Good, But Not Great

On this week’s show, Karl discusses how a “good” economy is vulnerable to shocks and tariffs and trade war may just be that shock.  Plus, proper portfolio positioning can help during volatile times.

Hey everybody, welcome to the Eggerss Report, it’s your investing playbook. Thanks for joining me. We appreciate it, as always. Grab yourself a cup of coffee, and sit back, and we’ll talk about tariffs. No, just kidding. Well, we will talk a little bit about that, but if I talked only about that you’d probably tune out, because it’s not the most fun thing to talk about. But, it is front and center, and so we’ll talk a little bit about that.

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All right, let’s jump right in here. Tariffs continue, right? We know that the deadline came and went, and some of these things kicked in. Of course, I’ve had people this week asking me what do I think, and this is just my opinion because … which is what this podcast really is, but it’s my opinion, and part of it’s my opinion, and part of it’s our collective opinion here. But, we know that the tariffs generally are going to be no good for most of us, right? Things will cost more if this continues to move forward. That’s what tariffs do, is we get the brunt of it, the consumer pays more. Whether it’s electronics, or food, or what have you.

China is probably going to suffer worse than we are. That’s really what this is really about is, who suffers worse, unfortunately. Now, I think this escalated a couple of weekends ago on a Sunday when President Trump tweeted out that basically China had backed out of some of their agreements, and therefore he was going to push forward with tariffs. All these reasons came about, why China did back out at the last minute as the deadline loomed. There was various reasons why. They thought maybe they were trying to save face, and act tough before they gave in. They saw that the US economy was maybe weaker than what we were saying, and therefore they had more negotiating power. All different types of reasons.

But, the bottom line is, we are back at a stalemate. And so, we’ve seen some increased volatility. Now, people ask me, “Hey, this seems like the … Boy, the market’s gotten volatile lately.” Yeah, it’s gotten volatile a little bit, but we’re still not very far off of the all time highs, right? I think in general the market’s taking some of this in stride, and we’ve had a lot of situations where the market goes down, and then it bounces back, or reverses and actually goes higher throughout the day. We’ve had a couple of really bad days, four or five, 600 point down days. But, we’ve also had some good days, but we’re not seeing really a trend just yet.

Even when you think commodities are gaining steam, or gold, or you’re seeing even cryptocurrencies, which kind of went bonkers this past couple of weeks, reversed. Stocks, certain sectors going up and then they reverse and go down, or they’re going down and reverse, and go up. Because, it’s uncertainty right now. We know when there’s these tariffs kicking in, if you are a manufacturer, a large manufacturer, you don’t just move operations overnight.

Now, eventually you will go where the path of least resistance is in terms of cost, and what’s best for your company. Whether that’s the US, China, Mexico, right? But, what’s interesting is on Friday, President Trump came out and … or, the US basically announced that they were going to lift steel and aluminum tariffs on Canada and Mexico as soon as yesterday. Really interesting, right? Because, what does this do? This is another move in the chess match with China. By making things easier with Canada and Mexico, it makes it harder on China.

This is all a high stakes game of negotiations, we know that. Ultimately I do think this will get resolved. But, the longer it lingers, the more uncertainty there is, the more companies may hold back. Whether they’re increasing salaries, whether they’re buying more goods and services to pass down. Whatever it looks like, there’s uncertainty, and they may hold off doing some of that, which then obviously puts our economy at risk. As we’ve mentioned, our kind of theme for the economy has been good, but not great.

Now, good but not great means it’s okay, but it’s not going so fast that a shock wouldn’t hurt it. A shock of some sort could put us into a recession. We don’t see a recession as it stands right now, but as we’ve said, we’re vulnerable. There’s enough things flashing a yellow sign right now, to tell us that a little cautious here, right? In the short term, just because of the fact that again, a shock could be these tariffs, and the uncertainty around them, and how long this lasts. That could be enough to push us over the edge in the next few months to a recession, but as it stands right now we don’t see that, we also don’t see an end to the bull market.

But, do we all realize where we are in the cycle? The answer is yes, and so I do think as we continue, have stated the last several weeks and months, continue to focus on where you perceive to be value. Now, that is a term tossed around that, it’s kind of challenging at times because some people may find value in the most expensive stocks out there. But, I’m talking about more traditional value, because if we get into a more choppy environment, or the economy slows down, you have to have some stocks, or positions whether they’re ETF’s, or individual stocks, in things that will hold up because of the fact that they’re just not expensive.

The high flying, expensive companies and areas will get hit. We’re seeing a slow down in semiconductors. You are seeing some of that, and because of that you’ve seen those stocks as a basket fall off about 12% from their recent high. Again, focus on where there is value, because as we move along if we get into a prolonged period of a decelerating economy, or a slow down, money will start to shift to those areas. Again, you can do that in the form of mutual funds, ETF’s, or stocks. With stocks, it makes it easier because you can really hone in. But, a lot of you don’t do individual stocks, you just do mutual funds or ETF’s, and that’s fine. But, know what you own because if you say, “Well, I’ll go buy a value ETF, or a value fund.” Realize that some of those use traditional metrics of value based on sectors or industries.

They may say, “Well you know what? The consumer staples, or the utility sector is traditionally in a value basket.” Well, those are some of the more expensive areas right now. Trash companies for example, very expensive relative to their history. If you look at utility companies, some of those very expensive, relative to their history. Be careful what’s called value. You have to look underneath the hood of all your ETF’s and funds to know specifically what you own, because that will make a difference as we move forward, in how defensive or how much volatility your portfolio is going to be.

We have this tariff still looming. We know that some of the items, economic items not only in the US, but in China are slowing a little bit. China’s retail sales growth fell to the lowest since 2003, and China’s holdings of US treasuries has seen the first decline since November. By the way, on early Friday morning we had news, and it had the futures down a little bit going into Friday, but we heard a quote basically saying that Chinese negotiators had no interest in continuing these trade negotiations with the US now, because it sees little sincerity out of the President.

What we don’t know is this just talk? Is this trying to rally the troops? We came in Friday morning with the futures down 200, and then of course the markets went green. We’re still getting this volatility, we’re still getting markets that move based on tweets, based on news flow. As we all know with technology, there are computers literally programmed to look for words in the fed statement electronically, to look for words from Twitter, to look for breaking news, and they trade massive amounts of stock based on that, electronically without anybody pulling the trigger. It’s already pre-programmed.

That’s why you get some volatility on news headlines. Sometimes, you can take advantage of it quite a bit, and we’ve seen some of that. We’ve seen even this week, I’ve mentioned the last … some of my tweets, and maybe on the podcast, we had a technical term called, “Hairy Bottoms.” The last few days. Which, simply means the market keeps not closing on its lows. It continues to rally, even if it’s down on the morning, it rallies into the close. It may not finish green, but it rallies. That still shows you there is a tug of war going on between the buyers, and the sellers.

But as I said, this is kind of a trendless market. I mean, for the week you had a lot of things that were working early in the week kind of fade. We did see a big move in agricultural commodities, we actually own an ETF in that arena in our aggressive strategy. A big rally in that this week. Oil rallied, home construction rallied, some of the gold miners rallied, which we have an allocation or aggressive strategy to that as well. You definitely saw some things that were up this week.

Then, on the flip side you had some specific countries down. Generally speaking, the emerging markets got hit more than the US did. Again, that kind of tells you this is a relative game that the President’s playing, because while tariffs may hurt us, they’re going to hurt China worse. They won’t publicly say that, but that is the reality of this. And so, you’re seeing the emerging markets weaker this week, we believe and continue to believe that there is value there. There’s value because they’re cheaper, they’re still growing faster as a basket.

Now, they’re not the safety net that the US is, which is why we’re seeing this. The US is, again, all things being equal, would come out better in my opinion in these tariff trade wars. But, long term emerging markets, we believe is an overweight. Whatever that would mean to you, it means different things to different people. But, most people are underweight that because it’s become naturally, a smaller and smaller part of the portfolio, and it hasn’t worked for the last few years.

It did work well in 2017. It actually rallied more than the US by a large margin, only to see it go back to the back of the line in 2018 because of the tariffs, and here we are in 2019, same deal. But, we think long term, especially for part of your portfolio if you’ve got a longer time horizon, emerging markets we think is a great place to be, in a diversified portfolio of course.

Now, if you want to have some contrarian good news too, a report came out this week that according to a major bank survey, money managers are as hedged as they’ve been in more than a decade against a decline in stocks. That is a contrarian indicator staring you in the face. People are positioning themselves for a fall in the market, and you’re always going to hear … if you read enough headlines, if you read enough Twitter, if you follow that. I would suggest if you do that by the way, get people on both sides. Follow people that are on both sides, because you have the permabears, people that are always gloom and doom. And, you have the people that are permabulls, mainly because they’re in a position where they can only be long stocks, they can’t be tactical. Therefore, they’re going to say the market’s always go up.

Have a balanced approach, so you can create your own opinion. But, we do know that’s a contrarian survey that people are hedged. That means they’re positioning themselves that way, so if the market keeps going up and breaks out to new highs, guess what happens? They have to undo that hedge, and often times that involves buying stocks to do so in some form or fashion, pushing us up to new highs, and making it accelerated to the upside. We’ve been on recording saying, and this was last year, that the bull market was not over. We still believe the bull market is not over. Whether we’re in the eighth or ninth inning of a long bull market since 08, we don’t know the answer to that, you don’t know the answer to that. A bald gentleman on TV throwing stuffed animals at the screen don’t know the answer to that. The smartest people in the world don’t know the answer to that.

What we do know is we can look at indicators, we can look at time frames, we know that seasonally this is a weak time, fine. But, we also know that the first four months of a year being up as strong as they are, majority of the time finish up at the end of the year, and sometimes stronger. But, not only that, we’re just looking at the pure supply and demand of the stock market. Things are still very favorable, and they should be because we have a low interest rate environment still, we have an economy that is not signaling a recession at this point, and really some of the risks we’ve seen is more geopolitical, and these tariff trade wars, and we don’t know what the long term impact’s going to be because we don’t know if there’s really going to … these tariffs are going to continue to exist or not, right? Given all of that, the market’s kind of just moving sideways right now.

All right, I’m going to keep this podcast a little briefer than normal this week. Hey, make sure if you have a question for me or a comment, you can always me, Karl@EggerssCapital.com. Yes, it’s Karl with a K, so don’t forget that. Don’t forget on our website, EggerssCapital.com. If you want to just ask us a question because you need help with something specifically, you can use that email address. You can always call us at the office at 210-526-0057.

Or, you can click on the big green button right on the homepage there, and we’ll have somebody reach out to you. We help people with all kinds of situations, specifically in the financial planning realm, trying to help them reduce taxes, and strategize around that. Maybe trying to figure out how do we take into consideration our kids, and grandkids, right? You might be dealing with three, or even four generations of wealth. There’s a lot of planning that goes, and is involved in that. How do I invest in a more tax efficient manner, all those different things. Or, how do I frankly deal with a market that is volatile given my specific situation, how tactical should I be, should I be using alternative investments? I’ve heard about those. I’ve heard about ETF’s versus mutual funds, the pros, and cons. Can you help me with my 401K allocation at work? Those are all the things that we deal with here, and so if you need help with any of those, or have a friend that does, feel free to reach out, and we will help you out.

Have a great weekend everybody, and we’ll see you next weekend here on the Eggerss Report, your investing playbook. Take care.

This show is for entertainment only, and information provided by the host, guest, and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As President and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients, just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.

 

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