By: Kent Engelke | Capitol Securities
From: 2/9/17

President Trump may soon label China a currency manipulator. While I will skip the obvious notion that all countries manipulate their currencies either overtly (devaluation) or covertly (monetary policy), such a declaration may have wide ranging implications.

China is an export dominated country, defined as its economic wellbeing is dependent upon the financial health of its trading partners. A dated Commerce Department statistic suggested about 45% of Chines production is slated for export, exports dominated to Western Europe, Japan and the US. In other words, China is in a position of inherent weakness.

I reiterate a reason why electronic equipment and many other products are so inexpensive is because of trade policies, permitting exports from regions where labor is extremely cheap as compared to western wages. If the cost of production rises, either margins contract or prices go up. Either scenario may create more uncertainty.

If these increased production costs are unable to be passed onto the consumer, margins will drop, hence stock valuations will also drop.

If these higher costs could be passed on, inflationary pressures may accelerate.

The loudest protesters of Trump’s trade (and immigration) proposals are the technology companies, companies dependent upon cheap labor costs which permit greater access to their products via low prices.

Regarding stock valuation, in my view the technology companies are overvalued, representing about 24% of the capitalization of the S & P 500, eclipsing 2000’s record level which was then viewed as an absolute mania.

What happens if technology margins erode because of higher prices and inflationary pressures accelerate that forces a more hawkish Federal Reserve? Technology companies would get killed from lower than expected future cashflows discounted at a higher risk free rate, amplified by lofty valuations suggesting there is no room for error.

Against this backdrop, it is no wonder the technology companies are ardent detractors of the Trump administration, falling under the guise there is no interest like self-interest.

For the record, I think a trade war between the largest and second largest economies will end poorly… albeit I am in favor of free trade, whatever this may mean, for such will support the common man and Main Street versus a few.

We do live in interesting times where life is indeed stranger than fiction. So much for last year’s mantra that Donald Trump was behaving in such a manner to enable or permit Hillary Clinton to win the presidency for Trump then was also viewed as an elitist entrenched in the Establishment.

Last night the foreign markets were up. London was up 0.30%, Paris up 0.78% and Frankfurt up 0.55%. China was up 0.53%, Japan down 0.53% and Hang Sang up 0.17%.

The Dow should open nominally higher. The 10-year is off 9/32 to yield 2.36%.



By: Kent Engelke | Capitol Securities
From: 2/8/17

Some are commenting there is a lack of direction in the markets as most are now looking for more details from the Trump Administration on promised tax cuts, reduced regulation and increased infrastructure spending.

For the immediacy, the averages will trade on the perception of policy success. I must write success will be defined differently regarding on what side of the aisle one sits.

To write the obvious, if The Trump Administration delivers 3.5% to 4% growth, a lot of today’s resistance would collapse. Vice versa, if growth collapses, Trump’s vision of economic nationalism would then collapse.

Regardless, yesterday’s globalist agenda is on life support and depending upon the success of Trump’s agenda, and the upcoming elections in both Germany and France, globalism may cease to exist in anything but name.

Wow! It is no wonder the Establishment, defined as anyone who is at the pinnacle of today’s power structure, is fighting so hard. Trillions are at risk in this potential change of global order to economic nationalism.

Yesterday was another quiet day as confusion is starting to grow over the direction of the young Trump administration…growth and regulatory repeal versus trade and immigration.

Last night the foreign markets were up. London was down 0.03%, Paris up 0.40% and Frankfurt up 0.05%. China was up 0.44%, Japan up 0.51% and Hang Sang up 0.66%.

The Dow should open flat. The 10-year is up 8/32 to yield 2.37%.