Trade Alert: 6.26.18 - Trade War Update

Update on The Technology Trade War with China/EU/Canada

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The monthly newsletter will be out by the end of the week.  But obviously technology and semiconductor world has been blasted in the cross fire of Trumpian Trade War bluster. 

Frankly, this WHOLE shit show pissed me off to no end. To begin with, by now we ALL KNOW that when the market (as measured by the Dow--don't ask me why the Dow Jone Industrials affect the POTUS and not the S&P 500!) drops 400 points because of a set of insane trade war tweets the POTUS will trot out Peter Navarro (my old pal l from CNBC days Larry Kudlow is recovering from his heart attack--a perfect metaphor for the markets btw) who will walk back the insane threats when the heat gets too much for the Trade War chef. 

But who really knows WTF is going on in the mind of this reality show POTUS? NO ONE has a playbook for interpreting TWEETS as trade policy. WE have not had a trade war since 1932 and the Smoot Hawley tariffs which of course took our recovering economy into the depths of the Great Depression.

ALL I can really hang my hat on is this: EVERYTIME the stock market blows up with fears of every larger tariff wars against ALL our allies and enemies, miraculously someone steps in to say "You misinterpreted our plan" or as in this latest dust-up "we floated a trial balloon by leaking our plan to restrict Chinese investment capital into American based tech companies" and that balloon went down like the Hindenberg. "

Do I sound pissed off? You bet. 

As a technology equities analyst, I spent the last 4 days NOT looking at fundamentals and new innovations; I spent it trying to read the tea leaves of TTT: The Trumpian Trade wars. ALL I know and can firmly report to you today is what I knew before--as SOON as the stock market shits the bed over these absurd "trade wars are easy to win" fantasies, the White House Trade War Team pulls back to what the status quo was 48-72 hours before. I

The market understands this preening and flagellating is just reality show drama The market knows that when the caca hits the fan, our Neediest-in-Chief can't take the public scorn from the elites he is so jealous of and needs approval from.

The market knows in  48-72 hour after the latest tweet, he is cowering in his room watching cable news report the world's disgust with his trade wars as geopolitical policy...and he then folds like a Coleman tent.

EVERYTIME. People like me are good a pattern recognition ya know?

With forward P/E's down down to 15 with $187 billion in stock buybacks and 19% bottom line earnings growth do to corporate tax cuts and increased capex (BTW info tech IS the new capex), the market is struggling whether it should price in a REAL global trade war with tit-for-tat escalations into a global recession OR the should we price in ALL this bluster as "negotiating strategy" and get back to our normal lives?

Our chip manufacuters got hit LRCX ASML AMAT ACLS even though China's alternative semiconductor foundrry equipment suppliers to not exist on planet earth.The PRC tried to buy Micron and KLAC years ago and it did not pass regulatory issues--so why would they now?

CAN I TELL YOU how this insanity works out? Can I tell you if our POTUS is playing 3D chess and a long game strategy that everyone is missing? Not for certain...and it is THAT LACK OF certainty that is what has me worried. 

AT the margin, worried executives in my experience say "We will wait for this storm to pass before we make any big investments or expansion plans." WHEN a LOT of execs say they same thing, THAT is where CAPEX recessions come from. In economics we use the terms "first-order order effects of tariffs" and second-order economic effects like supply chain disruption, business confidence, a stronger dollar to create enough uncertainty for global companies to just say "Let's wait."
 Taking this logic one step farther is "Let's take down global growth estimates." Then the consequences add up quickly. Look at Damiler or Polaris Industries or Winnebago Industries--all reporting less demand and higher input costs. NO ONE in the modernd 21st century supply chain for vehicles or snow mobiles has experience with tariffs.  And of course all those US based plants and vehicles will become liability in a tariff war. 

All I can tell you for sure is there WILL BE 1) unintended consequences for this geopoliitcs and geoeconomics by tweet storm and 2) complex supply chains built over decades will suffer greatly in a trade fight.

Action to Take: RIDE THISOUT and wait for cooler heads to prevail and upgrades to hit. But IF IT LOOKS like the threatened second set of tariffs are going to be enacted, we will close positions and hedge this economic insanity. 

Meanwhile RAISE Buy UNDER for MORL to $16 (and 19% yield) and BDCL to $15.50 and 18% yield. URTY is a hold and FINU is a hold.

World on AAOI: We closed this position at $35 as one of only two losing positions last year. They have significant Chinese exposure so to me IF you are still holding I would put a hard stop order at the 200-day MA or $38.

Your very agitated and pissed off ELITIST Editor,

Toby

Tobin Smith