March 2018 ENR Market Outlook Executive Summary: • The threat of widespread protectionist trade measures by the United States threatens the global macro economy and might trigger a Black Swan event in 2018. The bullish backdrop driven by big U.S. corporate tax cuts and less financial regulation might be offset by an all-out global trade war, possibly tipping the global economy into recession, if NAFTA is dissolved and trade tariffs legislated against America’s largest trading partners; • President Trump has targeted steel (25%) and aluminum (10%) tariffs, hoping to protect American jobs and deflect foreign dumping. Driven by his ‘America First’ agenda, the President doesn’t have the right facts. Despite pandering to the steel electorate, U.S. consumers, including the auto sector, command significantly more registered votes and will be adversely impacted by rising prices as companies offset rising inputs; • Canada, America’s oldest and most trusted ally, will suffer the brunt of steel (16% of imports) and aluminum (46% of imports) tariffs, resulting in widespread Canadian layoffs and retaliation across other industries; • Despite his tough talk on China’s unfair trade activity and dumping below market prices, including her massive $375 billion-dollar trade surplus with the United States, the President’s trade tariffs will barely hurt China, responsible for just 2% of U.S. steel imports and a bit more for aluminum; • President Trump Tweeted on March 2 that ‘trade wars are easy to win,’ but history suggests this is not the case. Tariffs are a significant negative for the U.S. dollar as evidenced from 2002 to 2004 when President George W. Bush imposed steel tariffs. Over that 24 months period, the USD Index crashed 31%; • After suffering their first losing month in February since October 2016, global equities have mostly bounced back, recapturing about 75% of their losses. Stocks posted their worst weekly decline in percentage terms since August 2011. In February, the MSCI World Index fell 4.3%, the S&P 500 Index declined 3.9% and the MSCI Emerging Markets Index fell 4.7%; • The February global market swoon, triggered by computer trading models, record-high NYSE margin debt and rising interest rates, saw a positive correlation among most asset classes, offering few safe-havens. Though rare, bonds, stocks, commodities, most foreign currencies and gold all declined the week of February 5. The Japanese yen ranked among the top-performing currencies against the dollar in February, rising 2.3%; • In our view, the Japanese yen is the most under-owned major currency in the world. Though the yen has rallied 6% in 2018, it has not discounted the growing likelihood of QE tapering at the Bank of Japan. On March 2, the Bank of Japan suggested it could start moving away from ultra-loose monetary policy as early as next year; • A victim of the February panic, Credit Suisse and Nomura Holdings-sponsored volatility products were crushed, losing more than 80% of their value the week of February 5. The Velocity Shares Daily Inverse VIX Short Term ETNs were subsequently closed. The ETNs were bets that volatility in the stock market would remain low; when amplified by leverage, it’s a one-way street to the poorhouse when volatility erupts; • China will launch a crude futures oil contract on March 26 as Beijing seeks to extend its influence over the pricing of oil barrels sold in Asia. In 2017, China became the world’s largest consumer of crude oil, surpassing the United States for the first time at 8.4 million barrels per day. It’s no surprise China is creating her own benchmark for oil. The long-term threat to the dollar is now real as more settlement contracts are settled in yuan at the expense of the American dollar;
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March 2018 ENR Market Outlook
Executive Summary:
• The threat of widespread protectionist trade measures by the United States threatens the global macro economy
and might trigger a Black Swan event in 2018. The bullish backdrop driven by big U.S. corporate tax cuts and less
financial regulation might be offset by an all-out global trade war, possibly tipping the global economy into
recession, if NAFTA is dissolved and trade tariffs legislated against America’s largest trading partners;
• President Trump has targeted steel (25%) and aluminum (10%) tariffs, hoping to protect American jobs and deflect
foreign dumping. Driven by his ‘America First’ agenda, the President doesn’t have the right facts. Despite
pandering to the steel electorate, U.S. consumers, including the auto sector, command significantly more
registered votes and will be adversely impacted by rising prices as companies offset rising inputs;
• Canada, America’s oldest and most trusted ally, will suffer the brunt of steel (16% of imports) and aluminum (46%
of imports) tariffs, resulting in widespread Canadian layoffs and retaliation across other industries;
• Despite his tough talk on China’s unfair trade activity and dumping below market prices, including her massive
$375 billion-dollar trade surplus with the United States, the President’s trade tariffs will barely hurt China,
responsible for just 2% of U.S. steel imports and a bit more for aluminum;
• President Trump Tweeted on March 2 that ‘trade wars are easy to win,’ but history suggests this is not the case.
Tariffs are a significant negative for the U.S. dollar as evidenced from 2002 to 2004 when President George W.
Bush imposed steel tariffs. Over that 24 months period, the USD Index crashed 31%;
• After suffering their first losing month in February since October 2016, global equities have mostly bounced back,
recapturing about 75% of their losses. Stocks posted their worst weekly decline in percentage terms since August
2011. In February, the MSCI World Index fell 4.3%, the S&P 500 Index declined 3.9% and the MSCI Emerging
Markets Index fell 4.7%;
• The February global market swoon, triggered by computer trading models, record-high NYSE margin debt and
rising interest rates, saw a positive correlation among most asset classes, offering few safe-havens. Though rare,
bonds, stocks, commodities, most foreign currencies and gold all declined the week of February 5. The Japanese
yen ranked among the top-performing currencies against the dollar in February, rising 2.3%;
• In our view, the Japanese yen is the most under-owned major currency in the world. Though the yen has rallied
6% in 2018, it has not discounted the growing likelihood of QE tapering at the Bank of Japan. On March 2, the
Bank of Japan suggested it could start moving away from ultra-loose monetary policy as early as next year;
• A victim of the February panic, Credit Suisse and Nomura Holdings-sponsored volatility products were crushed,
losing more than 80% of their value the week of February 5. The Velocity Shares Daily Inverse VIX Short Term ETNs
were subsequently closed. The ETNs were bets that volatility in the stock market would remain low; when
amplified by leverage, it’s a one-way street to the poorhouse when volatility erupts;
• China will launch a crude futures oil contract on March 26 as Beijing seeks to extend its influence over the pricing
of oil barrels sold in Asia. In 2017, China became the world’s largest consumer of crude oil, surpassing the United
States for the first time at 8.4 million barrels per day. It’s no surprise China is creating her own benchmark for oil.
The long-term threat to the dollar is now real as more settlement contracts are settled in yuan at the expense of
One of the biggest secular trends in the stock-market since the end of the financial crisis nine years ago remains firmly
entrenched: the bull market in stock buybacks. Though an ageing bull market threatens investors in 2018, the secular
advance in share buybacks received a big boost in late December following the passage of the Trump tax cuts. More than
ever, U.S. corporations are buying back stock and raising share prices – again.
A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. The
idea is simple: because a company can't act as its own shareholder, repurchased shares are absorbed by the company,
and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each
investor increases because there are fewer shares, or claims, on the earnings of the company.
Some pundits call this exercise accounting ‘trickery’ because it only serves the purpose of manipulating the share price
and enriching shareholders. And Forbes calls it ‘The Greatest Deception.’ As Senator Elizabeth Warren argued last year,
“stock buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the
value of a corporation is to invest in the future, and they are not doing that.” The UK Government is launching an inquiry
into buybacks, due to concerns that they “may be crowding out the allocation of surplus capital to productive
investment.”
Though there’s some merit in the above assertions, they’re not entirely accurate, either. I turned to the Harvard Business
Review (Sept 15, 2017) for some hard evidence on buybacks, if any:
“The claim that the need to buy back stock forces firms to cut investment puts the cart before the horse. A more plausible view goes like this: First, firms allocate funds to investment based on the opportunities that are available. If they have spare cash left over after taking all value-creating investment opportunities, then they may use it for buybacks. This highlights a logical error in the UK Government’s quote above: “surplus capital” is, by definition, capital left over after all productive investments have been made.
The evidence suggests this view is more accurate. A comprehensive survey of financial executives concluded that “share repurchases are made out of the residual cash flow after investment spending.” Other studies find that CEOs repurchase more stock when growth opportunities are poor and when they have excess capital. It is the exhaustion of a firm’s investment opportunities that lead to buybacks, rather than buybacks causing investment cuts.
Moreover, the claim that buybacks weaken companies long-term isn’t borne out by the data. Firms that buy back stock subsequently beat their peers by 12.1% over the next four years. Rather than eroding long-term firm value, buybacks create value by ensuring that surplus capital is not wasted. For several years, Yahoo was valued at below the sum of its parts, partially due to concerns that it would waste its cash on poor acquisitions; more broadly, a large-scale study found that, in poorly governed firms, $1 of cash is valued at only $0.42 to $0.88. This highlights the value that can be unlocked simply by not frittering away corporate resources.”
iShares TIPS NYSE TIP $113.53 Dec 7/16 2.13% $112.09 0.70% BUY
iShares Floating Rate
NYSE FLOT $50.69 Oct 5/16 1.45% $50.92 2.54% BUY
Vanguard Intermediate-Term Corporate Bond ETF
NYSE VCIT $85.66 Jan 3/17 3.34% $84.44 2.09% SELL
Disclaimer: The ENR Low Risk Portfolio holds the iShares TIPS Bond Fund and the iShares Floating Rate Bond ETF. The ENR Medium Risk Portfolio holds the iShares TIPS Bond Fund and the iShares Floating Rate Bond Fund.
Foreign Exchange
USD Vulnerable to Protectionist Rancor The U.S. dollar started 2018 deeply oversold and trading at a three-year low. The number of bears committed to shorting
the currency hit multi-year highs as February commenced, according to the CFTC. The dollar was long overdue for a big
counter-trend rally, especially under the support of a new Fed chairman committed to additional interest rate hikes. And
we advised against dumping dollars. Now we’re not so sure.
The Trump administration has extended its tough trade talk this month by planning to introduce a 25% tariff on imported
steel and 10% on aluminum. Though the President has regularly chastised China for unfair pricing and dumping, the real
burden of planned tariffs will be consumed by Canada – by far the largest exporter to the United States. Canada sends
BUY Pioneer Natural Resources Co. at market up to $195. Place a 20% stop-loss on your entry price.
This month, we’re selling Inter-Pipeline Ltd. In Toronto.
Market Outlook Commodity Portfolio:
Security Listed Symbol Entry Price
Date Current Yield
Current Price
Gain/ Loss
Advice
Pioneer Natural Resources Co.
NYSE PXD $170.17 Mar 8/18 0.19% $170.17 New BUY
iShares S&P GSCI Commodity Trust
NYSE GSG $16.34 Jan 2/18 0.00% $16.22 -0.73% BUY
Randgold Resources
NASDAQ GOLD $61.93 Dec 31/15
1.23% $82.00 35.09% BUY
ETFS Physical Platinum
NYSE PPLT $88.54 Nov 2/17 0.00% $91.93 3.83% BUY
Inter Pipeline Ltd TSE IPL CAD
25.67 Jun 28/17
7.35% CAD
22.14 -81.74% SELL
Newmont Mining NYSE NEM $17.99 Dec 31/15
0.66% $38.17 114.26% HOLD
Gran Tierra Energy
TSE GTE CAD 3.18 May 30/17
0.00% CAD 3.28 8.10% HOLD
Schlumberger NYSE SLB $69.75 Dec 31/15
3.07% $64.95 -0.43% HOLD
Shareholder Disclaimer:
1. ENR or its employees or its access persons own shares of Apple Inc. 2. ENR or its employees or its access persons own shares of Dollarama Inc. 3. ENR or its employees or its access persons own shares of Procter & Gamble. 4. ENR or its employees or its access persons own shares of Nestlé
5. ENR or its employees or its access persons own shares of Pfizer Inc.
6. ENR or its employees or its access persons own shares of BCE Inc.
7. ENR or its employees or its access persons own shares of Huntington Ingalls Industries.
8. ENR or its employees or its access persons own shares of Newell Brands Inc.