Trade War Feint
The big market sell-off turns out to have been an unintended consequence of a Trump negotiating tactic: putting pressure on our country's Nafta partners and opposite numbers in the Trans-Pacific Partnership talks. It was all a negotiating feint.
Yesterday, the President suggested to both Reuters and Bloomberg that Canada and Mexico can win exemptions from the steel and aluminum tariffs by making concessions in the trade talks. This is a reckless way to bully our trade partners and damaging to market confidence, but it is a negotiating tactic which the unpredictable president likes to use. He said the US “is not backing down on tariffs” but that he “doesn't expect a trade war.” He said Canada can avoid metal tariffs with a “new and fair” Nafta deal which “treats our farmers much better” while Mexico has to “stop drugs from pouring into the US.”
Meanwhile, Treasury Secy Steven Mnuchin says the President “will consider... going back into the TPP” (Trans-Pacific Partnership) if the right offer comes along.
Policy shocks which hurt Wall Street and the dollar have consequences beyond the short-term. Danger lurks in the confusing tactics of the Administration, on gun control, bank regulation, taxation, a new sub-Hudson tunnel, addiction treatment, and dozens of other major policy issues. Unfortunately, the US cannot negotiate on issues with the variable geometry of a real estate and media empire like Trump used to run.
Even if the trade war is averted, the vulnerable industries have been tagged. To the rye and bourbon liquors from Kentucky and Tennessee that I reported the Europe Union will use to retaliate against the US if tariffs are imposed, add blue jeans and hogs (Harley-Davidson motorcycles), as reported in yesterday's Wall Street Journal. These iconic USA products are innocent bystanders hit by an escalation in the trade wars. Automakers are the most vulnerable to retaliation by the US because luxury items are a nono to Melania and Ivanka in the Trump household, Ivanka because of her business interests, and Melania because she needs all the help she can get at her age.
And the US tit for tat against bourbon and blue jeans tariffs will hit Euroland car imports.
For whatever it ' s worth, after Asian stocks were mixed yesterday, European ones are up and Nasdaq is too. The S&P and the Dow-Jones, however, were lower. The single forecast to make under these conditions is that volatility is on the rise. Confusion about what the White House is up to weakens the US$, which is at a 10-year low against major currencies. In such a climate of threats and withdrawals, any non-US stock an American owns goes up at least in the short term, because of a higher conversion level into greenbacks. The passive investment arena is going to have to adjust its index tracking to remove sectors vulnerable to trade challenges: hard liquor, Hogs, and blue jeans, in the USA, and steel and aluminum inputs in foreign markets. This is on a par with removing gun manufacturers from their indexes. Black Rock, Vanguard, and State Street collectively are the top shareholders in publicly listed gun companies like Sturm Ruger, American Outdoor Brands (formerly Smith&Wesson), and Vista Outdoor, in their small to mid-size exchange-traded funds. In the name of corporate governance, the top 3 managers are proposing to rewrite their indexes or put pressure on the gun-makers. Up to now, they have simply voted for management using their proxies 85%+ of the time.
In Britain, but not in the US, supposedly active fund managers who engage in “closet tracking” have been made to disgorge part of their management fees, to the tune of £34 mn, or $47 mn, chump change in the fund management business. In Britain, if not in the USA, the regulator requires that those charging investors for active management and engage in index investing have not managed peoples' investments as they were expected to, and failed to tell consumers this in promotional material.
Its Financial Conduct Authority fined 64 fund managers for violations and cleared another 20, who told investors they were index-tracking.
This is, of course, another argument for stock picking by activist managers. Our portfolio is activist. And for the record, we own no gun-makers, exited autos, and only own a proletarian drink-maker.
*Among the concession made last week by Theresa May over the Brexit negotiations was that Britain will remain in the European Medical Agency, a concession to the UK pharmaceutical industry. However, it is unclear how the associate membership of the EMA could be structured, as there is no precedent for a non-member of the EU to belong. (Reported by fiercepbiotech.com).
*Crédit Suisse guru Vivek Divan, MD, raised its 2018-20 estimates for Galapagos of Belgium based on its Q4 earnings. This year he expects EPS to hit $3.16 (down from an earlier $3.86), and next year's to 54 cents from 72 cents because of higher R&D spending for its pipeline, notably for its 3-drug cystic fibrosis drug and new indications for filgotinib in dermatitis, osteoarthritis, and idiopathic pulmonary fibrosis, all autoimmune plagues. Idiopathic means of no known cause. The spend also increased the risk of GLPG shares. Dr. Divan kept its neutral rating and lowered his target price to euros 85 from 90.
*Shire Pharma reports that the FDA accepted its ANDA for Prucalopride (SHP555) as a daily treatment for chronic idiopathic constipation. SHPG used purchased queue-jumping points to move quickly (pun intended.) A decision will come by Dec. 21, in time for Christmas in Ireland.
*British GlaxoSmithKline reported on use of its Nucala to treat uncontrolled asthma in patients who did not respond to Xolair from Roche and Novartis after they switched The GSK drug reduced emergency room visits or hospitalization by 69% from the prior year in treated asthmatics and also cut the blood eosinophils associated with asthma by ~80%. Nucala is already approved for severe asthma.
GSK with its partners in ViiV Healthcare reported positive phase III trials of dolutegravir in new patients with HIV co-infected with TB. GSK controls ViiV but Pfizer and Shionogi own minority shares. The results were reported at a Boston conference on Retroviruses. TB (or tuberculosis) is the leading cause of death to people infected with HIV.
GSK also exercised its option to license Adaptimmune's Specific Peptide Enhanced Affinity Receptor to engineer T-cells to target solid tumors. GSK is up 1.4% here after the LSE got bullish alongside Wall St yesterday. RHHBY gained 2.1%. ADAP-Q is a UK small cap which fell on the news.
*As expected, Danish Novogen launched its Ozempic, weekly semaglutide jab, in Canada. It is a glucagon-like peptide which controls blood sugar, the cause of diabetes, and can be used with or without insulin. It also lowers the danger of hyperglycemia, or low blood sugar.
*Israeli Compugen was up over $4 yesterday.
*Benitec Biopharma Down Under has started its phase II trials of BB-401 in metastatic head and neck cancers in Australia and Russia by injection. The drug is a combination of antisense RNA plus DNA-directed RNA-silencing against epidermal growth factor receptor, a marker for this cancer. for people who have failed all other treatments. We own its warrants. Its trials are competing with one from Bristol-Myers, and the injection delivery mode may hurt signups.
*Zymeworks (averaged down last week) rose 3%+ yesterday. I suspect people are being herded in by the company's unusual opening of its phase I trials to more HER-2 cancer patients in Canada.
Infrastructure
*Delek Group is again taking the lead in a political direction in Israel, by its auto sales sub buying into Veridis, the operation of a desalination plant in Israel, 70% of which it bought from OCM Luxembourg (Oaktree Mgm) for 992 mn Israeli shekalim. Another 10% of the OCM outfit will be bought by Harel Insurance, an unrelated private company run by Jeckes (German Jews).
*Abengoa (ABGOY of Spain) now half owned by Algonquin Power & Utilities is close to selling to ABX a quarter of UK firm Atlantica Yield (AY-London). AQN is expanding outside NAFTA. AQN was down 1.75% yesterday because it's misunderstood.
*Wallbanger Magal Security Systems gained another 1/2% yesterday on Trumpian expectations. MAGS is an Israeli maker of electronic and physical barriers to protect buildings, airports, or borders.
Bancos
*Among those who may gain from the Dodd-Frank deregulation of smaller banks based on their US capital levels are some European majors like Santander and Deutsche Bank, both of which ran into trouble during the global financial crisis with their US arms, despite or because of lower capitalization. But if the Euroland banks are exempted, their US major rivals demand that they too be exempted. Other factors being cited like removing custodial accounts from being counted in the capitalization level. The biggest risk is allowing foreign banks to avoid the “stress tests” which SAN had to work years to meet.
Sheila Bair, ex-head of the FDIC spoke (in The Economist this week) against relaxing US regulations.
Tech & Tel
*WeChat (Weixin) the Tencent social media platform, has topped 1 billion users worldwide. As analysts struggle to figure out the complexities of US-listed Alibaba, TCEHY is gaining traction as a Hong Kong share.
*Talks are continuing between Vodafone, VOD of Britain, and Liberty Global (LBTYA, sold), although LBTYA operational chief Mike Fries regrets that so much is public.
*Mazor, an Israeli maker of surgery robots, was up over 5% yesterday.
*Autoliv was up 1.5% yesterday showing that auto reprisals are not worrying our market. ALV is Swedish.
Funds
*Canadian General Investments, CGRIF, reported that its top holdings at the end of Feb. were: Nvidia, 4.9%; First Quantum Minerals, 4.4%; Dollarama Inc, 4.3%; Amazon, 3.9%; Shopify, 3.7%; Air Canada 3.5%; Franco Nevada (gold-ming) 3.4%; Bank of Montreal and Canadian Pacific Railway both 3.2%, and Royal Bank of Canada 2.9%. On Mar. 2 its NAV hit C$32.91 and its share price C$23.21, a tempting discount. I expect it will lighten its consumer bias going forward.
*Adrian Ash, who writes about gold for the same miner grouping as runs our SPDR Gold, GLD, writes that the gold price has failed to rise so far under Trump because institutional investors are not yet scared enough to buy the yellow metal. Worldwide demand for bullion fell by 29% last year. But with the trade war threat, gold should be a better haven in 2018 as the pros leave the cryptocurrency arena.
*BlackRock is back under 5% in its holdings of Sampo Oij of Finland, a financial firm. SAXPY reported that the US fund major used securities lending or contracts for difference to reduce its exposure.
*Phil Goldstein, a director, used the buyback at Mexico Equity & Income Fund to sell 75% of his holdings in our fund, to 8,612, 0.12% of the shares out. Goldstein, an activist in closed-end funds, runs a fund of funds outfit called Bulldog Investor.
Disclosure: None.
ALAS, you are right. and there is little a mere single US citizen and voter can do
Sadly Europe and Asia are gaining in their relationship as the US becomes more unpredictable. Arguing about who gets what with allies does nothing but weaken both parties relations with each other.
Sadly, Europe is forging new ones as the US also alienates its Asian allies. Things are not that bad for the US. What it needs to do is get its ship in order by supporting small business and ridding itself of the QE zirp monkeys on its back. This is what is hurting the US, not importing steel.