance to the WTO, and I intend to enforce those rules. [Check.]

 

Seven: If China does not stop its illegal activities, including its theft of American trade secrets, I will use every lawful presidential power to remedy trade disputes, including the application of tariffs consistent with Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.” [Check.] 

 

These notes are aligned with some help from our good friend Dr. Ed and his team.  By the way, Dr. Ed has a great new book out - check it out here !

 

It Is Not All Bluster

 

The 215-page trade investigation report being referenced in the media was finally released just last week.  It was done by the USTR to support the issues related to decades of abuse and railroading from China - often overlooked by recent US Presidents. 

 

It is titled “Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974.” 

 

Interestingly, the report pulls no punches.  It openly accuses the Chinese government of several unfair trade practices and estimates that the cost to the US closes in on over $50 billion per year:

 

(1) “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from American companies.”

 

(2) “China uses discriminatory licensing processes to transfer technologies from U.S. companies to Chinese companies.”

 

(3) “China directs and facilitates investments and acquisitions which generate large-scale technology transfer.”

 

(4) “China conducts and supports cyber intrusions into U.S. computer networks to gain access to valuable business information.”

 

Many may have overlooked that when President Donald Trump directed the USTR to publish a proposed list of products and any tariff increases by April 6, he also said that, “[a]fter a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases.”

 

Overlooked by the media was Trump's further instructions to the the USTR “to first pursue dispute settlement in the World Trade Organization to address China’s discriminatory technology licensing practices.”

 

Last but not least, Dr. Ed notes that the President directed the secretary of the Treasury “to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.”

 

What's the purpose of all this rhetoric?  Once again - as noted in your morning missive from Friday - "It's in Plain Sight" - to get them to negotiate.

 

Bingo

 

And guess what?  It is already working. 

 

Monday morning, before the markets opened here, China officials were being very clear and public:

 

"China is willing to hold talks with the United States to resolve their differences over trade", Premier Li Keqiang said on Monday.  His statement went on to say, "China is open to increasing purchases of semiconductors from the US to reduce the trade imbalance and to also open its financial sector to permit direct investment from US companies."  

 

Importantly, he went on to add, "China will no longer force foreign firms to transfer technology and would strengthen intellectual property rights."

 

I suppose "the reports" were not so crazy after all. 

 

I also suppose the reason this "news" was not heralded from the rooftops was because it would make the 24-hour stream of cynicism toward this White House appear to be what it is - foolish, often ignorant of facts and short-sighted.

 

By the way, we can add forward movement from China to big improvements in the new agreements reached over the weekend with S. Korea:

 

Stop me if you've heard this before...

 

We may not like the process - or the "way too non-PC" manner in which it is unfolding, but you cannot argue about the results:

 

When the dust has settled and the nasty headlines have abated, our trade agreements on many fronts will have dramatically improved - for the benefit of the United States. 

 

And on what planet can that be a bad thing?

 

Manufacturing is...um...Booming

 

You remember all that stuff about the industrial side of America being "dead", right?

 

The latest non-farm payrolls report from the BLS showed an increase of 31,000 manufacturing jobs during the month of February. Notably, February marked the fourth consecutive month of adding at least 25,000 manufacturing jobs.

 

While that may not sound like a big deal, the chart below shows we haven’t had a streak of adding 25,000+ manufacturing jobs for four straight months in more than 20 years!  Indeed, the process works - even when it's nasty sometimes. 

 

We’re starting to see a big turnaround in this area of the economy:

 

Hey - Don't Forget Earnings

 

Say all you want about the short-term shenanigan's, emotions, media hype, talking-head chatter and double-talk.  Those elements will very often take you down the wrong road.  Never confuse trading with investing - it's a poisonous venture and ruinous to your long-term effectiveness - if - you are trying to build real wealth.  Bet your bottom dollar, the louder the emotional stress gets - Warren is buying. 

 

..and here is why - earnings are solid.

 

With emotions throttling up fear levels again, the S&P 500 index fell 5.95% last week - one cannot ignore the rest of the numbers.

 

The latest snapshot from Thomson Reuters:

 

Fwd 4-qtr est: $158.02

PE ratio: 16.4x

PEG ratio: 0.79x

S&P 500 earnings yield: +6.11% vs. last week's +5.75%

Y/Y growth of the fwd estimate: +20.71% vs. last week's +20.8%.

 

Clearly, we will hear much about how the S&P 500 is sitting near key technical support from the lows of February 8th and February 9th, with Friday's close in the S&P 500 at 2,588.26.  As covered several times in recent weeks, it is better for your psyche to simply assume it will remain choppy for a bit - Q1 earnings are just around the corner.

 

Here is the thing to remember though:  

 

Prior to this latest S&P 500 flush, the last time the S&P 500 sported a 6% earnings yield were the weeks prior to the Presidential election in November 2016, and for that stretch, the S&P 500 earnings yield was over 6% for 5 straight weeks.

 

While not a hard-and-fast rule or buy signal, history suggests an S&P 500 earnings yield above 6% has typically meant strong, long-term value for the S&P 500.

 

Closing

 

As ugly as these windows of time always feel - and believe me, I get it - a patient and disciplined view of the larger forces defining our collective future tends to be a more productive philosophy...

 

Forget the White House.

 

Over wide spans of time, people make markets. 

 

The Barbell Economy is real. 

 

You can ignore it, you can disagree - but the two largest generations of our time are set to drive U.S. economic growth for the next 40 years. 

 

In time, innovative and well-run companies standing in that Barbell structure will be set to generate long-term profits, and the shareholders (owners) who patiently invest for the long-term will hopefully participate in the value creation that takes place as a result.

 

As such - panics like the one the markets are currently (still) finding their way through tend to be good for the long-run.  They reset values and perspectives and provide the long-term investor new opportunity to be patient and disciplined.  

 

No one ever stated it would be easy.

 

Be assured of this: if it were easy, the returns available would be insignificant.

 

For long-term investors, hunting season is open...time to start looking.

 

Be grateful for the latest bouts of panic.  

 

They are resetting values and building future larger returns. 

 

The wall of worry has been rebuilt nicely...though chop and churn as aftershocks are always likely - and normal.  

 

Demogronomics keeps you on the leading edge of change but there is a cost:  it requires a much larger, more patient and disciplined view of the elements at work.

 

It's the long-term currents we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon - just as they are now, causing doubt in the minds of millions once again. 

 

Those waves are the noise too many will likely continue to be lost in...and the reason the long-term game is so hard to win based on fearful activities.  

 

In the end, like it or not, long-term investors have learned this: 

 

Demographics Rule The Long-Term Game

 

Until we see you again - may your journey be grand and your legacy significant.

InvestingMike Williams