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Morning Commentary

From Tariff Handwringing to Fundamentals

By Charles Payne, CEO & Principal Analyst
3/7/2018 8:40 AM
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The stock market continues to meander. And while all the on-air chatter was about tariffs and global trade with the typical dose of fear-mongering, I suspect this market is marking time for something much more important. The February jobs report out on Friday will have provided an interesting twist to see if good news is good news of good news, or if bad news is good news. 

I’m referring to the last jobs report, which uncorked the volatility genie when wages increased more than expected.  I continue to marvel at the reaction of Wall Street. The overall increase in wages was +2.9% in January, which matched the high last reached back in June 2009.

However, the number is still much well below what most people used to consider a nominal wage growth.  Moreover, when it comes to non-supervisory workers, this moment of catch-up is delayed too long.  In January, non-supervisory wages increased +2.4%, significantly below the 4.1% increase back in March 2007.

So, Main Street will be rooting for more wage gains, but the Wall Street ivory tower folks might frown on everyone else getting raises.

Stellar Earnings Results

One of the reasons market bias is turning higher is corporate earnings and guidance. According to factSet, with 97% of companies’ earnings coming into the week, the results have been remarkable: 

Revenue

Earnings

Sharpening Pencil

Perhaps the most compelling part of earnings season is the fact that after two months, the Street hiked its earnings estimate for the quarter and the full-year. For the quarter, the Street hiked consensus to $36.32 from $34.37, or 5.7%.  It’s the first time in more than five years earnings consensus has risen (see chart).

Full-year earnings consensus from the start of the year to now climbed to $157.97 from $147.24. As noted in the FactSet report, some of this can be attributed to tax reform, but most analysts knew how to model for that before results began. 

I think this is more about a robust economy and management having the confidence to provide stronger guidance.

With the recent correction worries of valuation, although faded, there are some purists looking for ever lower levels. Ratios are important, but there are so many more factors that rank higher in our decision-making process.  On that note, however, I like the forward price-to-earnings (P/E) ratio better than other metrics.

We are looking for $170.00 earnings for the S&P 500, and I think at some point, the forward P/E will get back to 18 times, which means the S&P 500 has potential to 3,060 or 12% higher than yesterday’s close.

Message of the Market

On Tuesday, the market edged higher into the close, even as President Trump explained his intention to fix our trade, and even called out our “friends” like Sweden. Sure, there’s a chance Mexico and Canada can escape the industrial metals tariffs, but this isn’t a bluff.  Moreover, our North American Free Trade Agreement (NAFTA) partners are taking it seriously as they have a lot more to lose.

After the close, Mexico reported its first two months of auto exports to the United States, which increased 9.5%, and it’s now on pace to produce more than four million autos for the first time ever.  Trade Wars are ugly, but living with unfair trade deals is stupid when you have the purchasing power:

Breadth: NYSE

Breadth: NASDAQ

We get the ADP National Employment Report today, which hastens the countdown to the government jobs report on Friday.

Today’s Session

It’s all about the resignation of Gary Cohn and Wall Street is ready to have another temper tantrum.   Cohn was always going to leave the White House, his work was done, and he wasn’t on board with the rest of the Trump economic agenda.

Economic Nationalism

When Steve Bannon was banished from the White House, it seemed like so-called “Economic Nationalism” was banished with him.  Soon after, President Trump publicly chided Wilbur Ross, and we never heard from Peter Navarro.

That’s all changed. 

Many are saying Navarro could get the top economic adviser job (my buddy Larry Kudlow is also in the running, but he has been very public with his disdain for tariffs).  This is obviously a two-prong strategy from the White House.

Honest Discussion

All the establishment experts keep screaming about the dangers of an economic trade war pushing America into a fetal position that the world’s richest nation shouldn’t find itself in while at the crossroads.  We can take a stand now on the economy and military might or countdown the clock to the transfer of power and influence to China and others.

Part one of my March 2018 Newsletter lays out some facts about trade and tariffs…here’s part of my thinking.

Since the nation is embroiled in a discussion about tariffs and a possible trade war, I think we should lay out some simple facts and ask some questions to all the economic mavens that have watched jobs in America’s heartland vanish to other nations.

First, right now, every country in the world uses tariffs.  The average tariff on all products in 2016 was 7.0%, with the highest being 23% on food, and the lowest 3% on fuels.

Most Favored Nation Average Global Tariffs 2016

Products

Rate

All Products

7.0%

Animals

21.1%

Food

23.0%

Footwear

15.0%

Vegetable

15.7%

Textiles & Clothes

14.3%

Hides & Skins

12.7%

Stone & Glass

9.3%

Plastics & Rubber

8.0%

Wood

7.7%

Machine & Electric

5.2%

Chemicals

5.4%

Minerals

4.0%

Fuels

3.3%

                       Source: World Bank 

Second, nations poised to dominate the world’s economy in the next decade have two things in common: superfast growth over the last decade and huge average tariffs on imports.  If tariffs are an economic death knell, they are taking a long time to slow down China and India and others.

Country 

2008-17 growth

MFN Tariff

China

8.2%

9.92%

India

7.0%

13.39%

South Korea

3.0%

13.90%

United States

1.4%

3.48%

Third, China’s dominance in steel came through overproduction and government subsidies.  It all began to ramp up in the late 1990s…

…and as America watched haplessly, more than 50,000 steel-workers lost their jobs. Now, the same experts that cheered cheap steel and aluminum tell these unemployed folks to appreciate the low cost of their beer cans.

 

I’m not a protectionist, but there is something wrong with our current trade arrangements around the world. I think we need to stop screaming about Smoot-Hawley every time anyone dares to upset the apple cart.

America is in a trade war, and those not looking to save a few bucks on their next Mercedes are losing.

Now, let’s have an honest discussion.

For a copy of the full newsletter, contact your rep or research@wstreet.com.

While the markets are set to open lower, I'm pumped and wanted to see the market test lows.  This is the best way, on news that in the grand scheme of things is inconsequential.

This morning, the February ADP report blew it out of the park, adding 235,000 jobs versus consensus of 180,000.  January was revised up 10,000 to 244,000.  This marks 4 consecutive months that we have added more than 200,000 jobs.  We will have a more in-depth look at this in the afternoon note.

 


Comments
Charles.. Thanks for the great guidance! Remember, You don't have free trade unless everyone plays by the same rules. Our $800B deficit shows that we do not. Thus, Trump is doing the right thing and I support him. When this all started I saw large caps getting hit the worst and so I moved to small caps like the Russel and the s&p small caps. IJT, IWM. It's working well for me. Dan

Dan Cooney on 3/7/2018 11:10:53 AM
Continue to preach the word, Charles, maybe if we say it long enough and loud enough some of these naysayers might take a pause and actually look at the figures.

Jerry McDonough on 3/7/2018 11:16:36 AM
Let's remember Friday is jobs day, and another above average hourly earnings beat would likely probably raise additional fears that a hawkish Fed would signal for 4 increases and that on top of the traders trying to sort out the Cohn departure and tariff/trade turmoil could create a downdraft for the markets!

garro on 3/7/2018 1:47:06 PM
Charles, so TRUE, it's odd the one's crying" it's going to raise costs", are the only ones, not looking for WORK, or drinking the beer, that's all they left, after TAKING the factories we used to work in & dominated the economic growth of the world..Trade wars have been on going since 93, nafta & outsourcing, but again ,thank you pres Trump, or country wouldn't survive a second Clinton era,of selling out.

J on 3/7/2018 2:27:11 PM
Hello Charles, I watched you guest host on Varney and Co. on 3/7/18. I appreciate your candor in trying to get people to wake up to the fact we are in a trade war. President Trump made a statement last month that rings true. He pointed out there is no leader in the world who should not be looking out for their nation. By the same token, he stated he would put America first. He has yet to preach a protectionist policy yet the pundits are ravaging him (some in Fox news as well) trying to push for like of better words, a "New World Order." What people fail to realize is that America in truth, does not need the rest of the world. We have enough of natural rescourses and will to be self sufficient. Therefore, tariffs seem to be a logical means of getting other nations' attention to sit down and negotiate fair trade agreements. If a tariff does not work, then perhaps the world would consider standing on their own "two feet" to see if they can sustain themselves without our economy. I know we can. Thanks for your ear and keep up the good work!

Wayne on 3/8/2018 6:22:39 AM
 

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