Quarterly Earnings Shake Up

qtrly earnings

Companies are starting to report quarterly earnings for the second quarter of 2019 and if the preliminary reports are any indication, the numbers are not going to be pretty.

The main culprit for the crappy numbers is the tariffs.  Unless our companies here in the U.S. raise prices, they will have to eat the tariff costs since they are the ones paying them to our government.  Hence, their net incomes will drop.  So far, it seems like companies have not been passing on this cost to the consumers, according to the stats coming out of the Federal Reserve.

Well, at least the timing isn’t too bad.  Stocks are due for a little breather and this could be the catalyst that they have been waiting for to take a dip.  But fret not, because there are some silver linings.

First, interest rates are still at historically low levels.  So, after investors with itchy trading fingers sell their stocks, they’ll be coming back to buy them because there really is no other liquid investment out there better than stocks when rates are so low.  Second, a year from now when the tariffs are gone (hopefully), earnings will look much better when compared to right now, so that will help boost those companies’ stock prices.  This is all part of the earnings game that I talked about recently: Playing The Quarterly Earnings Game

As I always say, stick to your plan and you won’t have to worry about any of this.  Hit the beach and have a great weekend!

 

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Monthly Update – July 2019

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Stocks regained their May losses with a strong June rally.  The S&P 500 gained almost 7%, making it the best June performance for the index since 1955.  It also ended the first half of the year with a return of more than 17%, its best first half since 1997.

This rally is really due to the hopes that the Fed will cut interest rates and that a trade deal will get done between us and China.

Second quarter earnings will be coming out over the next few months and we should be able to see how the tariffs and trade wars have affected companies’ revenues.

Bonds of all flavors continued their upward trend.  The price gains can be attributed to the continued slide in interest rates due to concerns that the economy is slowing.

The interest rate drop is being amplified by the tariffs/trade wars.  It is really causing a lot of uncertainty with regards to what the next steps the fed will take.  Uncertainty is never a good thing for any markets.  We’re also experiencing a yield curve inversion.  This means that bonds with shorter maturity dates are yielding more than bonds that have longer maturity dates.  For instance, a US government bond that matures in 3 months is paying 2.11% while the 5 year is paying 1.76%.  That’s not normal.  It means investors are willing to lend their money for longer periods of time and get paid less to do it.  That’s bad but still not as bad as buying bonds from Germany, Japan, or France, where you pay them to lend them your money!

Interest rates continued to drop in June, especially longer-term rates, as reflected by the inverted yield curve.  The economy is showing no signs of inflation and the tariffs are disrupting commerce enough to hurt economic expansion across the globe.

On the savings side, short-term rates, like savings and money market accounts, have stayed about the same since the beginning of the month but longer term rates, like CDs, have come down some.

Currently, the average savings account is paying 1.33%, down slightly from 1.34%.

The 1 year CD interest rate is now averaging 2.46% and the 5 year CD rate is at 2.44%, both down from May.

Mortgage rates continue to decline, with the 30 year busting through the 4% level with authority.  Currently, the 30 year rate is at 3.80%, down from 4.01% last month and down for the sixth month in a row.  Refi’s are looking better and better, especially if you plan on being in your home for at least 5 more years.

Oil prices, after bottoming in the middle of June at around $51 a barrel, rebounded a little bit to end the month higher.  This comeback was mostly due to some nefarious activity in the Strait of Hormuz by Iran.  A barrel of US oil now costs about $60, up from $55 a month ago.

Nationally, gasoline prices have come down despite the rise in oil prices, which is unusual.  Prices at the pump are averaging about $2.71 per gallon, 12 cents lower than a month ago.  Mississippi, again, has the cheapest fuel, at $2.31.  FYI, a year ago, we were paying $2.85.

Check out the prices at the pump in your area: Gas Buddy.

Outlook

Events on the horizon that could move the markets in the near term:

  • Federal Reserve: Everybody is looking for the Fed to cut rates at the end of July when they meet again.  I think if the tariffs are still in place and the trade war with China is still going on, they’ll most likely cut rates at their meeting.  Theoretically, this should push more money into stocks and high yielding bonds.  But this cut will be priced into the market by the time they meet, so if they don’t cut, we could see a market drop.
  • Trade Wars: After a six-week stalemate, it looks like we’re back at the negotiating table with China.  That’s good news and could be the boost the markets need to get through the summer.  We’ve seen this before so don’t get too excited until a deal is actually inked.
  • Tariffs: Trump has postponed any more tariffs on Chinese goods for now as both countries get back to negotiating a trade deal.  Any progress on this front will give the markets a little boost.  Let’s make a deal people.
  • Mueller Testimony: He’s baaaaack!  Mueller is testifying publicly in front of Congress in the middle of this month.  Based on what he has said in the past, which was very little, I can’t imagine that he will tell us anything new that wasn’t in his report.  Unfortunately, hardly anyone has read the report and he’s probably mad about that.  This will move markets only if he comes out with some kind of shocker.

 

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

The Downs and Ups of Life

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I’m going a little off script with this blog today.  Recently, I just read that suicide is the second leading cause of death for people ages 15 to 24.  Accidents is number one, by the way.  I was sort of shocked and very sad that someone with their whole life in front of them would do that.  I can’t imagine what demons they are dealing with that would make them take their own lives.  Then, just yesterday, I read a great story about this issue from a guy named Drew Dickson, the Chief Investment Officer of a large money management firm.  He gives the reader a real-life example of this health crisis but with a much better outcome than usual.  Read on!


This is going to be an uncharacteristic departure for me.  This story is deeply personal, for our family, and for our oldest son in particular.  But it is a story he’s letting me tell, because it is a story he wants people to hear.

My son Max was born in Detroit in 1997, he spent the next summer in Hong Kong when I was interning at Fidelity Investments, and moved to London before he was two when I accepted an offer to work for Fido there full-time.

He was an amazing child, and became an amazing young man.  But he had his demons.  And just before he turned 16 years old, those demons arrived with a vengeance.   I will spare you the details, but for the next three years, he went through a personal hell.  Imagine all the things you don’t want to have happen to your teenager.  They happened to him.  For three years my wife and I would wait on our front stoop until 5:00 am, in the shadow of the Albert Bridge, hoping that he would come home. On those nights that he didn’t, we would call the hospitals, and call the police. And sometimes the police would call us.

We tried all the things that parents try, and we were very lucky that we could afford to try just about everything. But none of it helped.  The change in schools didn’t help. The psychologists didn’t help.  The wilderness therapy didn’t help.  Our closest friends and extended family all waded in too, but nothing helped.

Max didn’t want to be here.  He didn’t feel a sense of belonging anywhere.  His self-esteem was non-existent.  The anxiety was paralyzing.  He often contemplated ending it all, and only the thought of the impact on his three younger siblings prevented him from doing so.

It was a living hell for Max.  And honestly it was a living hell for us too.  There was nothing we could do about it.  The most difficult thing for my wife and I to accept was that only Max could make the choices.  It wasn’t up to us.  We couldn’t save him.  It was up to him if he was going to live, or going to die.  As one of my best friends told me at the time, only Max could choose to live.

Just over two years ago, he realized that the scene in London was poisonous for him, and he asked if he could head out.  He’d asked before, and we’d let him go to far-flung destinations, but the grass wasn’t greener in any of them.  And we didn’t honestly expect anything to come of it this time, but told him that we’d pay for the flight, because he really did need to get out of London, and there was almost no way things could get worse.

He chose a destination a lot of rudderless kids like to visit.  It might as well have been Goa, Tulum, Koh Tao or Maui, but he chose Costa Rica.  A friend of his, a good guy, was backpacking there, and invited him to come.  I told Max we’d cover the first week, but if he wanted to stay longer, he had to get a job and support himself.  We honestly didn’t know what to expect, but it felt like a last shot for him.

He loved that first week there, and indeed got a job working at one of the hostels (in exchange for room and board).  But after the honeymoon was over (and eventually, the honeymoon is always over), reality set in.  His anxiety set in, and his depression set in.  At the darkest point, he almost called it.  And there was nothing we could do about it.  Even if we weren’t 5,000 miles away there was nothing we could do about it.

But, for some reason, he decided not to.  Max decided to stay in the game.

We later learned the reason.  He’d found an eight-week old puppy roaming the streets of Santa Teresa.  The dog had been abused, was eating scraps from trash heaps, and was terrified of people.  But Max and the dog, which he named “Chica”, connected with each other.  Max and Chica became inseparable.

Max, who by then was 19 years old, started to realize he had something to offer.  Chica needed help, and Max was there to provide it.  Max started doing adult things, like earning and saving money so that he could take Chica to the vet for check-ups and vaccinations.  And Chica started getting healthy.  And Max started getting healthy.  I could hear it in his voice when he would call.  There was an excitement about life and the future that I hadn’t heard since he was 14 years old. He was starting to get his groove back.

On one of those phone calls he said to me “Dad, I think I’m ready to leave Costa Rica.”  Then he continued “and while I miss you guys, I don’t think I should come back to London.”  “I want to go somewhere where I won’t be tempted by my old habits, but where I can feel at home, and restart everything,” he said.  “Somewhere like Georgia or Indiana.”

He said “Georgia or Indiana” because he was vaguely familiar with both.  I grew up in Indiana, and then moved to Atlanta, where I lived for several years, and ultimately met my wife, Max’s mom.  I told him that either Georgia or Indiana would be a wonderful idea, and that there were great people in both places.  I mentioned that I would be comfortable knowing that my old buddies in the ATL would be around just in case he needed a backstop; and that back in Indiana, he’d of course have his grandparents and uncle there for support as well.

So he chose Indianapolis.  My wife and our other kids flew over to help get him settled into a new apartment downtown, and they got to meet Chica.  And before we knew it, Max was working a full-time job, and not doing any of the bad stuff he used to do. He still had his demons (these kids always have them – heck we all have ‘em – they just learn to manage them), and things were by no means perfect yet.  But he could work through the anxiety, and work through the depression, because he had responsibilities now.  He had Chica.

On his own in Costa Rica, Max had figured out how to get Chica into the US, and convinced someone at American Airlines to let her fly on his lap, because they wouldn’t let dogs fly in the hold due to the heat.  Thereafter, he and Chica settled into their little apartment downtown near the White River canal, and each of them began their new life, together.  Max had saved Chica.  And Chica had saved Max.

One afternoon three months later, when Max was walking Chica, she saw something she hadn’t seen in Costa Rica.  It was a squirrel, and before Max could stop her, Chica chased that squirrel straight out onto Indiana Avenue.  Right in front of a speeding car.

The car ran over Chica.  My son screamed.  In that brief moment everything that Max had worked for, everything he had overcome, everything that he was living for, was gone.

But the blow didn’t kill the dog.  The driver that hit her sped off and left Chica half-dead and crying in the road.  But the next car did stop.  It was a young black kid.  A young black kid who saw a young white kid on his knees in the middle of downtown Indianapolis.  His name was Kenny.  He opened his door, got out of his car, walked up to my son, and said “hey, I got you”.  He then walked Max out to the middle of Indiana Avenue and they picked up a bloody Chica and loaded her into Kenny’s car.

Turns out that Kenny had just moved to Indiana, and had grown up down in Georgia.  He had been traveling around a bit, and had recently lost his job up north.  He subsequently found an offer for a temporary position down in Indianapolis, and had just started work there.  He was apprenticing at his new shop, and was hoping to be made a permanent employee.  Kenny was just 21.

But none of that mattered to Kenny at that moment.  What mattered to Kenny was Chica and my son Max.  So Kenny looked up a vet clinic on his phone, and took Max and Chica there.  The vet said that without surgery, Chica would die, but the vet wasn’t a surgeon, and they needed to go somewhere else.

Luckily Kenny had stayed. Kenny was there by Max’s side, like a big brother, and this wonderful young man then took Max and Chica to another vet, one that could do the surgery.

The vet did the surgery.  It worked.  Chica lived.  Her pelvis was broken, but over the next six months Max nursed her back to health.

Without Kenny, none of this would have happened.

Kenny even stayed in touch with Max afterward.  He would text and see how Chica was doing, and how Max was doing.  This last Thanksgiving, about one year since the incident, Kenny even got some tickets to go see the Colts play, and asked Max if he would like to come, and then took him out to dinner afterward.

Max is doing great now.  He’s been working full-time, got super healthy, started running marathons, and is now on the good path.  These were his choices, they had to be, and he did it.  But it almost didn’t turn out this way.  Kenny made sure he stayed on that path.

This guy Kenny, I want to reach out and give him the biggest hug he ever got.  I want to tell him that he is special.  I want to thank him for saving Chica’s life.  I want to thank him for saving my son’s.

Oh, and as a follow-up.  We got some news about Kenny this past week.  It’s some really good news.

Kenny not only got that job offer, he just got a nice long contract along with it.  Kenny Moore, from Valdosta, Georgia, just signed a contract with the Indianapolis Colts to be the highest paid slot cornerback in the NFL, in a deal that is going to pay him at least $30 million over the next four years.

Good things happen to good people.

Kenny stayed in the game too.


 

 

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Pros and Cons of Low Interest Rates

Interest Rates

With the Federal Open Market Committee (FOMC) meeting this week, I thought this would be a good time to talk about interest rates and how they affect certain sectors of our economy.  Right now, rates are near historic lows and it looks like they might be heading even lower.  The trade wars and tariffs have had a detrimental effect on the U.S. economy, slowing down commerce in both directions.  One way to combat this problem is to lower interest rates to spur growth.  Consensus is that the FOMC will be doing just that at either this meeting or the next.

So, knowing that lower rates are probably going to be hanging around for a while, here’s how they affect various aspects of our economy:

Lower Mortgage Rates

This helps people looking to refinance their existing mortgages and for first time home buyers.  It also helps home builders, appliance manufacturers, and everyone else included in the housing industry.

Reduced Borrowing Costs for Companies

Corporations can borrow money at lower rates.  This lowers their interest expense which makes them more profitable and frees up cash to hire more people, expand their businesses, etc.

Investment More Likely In Riskier Assets

When interest rates are low, investors tend to stray from the safety of government bonds to more riskier assets to make a better return on their money.  Currently, the 10 year US Treasury bond is yielding 2.07%.  As an investor, this makes me want to put my money in something that can get me a better return than 2% per year, such as stocks, real estate, or high yield bonds.

Conservative Investors Get Hurt

Risk averse investors get punished in a low interest rate environment because savings rates for money markets, CDs, and savings accounts drop.

Pensioners, Social Security Recipients Lose Their Annual Raises

People that rely on pensions, social security, and other fixed income sources are less likely to get any cost of living increases when interest rates stay low.

U.S. Dollar Devalues

The dollar typically drops in value in relation to other currencies when interest rates stay low.  This makes our exports cheaper abroad but costs more for us to import goods.

 

As an investment adviser, all things being equal, I’d rather have lower interest rates than higher.  I feel low rates put a “floor” under stock prices, meaning stock market drops won’t be as bad and won’t last as long versus when interest rates are higher.

 

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Fun Facts About US-Mexico Trade

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Since tariffs are still on the front burner of the financial news cycle, I thought I’d share some interesting facts about our trade relationship with Mexico.

  • The US imported $345 billion in goods from Mexico last year and we exported $265 billion of our stuff to them. This was surprising to me because I thought the trade imbalance was much greater, meaning we imported much more than we exported to them.
  • If Trump goes through with the 25% tariffs on Mexican imports, it would cost the importers (US companies) about $88 billion annually. These companies will have to eat these costs and/or pass them on to us, the American consumer.
  • About 30% of the materials of a finished product that we import from Mexico comes from the U.S. This tells you how intertwined the international trade is in North America.
  • The most interesting fact that I learned was that two-thirds of our imports from Mexico are taking place as intra-company imports. This means that these products travel across our southern border between factories owned by the same company.  These companies’ products will get hit with a tariff each time they cross the border as they go from one plant to the next.  And if Mexico retaliates with their own tariffs, many of these companies may not survive.

I am not a big fan of tariffs.  In a global economy, it is an outdated negotiating tactic that produces an adversarial trade relationship where nobody wins.  Also, using tariffs to stop illegal border crossings just won’t work.  We definitely need a more secure southern border but tariffs are not going to solve that problem.

 

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Monthly Update – June 2019

June
Stocks finally pumped the brakes in May after racking up positive returns for the last four months. The catalyst was more tariffs and, unfortunately, there are more to come. Just this week, Trump added tariffs to imports from Mexico, starting June 10th, to try and force our southern neighbor to halt people from flowing through their country into the U.S. illegally.
The S&P 500 lost over 6% in May but still remains up about 10% for the year. The economy is still in good shape but these trade wars are taking a serious toll on it. Companies that import products and materials to the U.S. pay the tariffs and they have to either eat the costs or pass them on to us, the consumers.
The good news is that we can use monetary policy to combat our own fiscal policy. The Fed can lower interest rates to help spur the economy again. Hopefully, we can just negotiate some trade deals that benefit all parties and be done with the tariffs. That would be the best for the stock and bond markets.

Bonds returned to their march higher in May after their April pause. The only exceptions were high yield bonds. The price gains can be attributed to the continued slide in interest rates due to concerns that the economy is slowing.
The interest rate drop is being amplified by the tariffs/trade wars. It is really causing a lot of uncertainty with regards to what the next steps the fed will take. Uncertainty is never a good thing for any markets. We’re also experiencing a yield curve inversion. This means that bonds with shorter maturity dates are yielding more than bonds that have longer maturity dates. For instance, a US government bond that matures in 1 month is paying 2.37% while the 10 year is paying 2.20%. That’s not normal. It means investors are willing to lend their money for longer periods of time and get paid less to do it. That’s bad but not as bad as buying bonds from Germany, Japan, or France, where you pay them to lend them your money!

Interest rates are still heading lower, now that sentiment has shifted from the Fed keeping rates the same to them cutting rates in the near future.
On the savings side, rates have increased a bit in May but only short term rates like savings accounts and money markets. Longer term rates like CDs pretty much stayed flat.
Currently, the average savings account is paying 1.34%, up slightly from 1.25%.
The 1 year CD interest rate is now averaging 2.66% and the 5 year CD rate is at 2.61%.
Mortgage rates continue to decline, with the 30 year barely holding on to the 4% level. Currently, the 30 year rate is at 4.01%, down from 4.04% last month and down for the fifth month in a row. Not a bad time to look at refinancing if you have a current loan over 5.5%.
Oil prices fell off a cliff in the last week of the month, dropping over 12%. Again, the root cause is the tariffs/trade wars affecting commerce and subsequently, the manufacturing and transportation of goods. A barrel of US oil now costs about $55, down from over $63 a month ago.
Although the falling oil prices reflect bad things happening in the economy, it does benefit the public and the companies that use a lot of fuel that aren’t affected too much by tariffs, such as commercial airlines.

Nationally, gasoline prices are heading back down, in concert with oil prices. Prices at the pump are averaging about $2.83 per gallon, 6 cents lower than a month ago. Mississippi has the cheapest fuel, at $2.42. FYI, a year ago, we were paying $2.96.
Check out the prices at the pump in your area: Gas Buddy.

Outlook
Events on the horizon that could move the markets in the near term:

• Federal Reserve: Due to the trade wars, the economy will continue to be hindered. This may push the Fed to reconsider their current stance on interest rates and begin lowering rates. Theoretically, this should push more money into stocks and high yielding bonds. However, it could be interpreted that the Fed is concerned about the economy’s strength and might cause investors to sell stocks and head for safety.
• Trade Wars: A deal with China is possible at the G20 Summit in Japan at the end of June but it’s a crap shoot at this point. No deal could be the catalyst for another down leg in the markets. Eventually, a deal will get done but the uncertainty of the timeline is what is hurting stocks. In any case, Trump won’t let the trade war go too long because that will hamper his reelection efforts.
• Tariffs: Trump is doubling down with more tariffs. These, coupled with the retaliatory tariffs from China and Europe, are only hurting the global economy. Countries that import our goods, particularly from our farmers, are lining up trade agreements with other countries to supply them. That means our farmers are going to lose that market share and may not get it back. For the most part, this has already happened with soybeans. We’ve already given two bailouts to farmers totaling almost $30 billion. These payments will have to continue as our farmers lose more market share. Stop the madness and get someone in there that can negotiate a deal that will be a win-win instead of a lose-lose.

Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com

It’s A Good Time To Sift Through The Value Bin

value bin

When stock markets drop like they have over the past month, almost everything goes down, even if they are great companies that are doing well.  It is sometimes referred to as “throwing the baby out with the bath water”.  The over selling is usually caused by investors that don’t have a plan, so they would rather sell everything and ask questions later.  This happens periodically, most recently at the end of last year, 2018.  Market reactions like these end up creating opportunities for patient investors looking for a bargain.

So, if you have been waiting for a chance to invest in some great companies but were hesitant because prices were too high, now might be a good time to check them out again.  These situations are ideal for investors planning to hold on to their investments for three years or more.  That amount of time allows you to weather the inevitable short-term market dips like the one we are in right now.

Most importantly, make sure that you do your homework.  It does take some time and research, but if it were easy, we’d have a whole lot more Warren Buffets running around.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Using Options To Protect Your Portfolio

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Stock options have a tough time trying to convince investors that they can be used to lower your portfolio risk.  They are typically categorized as a high risk investment.  But this is not always the case.  The following talks about one way that we can use stock options to mitigate losses if stock prices fall.  It is a strategy known as covered call writing and can help protect your portfolio while also generating some income. Here you go:

Writing covered calls is the strategy of writing (selling) call option contracts while at the same time owning an equivalent number of shares of the underlying stock. It is probably the most basic and most widely used option strategy by individual investors. Here’s how it works:

The option buyer pays you, the covered call writer, a premium for the right, not the obligation, to buy your shares or exercise the option on or before the expiration date, which is usually the third Friday of the month that the option expires.

When you think about it, covered call investing isn’t much different than simply buying and selling stocks, which most people are already doing and are already familiar with. The difference is when you write covered calls on stock that you already own, you agree to sell your stock at a certain agreed upon price known as the strike price. The covered call that you sell generates income for you via an option premium that you pocket immediately (actually, it is deposited into your brokerage account the following day). This ability to generate income, over and above any dividends paid out by the stock that you own, is the key and the strength of covered call investing.

Now let’s look at a scenario where a covered call would be considered:

You just bought 500 shares of XYZ stock at $10 in May for a total investment of $5,000. You consider it a long term holding (hold for at least five years) but you do not expect the stock to significantly increase in value over the next two years. You can generate income from this stock by selling 5 XYZ call options with a strike price of $15 that expire in June. If the price of the option is $1.00 per contract, then the premium that you would receive is calculated as follows:

5 contracts x 100 shares per contract x $1.00 per contract = $500

As long as the XYZ stock price does not go above the $15 strike price before expiration date in June, you will keep the stock and pocket the $500 premium. This equates to a 10% return (120% annualized) on your original investment of $5,000. Additionally, you can now write another 5 covered calls on the same XYZ stock.

However, if the stock price rises above the $15 strike price at anytime before the expiration date in June, the call options can be assigned and you will have to sell your 500 shares of XYZ stock at $15 per share. This time, your profit would be calculated as follows:

$500 premium + $2,500 ($5 gain per share x 500 shares) = $3,000.

This equates to a 60% return on your original investment of $5,000. Now, you can take that $8,000 to buy XYZ stock again and write some more covered calls.

Here are the characteristics of the covered call strategy. Knowing these will help you make the best decisions on implementing your covered call program.

Best Time to Use

Though the covered call can be utilized in any market condition, it is best employed when you meet the following criteria:

  • Bullish on the underlying stock.
  • Feel that its price will not fluctuate substantially over the lifetime of the call contract.
  • Desire to generate additional income (over dividends) from shares of the underlying stock.
  • Want to provide a limited amount of protection against a decline in the underlying stock price.

Advantages

  • Generates income because you keep the premium received from writing the call regardless of what happens to the underlying stock.
  • Offers some protection from a decline in price of the underlying stock.
  • Lowers the overall risk of your portfolio.

Disadvantages

  • Places a ceiling on any additional gains in the underlying stock price.
  • Downside protection is limited (but still less risky than owning the stock without any covered calls).

 

This strategy doesn’t fully protect your stock investments if prices fall but it lessens the blow by providing income.  Option strategies can be very confusing, especially if you are not using them every day, so if you have any questions, please feel free to contact me.


Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com

Who Actually Pays The Tariffs

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I just wanted to put out there what tariffs are and who really pays them since they are hitting the news stream big time today.

Tariffs are a form of tax placed on specific imported goods by the receiving country.  They are usually implemented by a country to collect revenue and also to make their domestic products more price competitive.  Tariffs are a way for a country to level the playing field for their companies but also are a big part of a country’s strategy practicing protectionist economics.

Unfortunately, tariffs are not the best idea when drawing up trade agreements.  It puts countries in an adversarial relationship instead of one that is mutually beneficial.  Hence, the big standoff in our trade negotiations with China, Europe, Canada, etc.

That’s my take on tariffs.  So, who actually foots the bill?  It’s definitely not the country that is exporting the tariffed goods.  It’s the companies that import the tariffed goods.  For example, a company that imports steel to use in their manufacturing plant has to pay a steel tariff.  That company has many options to manage the increased costs of their product:

  • It can eat the tariff costs and live with a smaller profit.
  • Ask the supplier for a discount to offset the tariffs.
  • Reduce their costs in other areas to make up for the increased costs due to the tariffs.
  • Pass the tariff costs on to their customers by raising prices.

I’m sure most companies that import use a combination of all of the above.  But, it seems like most companies are definitely passing the increased costs onto the consumer.

Tariffs, in my opinion, are an antiquated and hostile strategy to use when negotiating trade deals in a global economy.  They almost always force a binary outcome (only 1 can win) and end up hurting the consumers the worst.

Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com

Monthly Update – May 2019

month-of-may-flowers

Stocks showed no signs of letting up as they reached record highs by the end of April, making it 4 positive months in a row for the S&P 500.  The index finished up about 3.5% for the month. Obviously, this has been a great start to the year, with the S&P 500 up an amazing 17.5% already for 2019.  Even more surprising, stocks are making these all-time highs despite some pretty strong headwinds, like tariffs and trade wars.

Unfortunately, stocks don’t go straight up forever.  The major market indexes already have returns in the first 4 months of 2019 that would be great for an entire year.  So, I would not be surprised if stocks took a breather in the near future. Take a look at the Outlook section below to see what events are on the horizon that could cause this change.

Bonds had a pretty quiet April compared to the huge price rises that they had in March.  Still, prices rose again, albeit slightly. The only exceptions were long-term government bonds, which saw their prices dip a little bit as their yields rose.  This comes on the heels of more economic data showing that inflation and wage growth are tame, suggesting little reason for the Federal Reserve to raise rates.

In this environment, it is still a good idea to own individual bonds or better yet, bond ETFs, that mature in 1 or 2 years and to hold them to maturity.  That way, you don’t have to worry as much about big price fluctuations while you own the bonds.

Interest rates seem to have bottomed out in April after a pretty steep drop since September of 2018.  With the Fed on hold for raising rates and little inflation in sight, they could meander down here for awhile.

On the savings side, rates have stayed flat after dropping in March.  This is reflected in the rates for savings accounts, money markets, and CDs.

Currently, the average savings account is paying 1.25%, up slightly from the previous month.

The 1 year CD interest rate is now averaging 2.67% and the 5 year CD rate is at 2.84%, both down slightly from where they ended in March.

Mortgage rates continue to decline, with the 30 year barely holding on to the 4% level.  Currently, the 30 year rate is at 4.04%, down from 4.08% last month and down for the fourth month in a row.  Not a bad time to look at refinancing if you have a current loan over 5.5%.

Oil prices have been on a staircase-type move upward this whole year so far.  A barrel of US oil now costs over $63, up about 5% from a month ago.

The White House is starting to enforce sanctions in the Persian Gulf, particularly on Iran.  Even though we are producing a ton of our own oil, these bottlenecks on foreign oil production are causing prices to rise pretty steadily.  OPEC could easily make up for the shortfall in production, but they don’t mind seeing higher prices, especially as we move into the summer driving season.

Nationally, gasoline prices are moving up with the steady rise in oil prices.  Prices at the pump are averaging about $2.89 per gallon, 20 cents higher than a month ago.  I was paying under $2 per gallon at Costco just 2 months ago! Alabama has the cheapest fuel, at $2.51.  FYI, a year ago, we were paying $2.81.

Check out the prices at the pump in your area: Gas Buddy.

Outlook

Events on the horizon that could move the markets in the near term:

  • Federal Reserve: With regards to interest rates, it looks like they are going to sit tight for the rest of the year.  This is a positive for markets because there is much less guessing as to what they are going to do next.
  • Trump-related Investigations: Taking this one off the board.  I can’t see anything coming out of these before the 2020 election that would impact investments or the economy significantly.
  • Trade Wars: I thought we could get a boost for the markets with a deal with China but little progress was made in April.  Any deal that gets done will be one less thing for the markets to worry about so it should be a positive catalyst.
  • Tariffs: These continue to hurt our farmers and manufacturers the most.  It seems like the effect of the tariffs have been factored into stock prices already.  So, any resolutions will definitely provide a boost but if they continue for much longer, earnings reports will reflect the damage and could drive stock prices lower for these companies.

Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com