Part II: Why The Bull Market Isn’t Over

By Zach Scheidt

Zach Scheidt

This post Part II: Why The Bull Market Isn’t Over appeared first on Daily Reckoning.

Yesterday, I shared with you part one in my three-part series, “Why the Bull Market Isn’t Over.”

In it I explained how the record unemployment numbers we’ve been seeing recently and how this sets off a chain reaction through the economy.

Today, I want to talk about the second theme underlying this bull market, which is why I believe the bull market still has legs…

The second big theme shaping today’s economy is the robust energy market.

For the last twelve months, the price of oil has been marching steadily higher. Today, oil in the U.S. trades above $70 per barrel. And it’s even higher in Europe (where production is a bit more constrained).

Now the strong oil market is a conundrum for some economists. Because the U.S. is producing so much oil. We’re literally hitting record amounts of oil pulled out of the ground, to the point where we don’t have enough pipelines to pump all of that oil to refineries.

It’s a good problem to have, but a problem nonetheless!

So in an environment where we’re producing oil at a record level, why would prices be high? Usually when you have too much of something, the price goes down…

Well the answer is that we have so much demand for oil, that it almost doesn’t matter how much we produce.

Americans are driving cars and taking flights for vacations. Truckers are shipping products from manufacturing plants to consumers. Around the world, the growing global economy is thirsty for fuel. And all of this demand is driving the price of oil higher.

This is a great indicator of how well our economy is doing.

Because if it weren’t for a strong economy and healthy demand for fuel, the high level of production would cause prices to drop. Think of this like an indicator flashing green. The high price of oil is showing us that our economy is very strong.

Lately, there have been a lot of headlines about decisions that OPEC and Russia are making to try to increase production and sell more oil into this strong global energy market. For a short time, oil prices pulled back this summer.

But that pullback is now almost completely reversed.

And one of the main reasons why is because Saudi Arabia, OPEC, and Russia aren’t the key players in the oil market anymore.

Thanks to advances in fracking techniques, U.S. oil companies have been able to tap into shale deposits that used to be too hard and too expensive to get to. But new technology advances have made it cheap and very profitable to access this oil.

And now, the U.S. is the primary driver of the global oil market. So it matters less and less what Saudi Arabia or other Middle East countries do. This has definitely been a major shift of power, both economically and politically!

We’ll continue to talk more about some of the ways you can profit from this macro trend in the coming days. But for now, just know that the U.S. is now the dominant energy power in the world. And that’s great news for our economy.

Theme II: A Robust Energy Market

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
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The Contrarian Position on Emerging-Market Currencies

By James Rickards

Chart 1

This post The Contrarian Position on Emerging-Market Currencies appeared first on Daily Reckoning.

In my view, the rout in EM currencies is due for a sharp technical reversal.

To understand this coming EM currency rally, we need to understand some fundamentals about foreign exchange markets in general. After decades of studying stock markets and foreign exchange markets, I’m amazed that most analysts still don’t see the fundamental difference between the two.

In stock markets, movements are always absolute and may or may not be relative. In foreign exchange markets, movements are never absolute and are always relative.

Let’s unpack that statement.

When individual stocks go up, it’s generally because the market as a whole is going up. That’s not an ironclad rule, but it is a good rule of thumb. There’s even a technical metric for the correlation of individual stocks to the market as a whole called “beta.”

In short, stocks move up or down on an absolute basis, and in doing so they may or may not move up or down in sync with the overall market.

Currencies are different. When analysts say the dollar is “up” or the dollar is “down,” what they mean is that the dollar is up or down relative to another currency. There is no absolute “price” of a currency. Currencies are always quoted as cross-rates compared with another currency or an index of currencies.

Gold used to perform the role of the absolute measure for the value of currencies defined as a weight in gold, but that has not been true since 1971. You can still get gold quotes in various currencies, but forex traders, government officials and central bankers all but ignore gold for this purpose.

At least until the return of a gold standard (don’t hold your breath), currencies are quoted as cross-rates.

In practical terms, this means that one currency cannot go “up” without some other currency going “down.” It’s a zero-sum game. It’s also like a roller coaster ride with steep climbs, scary plunges and sharp turns that nevertheless ends up back where it started.

In the past 20 years, the EUR/USD cross-rate has risen as high as $1.60 and fallen as low as $0.80. Right now EUR/USD is around $1.16, about in the middle of that 20-year range.

EUR/USD did not move in a straight line from 80 cents to $1.60 and then back down again. In fact, there have been 10 reversals in EUR/USD of approximately 20% each over those 20 years.

The euro today is right at the $1.16 where it opened in 1999. It’s just like that roller coaster ride — lots of thrills and chills, but it’s back where it started.

The same is true for EM currencies versus the U.S. dollar.

There’s plenty of reason to be bearish on EM economies and the long-term prospects for their currencies. Yet the recent plunge in EM cross-rates to the dollar has been driven almost entirely by Fed tightening combined with interest rate differentials and perceived creditworthiness.

The Fed will have to reverse course soon, probably at their meeting in September. This does not mean the Fed will cut rates, merely that they will “pause” in the current course of rate hikes.

By the way, this is exactly what the Fed did in 2017; they raised rates in March, June and December, but took a pause in September.

A pause in rate hikes is a form of ease relative to expectations. Fed ease will weaken the dollar. When the dollar gets weaker, EM currencies must get stronger. That’s the zero-sum nature of cross-exchange rates. Getting into EM currencies now just as the Fed is announcing its most recent rate hike is an ideal entry point for the coming reversal and rally.

Here’s what Marcelo Perez of Alhambra Investments had to say on the subject of the dollar and emerging-market currencies recently:

Emerging-market currencies are down and the press coverage makes it sound like armageddon. In the 2015/16 crash this broad-based ETF of emerging currencies fell by over 20%. This latest pullback amounts to a little over 5%, or about the same as the euro drop. Such negative sentiment on such a small move might be a good opportunity for a contrarian.

How bad has it been lately for EM currencies?

The price action and sentiment have been awful, as revealed in the three charts for the Turkish lira, Indian rupee and Brazilian real. Yet it’s precisely these cross-rate collapses that make EM currencies attractive right now on prospects for a reversal.

Here’s the recent price chart of the Turkish lira (TRY) against the U.S. dollar:

Here’s another recent price chart of the Indian rupee (INR) versus the dollar:

Chart 2

Finally, here a price chart of the Brazilian real (BRL) versus the dollar:

Chart 3

I could provide many other examples, but you get the point. EM currencies are in free fall versus the dollar. But, as explained above, currencies don’t move to extremes in a straight line.

They fluctuate for hundreds of reasons including headline risk, geopolitics, risk-on sentiment, interest rate differentials, hot money flows and carry trade potential.

The dollar might be stronger a year from now, but it looks set for a drop in the next six months as the Fed takes a pause in its interest rate hikes in order to assess the impact of monetary tightening so far.

When the dollar drops, EM currencies rally. It’s that simple.

With this EM currency rout now behind us and a Fed interest rate pause ahead, what do my predictive analytic models telling us about the prospects for EM currencies in the near future?

Right now EM currencies are oversold. This is due to unusual strength in the dollar due to Fed tightening.

Current monetary policy in the U.S. is completely unprecedented. The Fed is not tightening because of economic strength. They’re tightening because they need to raise rates and reduce their balance sheet to prepare for the next recession.

Raising rates into weakness has not been Fed policy since 1937. That policy ended in a severe recession and extension of the Great Depression.

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The Dollar Is a Source of Global Instability

By James Rickards

This post The Dollar Is a Source of Global Instability appeared first on Daily Reckoning.

The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions.

So the dollar’s strength or weakness can have an enormous impact on global markets.

Using the Fed’s broad real trade-weighted dollar index (my favorite foreign exchange metric, much better than DXY), the dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3).

Right now, the index is 95.2, below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets (EM) debtors who borrowed in dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength.

And EM lending has been proceeding at a record pace.

Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

When the focus is put on specific EM currencies, the dollar’s appreciation in some cases is 100% or more.

Much of this dollar appreciation has been driven by the U.S. Federal Reserve’s policy of raising interest rates and tightening monetary conditions with balance sheet reductions. Meanwhile, Europe and Japan have continued easy-money policies while the U.K., Australia and others have remained neutral.

The U.S. looks like the most desirable destination for hot money right now because of interest rate differentials. And that is having far-reaching consequences on EM economies.

A new EM debt crisis has already started. Venezuela has defaulted on some of its external debt, and litigation with creditors and seizure of certain assets are underway. Argentina’s reserves have been severely depleted defending its currency, and it has turned to the IMF for emergency funding.

Ukraine, South Africa and Chile are also highly vulnerable to a run on their reserves and a default on their external dollar-denominated debt.

The only issue now is whether the new crisis will be contained to Argentina and Venezuela or whether contagion will take over and ignite a global financial crisis worse than 2008.

It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis.

This new crisis could take a year to spread, so it’s not too late for investors to take precautions, but the time to start is now.

The Fed’s path of rate hikes and balance sheet reductions since December 2015 has reinvigorated the U.S. dollar, as I explained above. A stronger dollar means weaker EM currencies in general. Again, that’s exactly what we’ve seen lately. Right now, EM currencies are in free fall against the dollar.

But here’s a curveball question for you:

Now that the Federal Reserve raised rates again last month, is the bottom in for emerging-market currencies? And is the top in for the dollar?

Regards,

Jim Rickards
for The Daily Reckoning

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Part I: Why The Bull Market Isn’t Over

By Zach Scheidt

Zach Scheidt

This post Part I: Why The Bull Market Isn’t Over appeared first on Daily Reckoning.

Let’s step back and look at the big picture.

This market is currently just two months away from earning the title of the longest bull market in history.

That’s right. The “post-crisis bull run,” as it’s being called, is in its 112th month, right on the tails of the 114-month bull market from October 1990 to March 2000.

Since the bottom in 2009, the S&P 500 has returned over 300% with an annualized return of 16.7%. That’s an extraordinary amount of growth. But let me be absolutely clear — it’s not over.

When it comes to the big picture (macro) view of our financial markets and of our overall economy, there are three primary themes that we’ve been watching closely.

Each of these themes has far reaching effects in different areas of the market. Today, I will be kicking off a three-day series to fully explain all three themes.

Think of this macro view of our economy like the ocean tide. The tide ebbs and flows over a longer period of time and it causes all kinds of changes to the shoreline and even the inland landscape.

Individual waves are like trades. We want to look at the specific waves and see how they’re setting up. But without knowing what’s happening with the overall tide, you’re unlikely to find the specific waves (or trades) that are best for you.

The first big macro trend that is shaping our economy is the job market.

President Trump campaigned on the promise that his policies would provide jobs for American workers. Now, I know the president’s personality can be polarizing and I understand why some people love him and some people really can’t stand him. We’re not a political newsletter, so I won’t get into all of the details there.

But when it comes to the job market, the policies in the U.S. have gone far towards encouraging companies to create more jobs for American workers.

Today, the unemployment rate is the lowest it has been in decades. And each month, we’re adding hundreds of thousands of new jobs to our economy.

The corporate tax cuts are a big part of why this is happening. This year, corporations are paying just a 21% tax rate on their profits. This compares to a 35% rate last year. So companies are able to keep a larger portion of their gains.

And with more capital to spend, corporations can invest in new growth opportunities — which means hiring more people to take on new projects, and paying those people more as budgets allow.

The chain reaction to this strong job market is important.

Because with a larger portion of Americans employed, and with wages moving higher, people simply have more money to spend.

Now you should know, about 70% of our economy is driven by consumer spending. So if consumers across America have more money to spend, this is a very good thing for our overall economy.

Think about what happens as a large batch of newly employed consumers go shopping — or as people who just got a raise start spending that extra money.

Companies who sell to these consumers will generate higher profits. They will need more merchandise (which needs to be manufactured). They will hire more wait staff, or add new locations. All of this compounds on itself leading to more strength for future quarters.

In short, the strong job market is driving growth in many different areas of our economy. And that’s a very good thing for us as investors.

This is just the first of three macro themes pushing today’s market higher. Watch out for tomorrow’s Daily Edge where I’ll be revealing the second!

Theme I: Job Growth

Now let’s get to the 5 Must Knows before you start investing on this new trading week…

5 Must Knows For Monday, July 2nd

Tariffs Take Effect — The first round of Trump tariffs goes into effect on Friday when the U.S. will begin imposing a 25% tax on $34 billion worth of Chinese products. This initial round will target industrial products like robotics, engines and aircraft parts. As of this writing, no new talks to resolve the situation have been announced.

Jobs, Jobs, Jobs — As I talked about in today’s alert, the U.S. jobs market is robust! And on Friday we get to see how well the trend is continuing. At 8:30 a.m., the Department of Labor is scheduled to release its monthly report on hiring and unemployment for the month of June. Current estimates project 200,000 jobs added last month.

Fed Minutes — Another clue into the Fed’s mindset is set to be released on Thursday when the Fed releases the minutes from the June meeting. Investors will be focusing on the Fed’s take on how tariffs will impact the economy and whether one or two more hikes are in store for 2018.

Market Closing Alert — On Tuesday, July 3rd, U.S. stock exchanges will close at 1 p.m. And on Wednesday, July 4th, U.S. stock exchanges will be closed for Independence Day. Enjoy the midweek break!

Autos Get A Check Up — On Tuesday, automakers will report their June sales totals. Researcher Cox Automotive estimates that we will see a small rise of about 2% over last June’s sales. However, forecasters still predict full-year sales falling short of the three previous years when sales have topped 17 million cars and trucks.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
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This Man Turned $10,000 Into $$850,000… Let’s Follow Him

By Jody Chudley

billions in the red

This post This Man Turned $10,000 Into $$850,000… Let’s Follow Him appeared first on Daily Reckoning.

Hedge fund legend Julian Robertson loves shares of the Canadian airline Air Canada (ACDVF), and it isn’t hard to see why.

Shares of this dominant Canadian carrier trade for just three times earnings. That is a fraction of the valuation that the market currently assigns to Air Canada’s peers that operate south of the border.

It makes you wonder how Air Canada slipped past another legendary billionaire investor who has developed a recent love for the airline industry.

Let me explain…

Warren Buffett’s $10 Billion Bet On The Airlines

For a guy who is famous for being a very picky investor, Warren Buffett certainly got very excited about the airlines.

Over the past several years, he has invested billions in four different operators.

As of March 31, 2018, Warren Buffett’s company Berkshire Hathaway owned the following:

  • 53.5 million shares of Delta Airlines (DAL) worth $2.9 billion
  • 47.7 million shares of Southwest Airlines (LUV) worth $2.7 billion
  • 46.0 million shares of American Airlines (AAL) worth $2.4 billion
  • 27.7 million shares of United Continental (UAL) worth $1.9 billion

That is a combined $9.9 billion investment. Even for Warren Buffett, that is real money. Buffett doesn’t commit that kind of capital without having a very high level of conviction about his investment working out exceptionally well.

It is important to note that Buffett didn’t just buy one particularly standout airline, he bought all four of the major American operators in the industry.

But he should have taken a look north of the border as well — as he could have gotten a much better bargain…

If You Like Airlines — Air Canada Is Available At A Discounted Price

Like his fellow billionaire Warren Buffett, Julian Robertson sees the airline industry as a place to invest today.

If you were wondering why we should care what Julian Robertson thinks, let me tell you a little bit about his investment track record.

From 1980, when he launched his hedge fund, Tiger Management, until when he closed it in 2000, Robertson generated an annualized rate of return of 25 percent for his investors.1 That is an incredible 20 year run, virtually unmatched in the business.

Initial investors who got in on the ground floor with Robertson made 85 times their initial investment. If you had put $10,000 into Robertson’s fund in 1980, you would have been pulling out $850,000 twenty years later. A $100,000 investment would have turned into $8.5 million.

Those are life changing investment returns — similar to what Warren Buffett’s early investors experienced.

Today, Buffett and Robertson are both invested in airlines. The reason for that is no mystery…

It is because the airline business has changed. These companies now generate huge profits… unlike before.

Over the nine years ending in 2009, the airline industry lost $54 billion. Since then, the industry has made almost $70 billion.

The driver of this improvement in profitability is the consolidation of the operators in the airline industry.

No longer is this industry fragmented and undisciplined. Consolidation has ended the boom-and-bust pricing cyclicality that the industry has always dealt with. The worst operators are gone.

Today, the consolidated airline industry is much more efficient and focused on return on capital invested rather than senselessly chasing market share. The industry now resembles other profitable industries that are dominated by a few major operators.

Buffett has chosen to place his investment bet on the four major American airlines. Julian Robertson, meanwhile, prefers Air Canada and it sure looks like he is onto something.

While the American airlines (Delta, Southwest, American and United) trade at a price to earnings ratio between 8.5 and 10.4 times, Air Canada trades at a paltry 3.2 times earnings. Air Canada would need to triple in price to trade at a valuation equal to the major U.S. airlines!

To put how cheap that is into perspective, consider that it will take Air Canada only three years to earn an amount equal to its entire current market capitalization (share price multiplied by number of shares outstanding).

That is cheap, cheap, cheap!

If Buffett is right and the airline sector is a great place to be investing, it sure looks to me like the way to do it is to follow Julian Robertson’s lead and take advantage of this extreme Canadian discount.

Then just sit back, relax, and enjoy a smooth ride.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1The End of the Game; Tiger Management, Old-Economy Advocate, Is Closing, New York Times

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Defense!

By Zach Scheidt

Zach Scheidt

This post Defense! appeared first on Daily Reckoning.

I couldn’t breathe… There were bursts of light in my field of vision… And it was all I could do to keep from puking.

My high school coach was in my face yelling at the top of his lungs.

“Zach, I have you in the game to play DEFENSE!” he bellowed.

“If you can’t get back to your position and keep them from scoring, I’ll find someone who WILL!”

His words stung as I sat down on the bench. But I knew he was right.

It didn’t matter how many points our team put on the board. If we couldn’t protect our lead, we didn’t deserve to win!

Today, investors are in the same spot. Defense is critical.

Protecting the capital you’ve worked so hard to save needs to be a high priority. Fortunately, you can do that while still growing your income for retirement…

A Flight to Safety Boosts Income Stocks

2018 has been an interesting year for income stocks.

I’m talking about stocks of solid blue-chip companies that pay reliable dividends.

During the first half of this year, blue-chip dividend stocks have lagged a bit. Most have held their value just fine, and the companies have continued to send generous payments to shareholders.

But investors have been more interested in growth opportunities like consumer technology plays, artificial intelligence and a few key retail stocks. With investors pouring money into more speculative areas of the market, the action for blue-chip dividend stocks has been a bit sleepy.

This week, that’s starting to change.

As the Trump administration turns the heat up on trade negotiations, speculative areas of the market are pulling back. Popular stocks like Netflix (NFLX), Alphabet (GOOG) and Amazon (AMZN) have pulled back sharply over the past week.

But do you know what isn’t pulling back?

Shares of defensive stocks like consumer staples and utilities.

As uncertainty starts to enter the market, shares of these solid blue-chip dividend payers have started moving higher.

Today, you’ve got a great opportunity to jump on this trend and lock in some great retirement income before these stocks become more expensive.

Shifting Trends for Defensive Stocks

Historically, there are a few areas of the market that have been considered “defensive” by nature.

These stocks tend to hold their value over time, and generally pay reliable quarterly dividends that can help retirees with day-to-day life expenses.

The companies are able to deliver consistent results because of their very stable businesses.

Shares of consumer staple companies are reliable businesses because they sell things that consumers need every day. Chances are good that you’ll buy toilet paper, toothpaste, basic food items and laundry detergent regardless of what’s going on in the economy.

That’s why stocks like Procter & Gamble (PG), Colgate-Palmolive (CL) and General Mills (GIS) typically do well even in down markets. Because investors know that these are stable companies and so investors are especially eager to buy shares during times of uncertainty.

Utilities are in a similar position.

During growth periods in the market, investors often move money out of utility stocks because they want to be invested in something more “exciting.” But when the market becomes more volatile, shares of utilities suddenly start looking more attractive.

Companies like Duke Energy (DUK), The Southern Company (SO) and Consolidated Edison (ED) have lagged this year as investors have been focused on more “interesting” stories. But now that the market is becoming more turbulent, shares of these utility companies have been trending higher.

Adding Income at Excellent Prices

Today, blue-chip dividend stocks are cheap thanks to the fact that investors have been paying attention to other areas of the market.

But even though the stocks have become cheap, the underlying businesses of these companies are still very strong. People are still buying all of the staples that they need and paying their electricity bills.

So the lower stock prices give us a chance to buy great businesses at very attractive prices.

Meanwhile, as investors start to worry more and more about a trade conflict, people have started selling some of their more speculative stocks and buying shares of “boring” blue-chip dividend stocks.

This is a trend that I expect to continue for the next several months at the very least.

To be clear, I’m not worried about the overall market or about the U.S. economy growing. We’re still seeing very positive signs for our market.

But the leading areas of our market are shifting. And it’s time for stocks like utilities and consumer staples to shine.

So today, I’m encouraging you to add some solid dividend-paying stocks to your portfolio.

By doing this, you’ll be putting yourself ahead of the newest trend on Wall Street. And more importantly, you’ll be defending the value of your retirement savings, and locking in great income for years to come.

We’ll continue to keep an eye on this new investment theme and let you know which opportunities give you the best income and protection for your capital.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
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Edge Alert: How To Profit From Today’s Trade War

By Zach Scheidt

Zach Scheidt

This post Edge Alert: How To Profit From Today’s Trade War appeared first on Daily Reckoning.

“Zach, what’s the best way to play the trade war tensions in today’s market?”

The question came from one of my Weekly Squawk Box subscribers during our call this week.

Every Wednesday morning, I sit down and host a conference call with subscribers to talk about the best opportunities in the market. We typically discuss the big picture and what’s driving markets higher or lower, we talk about opportunities in specific sectors and industries and then we zero in on one specific trade opportunity that is particularly timely.

One of my favorite parts of this weekly call is the chance to take questions.

This lets me know what’s on your mind as a subscriber and gives me a chance to share answers to your questions with everyone — so we all have a chance to benefit from the discussion.

(If you’d like to get more information about Zach’s Weekly Squawk Box, you can find out more here.)

The question on profiting from the trade war negotiations is especially timely and one that we have a special interest in here at The Daily Edge.

Today, I want to discuss my two favorite income plays that are setting up for some particularly attractive gains thanks to the trade war fears in the market right now.

When Will This Uncertainty End?

For most investors, the harsh talk between the Trump administration and our international trading partners has been considered a frustration.

That’s because every time the president makes an announcement about a new tariff or one of our trading partners hits back with a retaliation, the stock market tends to pull back.

No one likes to see the value of their investment turn lower.

But you may have noticed that each time the market gets knocked lower, buyers soon step in and help support prices. In the end, American stocks have been quite resilient and have not stayed lower for very long.

This is a testament to the very strong American economy and the higher profits that companies are generating. While investors are temporarily distracted by the trade war rhetoric, they eventually come back around to the idea of owning great companies that are generating reliable profits.

Now, with that in mind, consider what will happen once the trade disagreements finally start to get resolved.

We could soon see markets shoot higher simply because one of the major risks that investors have been worried about is being lifted while the strong trends that continue to support growth in the U.S. are still in play.

To get back to the original question of how to profit from the trade war, my recommendation is to buy stocks that will benefit most from a resolution…

Think of automakers like Ford (F) and General Motors (GM), who have been beaten down recently by trade fears.

The Trump administration has threatened higher tariffs on autos being shipped in from Europe. But what the media won’t tell you is that there are already duties being charged for cars exported to Europe.

Basically, the tit-for-tat trade agreements that have been structured over the last several decades have resulted in a giant tangled mess of trade restrictions. But now through some hardball negotiations, it looks like we have a chance at actually reducing the amount of trade restrictions in play and coming up with a fairer playing field.

Case in point…

Last week, leading German automakers sent a proposal to Washington that would effectively scrap the European Union’s 10% tax on auto imports to the U.S. in exchange for the Trump administration abandoning a proposed 25% border tax on European imports.

In other words, these automakers want to open the borders so automakers are free to sell cars and trucks to the consumers who want them.

This is great news for Ford and General Motors.

Both of these stocks pulled back earlier in the year thanks to concerns about a potential trade war. At the same time, both of these companies are generating reliable profits and paying lucrative dividend yields.

Ford currently pays a 60-cent quarterly dividend, which nets out to a 5.1% yield. And GM offers a $1.52 quarterly dividend, handing you a 3.6% yield.

Best of all, both stocks trade at very cheap multiples, which means you can buy shares for a very attractive price compared with the earnings that both companies generate. This is important because there is plenty of room for both Ford and GM to trade sharply higher when the public’s perception of their businesses changes.

And a resolution to the trade war disputes could be just the catalyst to get the stock prices moving.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
TwitterFacebookEmail

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Here’s Why You Shouldn’t Fear a Trade War

By Brian Maher

This post Here’s Why You Shouldn’t Fear a Trade War appeared first on Daily Reckoning.

The Dow Jones took its eighth consecutive licking yesterday — its worst streak since last March.

Down too was the S&P… and the Nasdaq.

VIX, Wall Street’s “fear gauge,” was in panicked spasm.

For the explanation, we turn to CNBC:

“Dow drops about 200 points on trade worries, extends losing streak to eight days.”

It is the trade wars — again.

Trade-sensitive stocks such as Boeing and Caterpillar took the heaviest rattling yesterday.

“The focus has been back on tariffs,” confirms Michael Hans, CIO of Clarfeld Financial Advisors.

Meantime, Goldman Sachs thinks “further escalation seems likely.”

But in the face of trade upheaval, where can the smart investor find refuge?

Gold, perhaps… or maybe Treasuries?

Or something else altogether?

We put our agents on the case:

“Go find us an investment that will advantage our readers while trade war hammers the markets!”

Dutifully, they soon reported a beacon of light… an investment class that has soared as trade war fears shake the overall market.

“While the U.S. and China are embroiled in an escalating trade war,” affirms ETF Trends, this investment is “outperforming.”

It is “mostly immune to any external shocks,” says Zacks.

Indeed…

While the Dow Jones has lost 0.8% on the year…

And while the S&P has eked out a slender 3.1% gain, this investment class has surged as much as 13.2%.

In fact, it tallied an all-time high on Wednesday… while the overall market sank in trade-filled despair.

The asset under discussion is not gold. Or Treasuries.

Then what?

The answer is… small-cap stocks.

Small-cap stocks are the antidote to trade-war fever.

The iShares Core S&P Small-Cap ETF — which tracks the S&P Small-Cap 600 index — is up 13.2% this year.

Meantime, the iShares Russell 2000 ETFwhich does duty for the small-cap Russell 2000 — is up 11.8%.

The Russell 2000 has registered 23 record highs this year… even as the overall market “corrected” 11% in February.

Interesting, you say.

But why are these small fry doing circles around the Dow Jones and the S&P?

The answer begins with the dollar.

We must first look to the stronger dollar…

Large U.S. multinationals earn vast revenues overseas — but they are earning these in weaker currencies.

When they convert these revenues from softer currencies to stronger dollars… the conversion leaves them short.

Their dollar earnings are depressed.

And according to FactSet, S&P 500 companies earn 38% of their income abroad.

On the other hand… S&P Small Cap 600 businesses only generate some 20% from overseas sales.

Thus, much of their earnings arrive in stronger dollars.

Thus their greater earnings.

Thus their greater investor appeal.

“We continue to like small-cap equities because they have a more domestic focus, [and are] less impacted by trade or dollar fluctuations,” explains Angus Sippe, fund manager at Schroders.

“Smaller companies have some natural hedges against risks like trade,” adds Tim Courtney, CIO at Exencial Wealth Advisors.

Meantime, official numbers indicate strong retail and consumer spending trends — rightly or wrongly.

And the National Federation of Independent Business reports small-business profits have notched their highest reading since records began in 1973.

This pleasant fact they attribute to the Trump tax cuts.

In summary, concludes Ryan Crane, CIO of Stephens Investment Management Group:

Small caps are being favored because they’re less exposed to foreign markets, and because they don’t have currency issues, which is becoming a problem for bigger names. Also, they should derive a disproportionate benefit from the tax bill, because the larger firms have big teams that were already working to minimize their tax burdens, so lower rates will mean less for them.

And so we rest our case on behalf of the small-cap stock.

Our default setting is one of detached indifference — we are observers, not drummers.

And detached observers we remain.

But if you wish to hunt big game right now… it appears you may wish to think small…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Here’s Why You Shouldn’t Fear a Trade War appeared first on Daily Reckoning.

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From:: Daily Reckoning

The 5-Year-Old Named Wall Street

By Zach Scheidt

Zach Scheidt

This post The 5-Year-Old Named Wall Street appeared first on Daily Reckoning.

My youngest son Caleb is 5 years old. And just like any healthy 5-year-old, he’s constantly moving. One of his favorite things to do is to play “tackle” with me on the living room floor.

It’s funny to see how any time he gets scratched or bumped, he wants to immediately stop the game and get a band aid. If I see that it’s not a big deal and I tell him to “shake it off,” he gets upset. He really wants that band aid! (And the sympathy that comes with it.)

Then, within 5 minutes, he’s back to playing tackle again like nothing happened.

That’s exactly what we’re seeing in the market these days when it comes to every tweet, news article, or statement about a new trade tariff…

Investors flip out, worried that we’re going to get an all-out trade war that will sink our economy.

And then next thing you know, the market is rallying again and doing just fine.

(Yes, I just compared Wall Street traders to my 5-year-old son.)

We saw this exact thing happen almost every day this week with the markets opening sharply lower on trade war fears.

But instead of staying low, the market basically spent the rest of the days in recovery mode, making back a lot of the initial losses throughout the day.

It’s as if the market is a 5-year-old shaking off a boo-boo!

Early in the day yesterday, I put some of my own capital to work, buying into the market while prices were lower.

That’s just the smart way to play pullbacks in this market. Because the underlying trends are very strong.

We’ve talked about this over and over. Companies are locking in bigger profits because of the growing economy and because of the tax cuts. They’re hiring more workers and paying them higher wages. Those workers are spending money, which helps corporate profits to rise even more.

And the cycle continues. And it pushes stocks higher.

Hopefully you took advantage of the lower prices yesterday — or earlier in the week — as well. After all, this isn’t a new concept and we’ve seen pullbacks turn higher over and over again this year.

If you missed out, don’t worry. We’ll see plenty of back and forth in the weeks and months ahead.

One area I want to bring your attention to is the oil sector… but not for the reasons you may think.

Take Valero Energy (VLO) for example. This refiner should do well in today’s oil market — where U.S. drillers are working around the clock to meet the growing demand. But the stock has pulled back recently on the eve of the OPEC meeting… which I think is a bit overblown.

That’s because not only does Valero benefit from the rising fuel demand, they also benefit from growing infrastructure spending because they also produce the asphalt commonly used to make roads and roofs.

This is a trend should only accelerate once Trump turns his attention back to America’s crumbling infrastructure.

I’ll have more on this topic in the coming days. But until then, remember, as investors we want to stay ahead of the trends. So while the entire market has their eyes on the trade war, we’ll be pivoting towards the next big rally in infrastructure.

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge
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The post The 5-Year-Old Named Wall Street appeared first on Daily Reckoning.

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From:: Daily Reckoning

A New Global Debt Crisis Has Begun

By James Rickards

Charts 1 and 2

This post A New Global Debt Crisis Has Begun appeared first on Daily Reckoning.

Emerging-market debt crises are as predictable as spring rain. They happen every 15–20 years, with a few variations and exceptions.

In recent decades, the first crisis in this series was the Latin American debt crisis of 1982–85. The combination of inflation and a commodity price boom in the late 1970s had given a huge boost to economies such as Brazil, Argentina, Chile, Mexico and many others, including countries in Africa.

This commodity boom enabled these emerging-market (EM) economies to earn dollar reserves for their exports. (By the way, we didn’t call them “emerging markets” in the 1980s; they were the “Third World” after the Western world and the communist world.)

These dollar reserves were soon supplemented with dollar loans from U.S. banks looking to “recycle” petrodollars that the OPEC countries were putting on deposit after the oil price explosion of the 1970s.

I worked at Citibank from 1976–1985 during the height of petrodollar recycling and even discussed the process personally with Walter Wriston, Citibank’s legendary CEO. In the 1960s, Wriston invented the negotiable eurodollar CD, which was later critical to funding those EM loans.

Wriston is considered the father of petrodollar recycling once the petrodollar was created by Henry Kissinger and William Simon under President Nixon in 1974. I remember those days extremely well. The bank made billions and our stock price soared. It was a euphoric phase and a great time to be an international banker.

Then it all crashed and burned. One by one, the lenders defaulted. They had squandered their reserves on vanity projects such as skyscrapers in the jungle, which I saw firsthand when I visited Kinshasa on the Congo River in central Africa. Most of what wasn’t wasted was stolen and stashed away in Swiss bank accounts by kleptocrats.

Citibank was technically insolvent after that but was bailed out by the absence of mark-to-market accounting. We were able to pretend the loans were still good as long as we could refinance them or roll them over in some way. Citibank has a long and glorious history of being bailed out, stretching from the 1930s to the 2010s.

After the defaults, the reaction set in. Emerging markets had to flip to austerity, devalue their currencies, cut spending, cut imports and gradually rebuild their credit. There was a major EM debt crisis in Mexico in 1994, the “Tequila Crisis,” but that was contained by a U.S. bailout led by Treasury Secretary Bob Rubin. On the whole, the EMs used the 1990s to rebuild reserves and restore their creditworthiness.

Gradually, the banks looked favorably on this progress and new loans started to pour in. Now the target of bank lending was not Latin America but the “Asian Tigers” (Singapore, Taiwan, South Korea and Hong Kong) and the “mini-tigers” of South Asia.

The next big EM debt crisis arrived right on time in 1997, 15 years after the 1982 Latin American debt crisis. This one began in Thailand in June 1997.

Money had been flooding into Thailand for several years, mostly to build real estate projects, resorts, golf courses and commercial office buildings. Thailand’s currency, the baht, was pegged to the dollar, so dollar-based investors could get high yields without currency risk.

Suddenly a run on the baht emerged. Investors flocked to cash out their investments and get their dollars back. The Thai central bank was forced to close the capital account and devalue their currency, forcing large losses on foreign investors.

This sparked fear that other Asian countries would do the same. Panic spread to Malaysia, Indonesia, South Korea and finally Russia before coming to rest at Long Term Capital Management, LTCM, a hedge fund in Greenwich, Connecticut.

I was chief counsel to LTCM and negotiated the rescue of the fund by 14 Wall Street banks. Wall Street put up $4 billion in cash to prop up the LTCM balance sheet so it could be unwound gradually. At the time of the rescue on Sept. 28, 1998, global capital markets were just hours away from complete collapse.

Emerging markets learned valuable lessons in the 1997–98 crisis. In the decade that followed, they built up their reserve positions to enormous size so they would not be disadvantaged in another global liquidity crisis.

These excess national savings were called “precautionary reserves” because they were over and above what central banks normally need to conduct foreign exchange operations. The EMs also avoided unrealistic fixed exchange rates, which were an open invitation to foreign speculators like George Soros to short their currencies and drain their reserves.

These improved practices meant that EMs were not in the eye of the storm in the 2007–08 global financial crisis and the subsequent 2009–2015 European sovereign debt crisis. Those crises were mainly confined to developed economies and sectors such as U.S. real estate, European banks and weaker members of the eurozone including Greece, Cyprus and Ireland.

Yet memories are short. It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis. EM lending has been proceeding at a record pace. Once again, hot money from the U.S. and Europe is chasing high yields in EMs, especially the BRICS (Brazil, Russia, India, China and South Africa) and the next tier of nations including Turkey, Indonesia and Argentina.

As Chart 1 and Chart 2 below illustrate, we are now at the beginning of the third major EM debt crisis in the past 35 years.

Chart 1 measures the size of hard-currency reserves relative to the number of months of imports those reserves can buy. This is a critical metric because emerging markets need imports in order to generate exports. They need to buy machinery in order to engage in manufacturing. They need to buy oil in order to keep factories and tourist facilities operating.

Chart 1 shows how many months each economy could pay for imports out of reserves if export revenue suddenly dried up.

Chart 2 shows the gross external financing requirement, GXFR, of selected countries calculated as a percentage of total reserves. …read more

From:: Daily Reckoning