Tariffs: From Seafood to Mattresses

Jul 13, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

You wouldn’t know it if you weren’t paying close attention, but the market was up this week.  With all the tensions between President Trump and NATO, Theresa May, China, Mueller, etc. you’d think that things were going worse than they are.  In fact, Microsoft hit a new all-time high this week.  That’s not to say all sectors and industries are doing well, but instead to point out that there are pockets of strength that remain.  However, the big concern continues to be tariffs which now appear to be more than just a negotiating tactic but instead a policy strategy.

Let’s talk tariffs.  This week China imposed a retaliatory tariff on U.S. optical fiber products of up to 78% hitting primarily U.S. company Corning (GLW).  The White House quickly published a new list of tariffs calling for a 10% tariff on $200 billion worth of Chinese goods which will likely become official in about two months.  Ironically, fearing a trade war, exporters rushed shipments to avoid the coming tariffs and thereby pushed the June trade deficit to a record $28.97 billion giving President Trump further ammunition to use against China.  For now, financial markets so far have shrugged off the first round of tariffs, but a new list would mark an escalation.  However, the following industries have already begun to feel the heat:

  • The textile industry is front-and-center in the escalation of tariffs. As a group there have been broad declines, but companies hit particularly hard include PVH, Tapestry, Gildan Activewear, Fossil, Vera Bradley, and Skechers.
  • Also hit hard is the soybean industry. Soybean prices fell to their lowest price in nearly a decade with domestic supplies set to rise to the highest level ever on expectations that China will cut into exports.  The USDA expects soybean exports to fall 11% next year with other countries failing to offset the lost demand in China.

Looking more broadly, it appears the corporate tax reform has resulted in what many analysts had expected.  S&P 500 companies are on track to repurchase up to $800 billion in shares this year – a total that would top the 2007 record.  However, despite these record share buybacks, a full 57% of those companies are trailing the S&P 500’s YTD performance, which marks the highest ratio of underperforming stocks since 2008.  One must wonder if corporate executives are buying high, just as in the previous record year of 2007.  Among sizable repurchasers this year not seeing a very good return on investment is Oracle, McDonald’s, and Bank of America.

In company news, Starbucks has big plans to ditch plastic straws in favor or new lids and recycled paper straws.  Starbucks isn’t the first company to do this, but seems to get more than its share of attention.  The movement to reduce plastic is gaining traction.  PayPal announced it plans on spending $3 billion annually on mergers and acquisitions that enable it to acquire specific capabilities.  The company is ambitious in its plans to grow and has a healthy balance sheet to help it get there.  And lastly, P&G announced it is not immune from tariffs, but not from China as might be expected.  Instead, the company says the vast majority of its products will be impacted by tariffs in Canada after the Canadian government decided not to issue an exemption.  It seems our stalwart ally to the north is done playing “nice” guy.

In closing, I came across an article today that got me thinking.  There used to be a time when the titans of industry worked to make the world a better place.  For example, Rockefeller donated more than $500 million to various philanthropic causes.  In more modern times, we have Bill Gates and Warren Buffett who himself has given away more than $46 billion since 2000.  But it seems, imperceptibly gradual, that philanthropy has diminished over time.  There are perhaps many good reasons explaining away this observation, including the possibility that the premise is completely wrong.  However, I’d be interested in knowing your thoughts after reading the following article.   Survival of the richest: The wealthy are plotting to leave us behind.  Let me know.

July 13, 2018

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