Financial Review


…Bad week for stocks. A trade war would be good and easy. Not so much.

Financial Review by Sinclair Noe for 03-02-2018

DOW – 70 = 24,538
SPX + 13 = 2691
NAS + 77 = 7257
RUT + 25 = 1533
10 Y + .05 = 2.86%
OIL + .39 = 61.38
GOLD + 4.90 = 1322.90
You’ve heard the old poem that March roars in like a lion and out like a lamb. March roared in like a mangey lion. For the week, the major indices were sickly. Oil stumbled. After much ado, bonds went nowhere.


The Dow and the S&P 500 moved below their respective 50-day moving averages this week and struggled to find support. Short-term, the S&P 500 has support around today’s low of 2647. If the S&P does not hold support, around 2647 to 2639, then the next level of support is a re-test of the Feb 8 low of 2580. I told you that it was unlikely the market would just bounce off the Feb 8 lows in a V pattern. It now looks like a retest is possible. If we can find support near or above 2580 (the close on Feb. 8) to around 2530 (the intraday low on Feb. 9), we could be setting up for a double bottom, which is a very bullish pattern – that is if support holds.


This morning’s trade started with the Dow dipping down almost 400 points, and finished with the Russell 2000 posting a 1.7% gain. For the week: the Dow lost 3%, the S&P 500 lost 2%, the Nasdaq was down 1.1%, and the Russell was down just over 1%. Oil was down 3.4% for the week.


There is a decent chance that support will hold. The economy is strong, and today the University of Michigan reported its consumer sentiment index in February was the second-strongest it has been in 14 years, though the final reading was revised lower a touch to 99.7. Consumers had favorable assessments of jobs, wages, and higher after-tax pay, although the report said the tax cuts haven’t generated universal support, unlike previous reductions.


Investors are still bullish and conditioned to buy the dips. But there are a few factors which should serve as yellow flags. The Fed is gradually hiking interest rates; gradual means they don’t want higher rates to freak you out. Corporate profits will have a hard time improving on the fourth quarter results; earnings should still be good, but not necessarily better.   And higher interest rates will make it even tougher to grow profits at an ever-faster pace. This is one reason Wall Street is laser focused on 10-year note yields breaking out above 3%. If the Fed has its way, it is just a matter of time.  And to throw some gasoline on the fire, investors are finally paying attention to the dangers of trade-war rhetoric.


After announcing plans to impose 25% tariffs on steel and 10% tariffs on aluminum, Trump doubled down with early morning tweets, saying “Trade wars are good, and easy to win.” Yeah, not so much.


Steel and aluminum companies and their workers greeted the measure as a much-needed salve for their industries. But the doubling down is only likely to further inflame tensions with other nations, which are already indicating they may take reciprocal measures and place taxes on United States exports. Jean-Claude Juncker, president of the European Commission, today discussed possible tariffs on products like Harley-Davidsons, Kentucky bourbon and blue jeans. That might sound like a random sampling of US made products, but the common denominator is that they are produced in the home states of key Republican leaders. Juncker added, “I can’t see how this isn’t part of warlike behavior.”


Criticism came from governments, lawmakers, metals makers and labor unions around the world. A Chinese Foreign Ministry spokeswoman said: “China urges the United States to exercise restraint in using trade protectionism tools.” Ministry of Commerce warned last month that, “China will definitely take necessary measures to safeguard its legitimate rights.”


Hans Jürgen Kerkhoff, president of the German Steel Federation, said: “These measures clearly violate the rules of the World Trade Organization. If the E.U. does not react, our steel industry will pay the bill for U.S. protectionism.” He called on the bloc to take action, through the W.T.O.


Simon Clarke, a Conservative member of Britain’s Parliament and vice chairman of the All Party Parliamentary Group on Steel and Metal Related Industries, wrote on Twitter: “Tariffs are the worst possible option for the world economy and a major threat to U.K. steel in particular.”


Roy Rickhuss, general secretary of Community Union, a British labor union, also denounced the move on Twitter: “Donald Trump is putting jobs at risk on both sides of the Atlantic. Thousands of steelworkers across the country voted for Brexit on the promise it would deliver a new era of international trade.” He called on Prime Minister Theresa May to ensure that steel products exported by Britain were exempt from the proposed tariffs.


Arcelor Mittal, the world’s biggest steel maker and the largest steel producer in Europe and the United States, said it would delay a planned $250 million investment to expand and modernize a factory in Tennessee.


Trump champions tariffs as a way to bring back manufacturing jobs to the US, but that is questionable; he also claims tariffs are needed to maintain national security. But the vast majority of  the U.S.’s imports come from strong allies: Canada, South Korea, Mexico, Germany, Japan, and Brazil all export more steel to the United States than China does. There is no question that steel and aluminum, materials used in the production of weapons and military systems, are vital for America’s military superiority, but it is not realistic to expect that foreign producers would withhold supplies in the case of a national security emergency. Threats to unleash a trade war over steel crushed any hopes of substantial progress in talks to rework NAFTA.


More broadly, the tariffs will raise costs for a vast sweep of businesses, given that steel and aluminum are major inputs in auto manufacturing, oil and gas extraction, and construction, as well as in the production of everything from beer cans to golf clubs. Manufacturers will be paying higher prices for our stainless steel and other metals going forward, ironically making us less competitive against foreign-finished goods. A more limited steel tariff in 2002 cost the economy an estimated 200,000 jobs, including roughly 11,000 in Ohio, 10,000 in Michigan, 10,000 in Illinois, and 8,000 in Pennsylvania. Trump’s “smart” trade action, then, might spark a trade war, hurt the auto industry, bleed jobs from the Rust Belt, and anger American allies around the world. A small number of companies and workers stand to benefit, but a far larger number are now at risk.


Here’s my analogy: tariffs might open up the sidewalk to traffic, but they might also close down a multi-lane highway. You can hope for the best but you should also plan on a really messed up morning commute.


A week ago, thousands of public school teachers in West Virginia went out on strike, a rare but familiar union-organized action to protest low wages and rising health-care costs. Tuesday night, state union leaders and the Governor Jim Justice reached a deal, and the teachers were expected to be back at work on Thursday. But the teachers didn’t care for the proposed resolution and they stayed on the picket line, mounting one of the country’s biggest unauthorized “wildcat” strikes in decades. As uncommon as work stoppages have become in the U.S., big wildcat strikes like West Virginia’s are almost unheard of. It arrives at a moment when organized labor, already in steep decline, is facing a new emergency: The Supreme Court heard arguments Monday in a case that’s expected by June to end mandatory union fees for all government employees, an outcome that would slash unions’ budgets and power.


West Virginia teachers say several factors convinced them to take the risk of striking. Their health care costs have been rising and their pay has remained very low – the state’s average teacher salary was $45,622 in 2016, about 22 percent below the national average. The state already has hundreds of teacher vacancies, which should mean that employees are that much more valuable. And the lack of formal collective bargaining rights, along with the state legislature’s years-long refusal to address their grievances, left them without much recourse. For some teachers, deciding to stay out on strike – despite a deal their union leaders reached that was supposed to get them back in the classroom – was easier than deciding to strike in the first place. Many doubted that the legislature would actually sign off on the governor’s agreement to raise their pay by 5 percent, and they weren’t happy that the deal created a task force to address escalating health costs in lieu of a concrete solution.


Wind, snow, and rain lashed New York City, Pennsylvania and northern New England, grounding more than 2,900 flights and leaving hundreds of thousands of homes and businesses without power. But the threat of flooding is the most concerning. Boston is already experiencing coastal flooding and 75-mile-per-hour winds are expected cause the worst damage since the last record-setting storm – 57 days ago.




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