There, That Wasn’t So Bad, Was It?
- Stocks: What goes up (well, you know the rest)
- The most profitable play from the State of the Union (6 stocks to watch)
- Speak no evil? Trump close-mouthed on the deficit
- After a strong 2018 start, new tail winds for gold
- A milestone in the housing recovery
- North Korea war drums beat louder (if anyone hears them)… what the Amazon-JPM-Berkshire health care tie-up won’t accomplish… reader braces for strategic fed pot busts… and more!
What, you mean the Crash of 2018 is over already?
From a record close last Friday, the Dow shed 550 points the first two days of this week. But as we pointed out yesterday, it would take 800 points to add up to a measly 3% pullback — something that hasn’t happened in 15 months.
A pullback might still take place in the next few days… but the free fall has been arrested this morning. As we write the Dow is up 164 points, to 26,241.
“Stocks are supposed to go down sometimes (no matter what you might be hearing on the financial news),” says our Greg Guenthner, tongue firmly in cheek.
If the selling resumes, the process is likely to feed on itself — at least for a while. “Hibernating bears will wake from their slumber and offer up dire warnings about our expensive, overbought stock market. Naturally, some folks will get scared and sell. They’ll convince themselves that this is the top and they need to get into cash to avoid getting skinned alive.
“But once the market bounces, they’ll kick themselves and chase stocks as they rocket higher once again. Investors never change. Our fragile emotions are our own worst enemy.”
Assuming you’re not trying to day trade, Greg urges you to tune out the noise: “There’s no need to constantly check your phone or computer every 15 minutes to see if the market is up or down. If you’re feeling nervous about stocks, a correction or your investments, just take a break. Go to the movies. Take a walk. Read a book.”
“With $1.5 trillion flowing into projects around the U.S., there are bound to be some big winners when it comes to profiting from infrastructure spending,” says our Zach Scheidt.
The president’s State of the Union speech last night keyed in on public works spending — some combination of federal, state and private-sector spending to shore up roads, bridges and ports.
Enacting such a program into law might be tougher sledding than most of Wall Street thinks; it took almost all of last year to get tax reform enacted. But it’s not too soon to start thinking about where these funds might be flowing. Who the beneficiaries would be. And how to invest accordingly.
Zach has three industries to watch…
- “Keep an eye on construction materials stocks,” he advises first. “These are companies that mine metals like iron ore or copper, steel companies, concrete companies and similar corporations. Naturally, with more infrastructure projects kicking off in the U.S., demand for the materials these companies produce will pick up. That means higher profits, higher stock prices and increased dividends. A couple of names in this area to watch are U.S. Steel (X) and Freeport-McMoRan (FCX)”
- Then there are the construction equipment companies. “With more projects kicking off in the U.S.,” says Zach, “there will be a need for more cranes, backhoes, graders, dump trucks and the like. Share prices for equipment stocks have already started moving higher thanks to infrastructure projects in emerging-market countries.” That will only accelerate as more U.S. projects come online. Zach’s names to watch: Deere & Co. (DE) and Caterpillar (CAT). CAT delivered a killer earnings report just last week
- Less obvious but equally important are the project management companies. “Think of these firms as the architects and contractors for roads, bridges and so forth. The great thing about project management companies is that they typically have low expenses and high profit margins. Their main cost is the salaries paid to architects and engineers. And that leaves plenty of income available for shareholders.” Zach’s favorite names: Aecom (ACM) and KBR Inc. (KBR).
Sign of the times: The president said nothing about the federal budget deficit during the speech.
And that was even though last night was the third-longest State of the Union address on record. (Only Bill Clinton was more enamored with the sound of his own voice.)
Political reporter Michael Tracey points out on Twitter that even Barack Obama gave lip service to the deficit in all seven of his State of the Union speeches. But as we learned long ago from Dick Cheney, “deficits don’t matter” to Republicans when Republicans are in charge.
Whatever. As Kevin Williamson wrote at National Review four years ago, “The annual State of the Union pageant is a hideous, dispiriting, ugly, monotonous, un-American, un-republican, anti-democratic, dreary, backward, monarchical, retch-inducing, depressing, shameful, crypto-imperial display of official self-aggrandizement and piteous toadying.”
As our third president, Thomas Jefferson ditched the notion of an annual speech to Congress. He thought it reeked too much of monarchy. Not surprisingly, the modern tradition came into being a century ago under Woodrow Wilson — a president at least as full of himself as Trump and Obama.
“2018 is setting up to be the best year for gold since 2007 when gold rose 36.5%,” says Jim Rickards.
As Jim told us last week, recent remarks by Treasury Secretary Steve Mnuchin (“Obviously a weaker dollar is good for us”) will have lasting impact — attempts by the president and Mnuchin himself to “walk back” those remarks notwithstanding. “The damage is done. Markets got the message. A weak dollar is now official U.S. policy.” And dollar weakness translates to gold strength.
The weaker-than-expected GDP numbers last Friday are another tail wind for gold. “Once again growth slowed down after a short burst of strength,” says Jim. “For the full-year 2017, U.S. growth was 2.3%, only slightly better than the 2.1% average since the last recession ended in June 2009. In short, the economy may be returning to its nine-year lackluster growth trend after a brief burst of better performance.”
That means the Federal Reserve can’t keep tapping the monetary brakes indefinitely. A March increase in the fed funds rate is still a near-sure thing… but beyond that? “By June the Fed might be ready to take a ‘pause’ in its tightening path to deal with disinflation, slower growth and possible slower job creation. In that case, gold will get another boost as Fed tightening turns to ease once again.
“Gold should sail comfortably past the $1,400 per ounce mark by midyear,” Jim concludes, “and reach as high as $1,450 per ounce by year-end.”
Meanwhile, Jim’s forecast of a preventive U.S. strike on North Korea later this year is looking more and more likely in light of news from Washington.
The Trump administration has backed away from plans to nominate Victor Cha as U.S. ambassador to South Korea. Cha’s CV seemed ideal — director of Asian affairs on Bush 43’s National Security Council, a teaching gig at Georgetown — but he’s not on board with the notion of a “bloody nose” strike against North Korea.
There’s been infighting in the administration about the wisdom of such a strike. But with Cha getting kicked to the curb, it looks as if the advocates of an attack have the upper hand. To be continued…
For the record: The homeownership rate rose last year for the first time since 2004.
The Census Bureau says the share of Americans who owned a home in 2017 was 64.2% — up from 63.7% a year earlier. That’s still way down from the peak over 69% in the mid-2000s, but many of those “owners” had zero equity or even negative equity.
Noteworthy is that the homeownership rate is finally picking up among the under-35 set — from 34.7% in 2016 to 36% last year. That matters because millennials now make up nearly a quarter of the total U.S. population. Sorry, baby boomers — they outnumber you now.
“Maybe you didn’t mean to be funny (or perhaps you did),” begins today’s mailbag, “but the phrase that the new health care initiative will be ‘free from profit-making incentives and constraints’ cracked me up.
“Who needs government to waste money on health care when private companies can do so with flair and style? Profit-making incentives and constraints are some important tools that keep people from doing dumb things with cash. I’m grabbing some popcorn for this one.”
The 5: That was a direct quotation from the announcement.
We have no idea what Amazon, JPMorgan and Berkshire Hathaway intend to pull off… and from the vague nature of the announcement, they probably don’t either. Whatever it is, we strongly doubt it will bend the cost curve of health care — which looks more like a hockey stick.
More likely, it’s a scheme to capture a bigger share of all that money sloshing around the health care sector nowadays. As noted here a few days ago, the annual per capita cost of health care in the United States reached $10,348 in 2016. Even after you adjust for inflation, it’s more than quadrupled over the last 40 years.
“Just catching up on The 5 and ran across a reader’s comment on the 25th that ‘The feds don’t have the manpower to crack down on pot in any meaningful way without state cooperation.’
“That’s most likely true, but the thing is they don’t need to crack down in ‘any meaningful way.’ All they need to do is go in and make a few strategically placed busts and then publicize the heck out of them, in order to inject uncertainty and scare people off. It wouldn’t likely change the overall trajectory of things, but I could sure see it messing with people’s plans in the short term.
“Now, doing that would likely whip up a whole hurricane of noise about jurisdictional over-reach, etc., etc., but that’s a separate can of worms. As you wrote earlier in that issue (regarding the likely appointment of Peter Boehringer in Germany), ‘Grab the popcorn…’”
The 5: Maybe, but to what end? The train’s left the station.
We’ll go back to something we said even before the Senate confirmed Jeff Sessions as attorney general: The Justice Department has only so many resources to work with. When it comes to picking fights with the states, he’s much more likely to go to the mat on immigration.
The president’s speech last night only reinforces our conviction level.
“The rule for question-mark headlines may be ‘Betteridge’s law’ in the new millennium,” writes our final correspondent, “but when I was in J-school over 50 years ago it was just a rule that was part of the beginning curriculum for wannabee journalists.
“The basis for that is that if the story under the headline had enough facts to support the headline, the question mark would not be necessary.”
The 5: In the broadcast news racket where I made my living for 20 years, posing a yes-or-no question is an even dicier proposition. If the answer is no, the viewer is likely to change the channel.
But the “clickbait” culture that’s infected the written word nowadays has given lazy headline writers carte blanche to throw out the old rules. Oh, well…
The 5 Min. Forecast
P.S. In case you missed the big announcement we put out at 1:00 p.m. EST today… you can check it out for yourself right now.