Markets held hostage by trade and machines

If it were not for computer-driven trading, it might actually be funny. Financial markets are careening up and down on a daily basis based on the next tweet or comment from the Trump Administration or its counterparts in China. We could see more of the same next week. Rhyme or reason has truly left the station. Day by day, the trade war of words is accelerating. This week, the U.S. banned China’s largest technology company, Huawei, from doing business with American companies. The president accused the company of espionage. The Chinese responded by threatening to drop trade negotiations. Markets collapsed, led by semi-conductor and technology stocks. A day later, the administration walked back their ban, at least temporarily, once they realized the entire U.S. semiconductor industry would be crippled by their move. Markets spiked higher. Then, Stephen Mnuchen, the U.S. Treasury Secretary, admitted there was no planned dates to resume trade talks– pow, markets fell again. Thursday, the President, in a free-wheeling news conference, announced a trade deal with China will happen “fast.” Confused investors jumped back into the markets chasing stocks up on Friday morning and down in the afternoon. Over in China, there also appears to be an escalation in the tariff/trade verbiage. The Chinese government-controlled media have stepped up its anti-U.S. rhetoric, quoting Chinese officials, who are increasingly painting America and its leaders as irrational and unreasonable. A protest song of sorts has hit their air and internet waves, gaining massive popularity among the billions of Chinese citizens. Rather than caving-in to our demands, it appears that China is hardening its stance and intensifying its “Made...

Don’t take loans from your tax-deferred accounts

It sounds too good to be true. Why borrow from a bank when you can take a loan out from your 401(k) or 403(b) and pay yourself back in both interest and principal? If that sounds like a great deal, it’s not. Money purchase plans, profit-sharing plans, 457(b) plans and both 401(k) and 403(b) plans may offer loans, but IRAs, SEP IRAs, and SIMPLE IRAs do not. The IRS does have some restrictions on the borrowing. It limits how much you can borrow at any one time. In general, you are limited to the smaller of 50% of your vested account balance, or $50,000. However, there is one exception (hardship) that allows you to borrow up to $10,000 even if it exceeds 50% of the balance. It also requires you to pay yourself a reasonable rate of interest on your loan. Generally, you have five years to repay the loan, although you are required to pay at least quarterly payments. Recently a Thirty-something-year-old client told me he had taken out a $7,000 loan from his $50,000 403 (b) tax-deferred retirement plan years ago. He was surprised to find that it was not an interest-free loan and that he was required to pay off the loan in its entirety before he could draw from the account in retirement. What’s worse, if he quit his job, his company required that he pay off the amount in 60 days. He thought it was the IRS that laid down the rule provisions, but that is not the case. It is the company you work for that offers the plan Some companies won’t let...

Markets sell in May

  The old adage “sell in May and go away” seems to be working this year. In short order all three averages experienced a down draft over the past few days that amounted to about a 5% decline in total. Is there more to go on the downside? If I were a betting man, I would say the odds are in favor of more declines in the weeks ahead. I base that bet on the assumption that it will take at least until the end of June before we get anymore clarity on whether or not President Trump is willing and able to salvage a trade deal with China. By now, most readers are aware that there has been an abrupt change in expectations on whether or not the tariff trade wars will end anytime soon. Both countries have escalated their rhetoric and at the same time made clear that more tariffs are in the works unless a resolution can be successfully negotiated. There is a G-20 meeting coming up at the end of June. Reports are that President Trump and his Chinese counterpart, Xi Jinping, will meet at that time. Until then, investors can expect this war of words to continue. Traders will be cocked and ready to pull the trigger on every tweet, comment, or action by either side. I expect markets to respond (up or down) with a vengeance. At the same time, expect to read and hear how tariffs are bad for worldwide economic growth. The bears will begin warning that Trump’s actions towards China will cause the U.S. economy to tip into recession next...

Epidemic pulls pork prices higher

The African Swine Fever could cause prices in China to spike 70% or more this year. The highly infectious disease is spreading throughout Asia and could lead to a large increase in the price of pork here at home as well. Before you ask, this highly infectious virus, while deadly to pigs, is not harmful to humans. The problem is that when even one pig is tested positive, the entire herd needs to be slaughtered as quickly as possible. There is no cure. The government is taking this epidemic seriously, and well it should. Tough new government rules have been implemented this month in Chinese slaughterhouses and processing plants to identify and test for the virus. The Chinese are the world’s largest consumers of pork, accounting for 49% of all pork consumed. Domestic hog production, prior to the epidemic, was roughly 700 million pigs. To date, only about a million pigs have been infected, but those figures may be understated. A Shanghai-based consultant company, JCI, is forecasting that pork production will fall by almost 16% this year to 8.5 million metric tons. That would leave roughly a 7 million metric ton shortfall in supply. The government’s inspection efforts have slowed down business and reigned in demand, at least temporarily. But given the popularity of pork in China, most producers are believed to have large stockpiles of pork supplies, most of which are in cold storage. As such, Chinese producers are dipping into their cold storage supply to satisfy demand and keep prices somewhat reasonable, at least until the second half of the year. Given the severity of the epidemic...

Tariffs trash stocks

Volatility in the form of U.S. trade tariffs levied on China cut through investors’ complacency with a vengeance this week. It took less than three days to drop the markets by 3%. Is it over or do we have another 5% or so to endure? My bet is that it is over—for now. Sometime during the on-going trade negotiations occurring in Washington today and tomorrow, the thorny trade issues, (such as intellectual property (IP) protection for U.S. companies) will be kicked down the road. A compromise on other, easier issues will be announced as “on-going” (although not inked) and the Chinese delegation will fly home in an atmosphere of reconciliation. From the President’s perspective, China, after agreeing to a list of breakthroughs in the trade negotiations in Peking two weeks ago, “broke the deal.” Over a half dozen important “firsts” involving IP rights, as well as other structural rules and regulations that have hampered U.S. companies doing business in China, were first agreed to as of two weeks ago. A week later, half of them had been deleted from the formal draft agreement sent to Treasury Secretary Steven Mnuchin and Chief Trade Negotiator Robert Lighthizer. The move surprised the negotiators and infuriated the President. Sunday night, the President took to Twitter and threatened to raise U.S. tariffs on $200 billion of Chinese goods from 10% to 25%. The tariffs took effect Friday morning. The Chinese have responded by preparing their own additional tariffs on U.S. goods. As you might imagine, the Dow dropped 500 points or more on Monday, spiking higher on Tuesday, down again Thursday, and by Friday...