What Did Americans Overspend On In March?

I must say that I remain very impressed with the economy and continue to push back against the idea of consumer spending drying up. I understand consumers have pulled back a little, but ebbs and flows are smart, especially when it sees saving rebound from very low levels. 

In March, Americans spent a lot more on autos than anticipated. Ironically, I was bracing for bad news when General Motors announced this would be their last monthly report on sales, and reports suggest Ford will also simply focus on that data with quarterly financial filings. These companies are saying the reaction from the Street is simply too exaggerated. 

I actually agree, but I also feel the same about quarterly financial results -an Annual Rate (March) 17.48 million against consensus of 16.70:

Company

• General Motor +15.7%
• Fiat Chrysler +13.6%
• Ford +3.5%
• Toyota +3.5%

Types

• Crossovers +18.2%
• Small SUV +27.9%

Models

• Jeep Wrangler +34.4%
• Jeep Cherokee +24.2%
• Chevrolet Equinox +31.4%
• Toyota Tacoma +23.6%

Market Action

It was an impressive session for the market on Tuesday, which remains trapped in a tight trading range and marred by a laundry list of worries:

• Economy Too Fast
• Economy Too Slow
• Trade War
• Legislative Scrutiny (technology)
• Federal Reserve

We should have a lot of answers this week when the jobs report is released. From the Wall Street point of view, stronger jobs and muted wages would be the “perfect” outcome, and I think it will be stronger-than-expected on both.

Highlights and Observations

Market Breadth New York Stock Exchange

• New Highs 19
• New Lows 97

Market Breadth NASDAQ

• New highs 41
• New Lows 110

Energy (XLE) was the best performing sector, which suggests investors are looking for value as tech remains vulnerable. Crude oil is higher this year as most oil-related stocks are actually lower.  Yesterday, the stocks outperformed the commodity. I still like the idea of becoming aggressive in oil patch stocks when West Texas Intermediate (WTI) closes above $67.00.

Recommended

Here's An IDF Officer Warning a Palestinian Civilian to Evacuate. The Call Is Horrifying. Matt Vespa

Advertisement

Healthcare was the second-best performer, in part to the speculation of companies that provide health care plans, including Humana (HUM), United Health Group (UNH), and Anthem (ANTM). There is no doubt there could be several deals in this space forced by new realities in the economy and in healthcare.

Material names, which have been hammered this year, were also higher, led by Sherwin-Williams (SHW).

Chicago Bridge & Iron Company (CBI) was also a big percentage winner after announcing two contracts in China.  Although this isn’t a U.S. company, it underscores the importance of fair access to China’s market.

Spotify (SPOT) went public with a so-called direct listing that skipped the traditional initial public offering route and high investment banker fees. I think folks can trade the stock, but longer-term investors should consider waiting to see if gross margins improve and the company can successfully defend market share.  (Ask for my special report.)

Descending Triangle Formation

As the Dow Jones Industrial Average has been holding at key support, the index has made a series of lower high points, resulting in the creation of a descending triangle stock formation.

This is typically a bearish formation, putting significant pressure on recent lows to hold as critical support. Meanwhile, the S&P 500 held at key support like clockwork for the second time in as many weeks.

This market is a coiled spring, and investors are antsy that something big is brewing. Yesterday, the market got help from a story that the Trump administration has no active plans to attack or derail Amazon, which is a reminder that headlines can also work to send stocks higher.

Today’s Session

The market poised to swoon on news China has reacted to the US Trade Representatives list of tariffs on Chinese imports.   The list of 106 products on China’s list includes additional 25% tariffs on US vehicles, soybeans and cars. 

Below are highlighted details from the 56-page report from USTR:

Under Section 301 Action, USTR Releases Proposed Tariff List on Chinese Products

WASHINGTON, D.C. – As part of the U.S. response to China’s unfair trade practices related to the forced transfer of U.S. technology and intellectual property, the Office of the U.S. Trade Representative (USTR) today published a proposed list of products imported from China that could be subject to additional tariffs.

Following USTR’s Section 301 investigation, President Trump announced in March that the United States will impose tariffs on approximately $50 billion worth of Chinese imports and take other actions in response to China’s policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises.  These policies bolster China’s stated intention of seizing economic leadership in advanced technology as set forth in its industrial plans, such as “Made in China 2025.”

The proposed list of products is based on extensive interagency economic analysis and would target products that benefit from China’s industrial plans while minimizing the impact on the U.S. economy.  Sectors subject to the proposed tariffs include industries such as aerospace, information and communication technology, robotics, and machinery.

The proposed list covers approximately 1,300 separate tariff lines and will undergo further review in a public notice and comment process, including a hearing.  After completion of this process, USTR will issue a final determination on the products subject to the additional duties.

The total value of imports subject to the tariff increase is commensurate with an economic analysis of the harm caused by China’s unreasonable technology transfer policies to the U.S. economy, as covered by USTR’s Section 301 investigation.

Today’s announcement comes just days after the USTR filed a request for consultations with China at the World Trade Organization (WTO) to address China’s discriminatory technology licensing requirements.  Such consultations are the first step in the WTO dispute settlement process.  If the United States and China are unable to reach a solution through consultations, the United States may request the establishment of a WTO dispute settlement panel to review the matter.

In particular, the proposed action is an additional duty of 25 percent on a list of products of Chinese origin identified in the Annex to this Notice. For example, if a good of Chinese origin is currently subject to a zero ad valorem rate of duty, the product would be subject to a 25 percent ad valorem rate of duty; if a good of Chinese origin were currently subject to a 10 percent ad valorem rate of duty, the product would be subject to a 35 percent ad valorem rate of duty; and so on.

Trade analysts from several U.S. Government agencies identified products that benefit from Chinese industrial policies, including Made in China 2025. The list was refined by removing specific products identified by analysts as likely to cause disruptions to the U.S. economy, and tariff lines that are subject to legal or administrative constraints. The remaining products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product.

Hearing Participation

The Section 301 Committee will convene a public hearing in the main hearing room of the U.S. International Trade Commission, 500 E Street SW Washington DC20436, beginning at 10:00 am on May 15, 2018. You must submit requests to appear at the hearing by April 23, 2018.

This is a War over the Future

Make no mistake, while the Trump administration is trying to make trade fair and open China’s market to Americans, there is a greater long-term battle for intellectual, scientific and technology supremacy.  China has already made its goals clear:

• Innovation Nation 2020
• International Innovation Leader 2030
• Worldwide Powerhouse in Science and Technology 2050

China has been able to fuel its goals, which also include becoming the world’s reserve currency through massive theft of American ingenuity and know-how.  Their strides have been remarkable, and maybe the best hope is that America stalls a changing of the guard, but that’s a poor excuse for letting this happen sooner. 

There is also a chance we win that battle as well.

Investor Guidance

First and foremost, let me begin by saying I think the absolute worst thing any investor could do today is sell stocks of great companies, especially names like Boeing and Caterpillar.  While it’s impossible to know if this is could be a near-term bottom (after all, the reaction from China isn’t even news), those that buy today will be rewarded at some point. 

For most, it’s smart to let Wall Street panic, and at some point, it will be even smarter to pick up those bargains. 

I must admit, I’m very excited about the values. However, I am very worried so many investors are going to panic and sell at the very moment they could be making moves that a year or years from now could have a major positive material impact on their financials.

We plan to take advantage of this period.