Taking Stock

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By Tony Crowell
By Tony Crowell
Trade Wars or Word Wars?

Wall Street is behaving like California motorists treating freeway on-ramps that employ traffic light controls as paved starting blocks. Red lights signal braking and green lights trigger competitive accelerating. For months, investors labeled halting market moves as “risk-on” and buying sprees as “risk-off.” This shifted this year to treating interest rate forecasts as signals and then shifted last week to “tariffs-on” or “tariffs-off.”

A tariff is essentially a tax added to the cost of imported goods. Economists are in rare agreement in opposing them as discouraging free trade, whose benefits include increasing the variety and decreasing the costs of imported goods while aiding domestic industries in selling their goods abroad. Politicians propose tariffs as protection rackets for domestic industries or for alleged defenses for national security. They are sometimes used as retaliation techniques.

After the onset of the Depression in 1929, the Smoot-Hawley Tariff Act raised tariffs on tens of thousands of products crippling world trade in five years to 66% of its 1929 levels. Although this misbegotten law was not passed until 1930, it had cleared the House in May of 1929 and stock traders saw the market collapse coming. The President’s seemingly impulsive announcement of steep U.S. tariffs on steel and aluminum rattled stock markets across the world. There are continuing flashing red lights as U.S. trade partners have already promised retaliation if tariffs go into effect while Mr. Trump said, “Trade wars are good.”

There is little good in almost all wars, even though they might appear to be rewarding when started. An early casualty was Gary Cohn, who resigned as the top White House economic adviser after attempting to block these tariff proposals. Mr. Cohn was diagnosed at a young age with dyslexia and I have long admired his hard work despite this disorder to become President of Goldman Sachs. I hope he may return to public life.

Global stock markets sold off on the news that Mr. Trump was imposing tariffs on steel and aluminum imports. Traders took this as a buying opportunity in biotech, software, computer networking and the semiconductor sectors. This is logical as these advanced sectors are relatively insulated from the impact of tariffs on base commodities. One commentator estimated that Apple’s costs on aluminum Macs or stainless steel rims for iPhones might be as much as $50 million. The company’s annual income exceeds $80 billion and a bump of this size would hardly be noticeable.

These sectors are the same ones that I have been urging readers to emphasize. This is the age of technology and traditional industries must either adapt or go the way of hand industries before the Industrial Revolution eliminated them with the factory system. Advanced medical, technology and financial sectors are capable of profit margins easily able to absorb tariff costs.

Among our tech stocks, Lam Research (LRCX-$212) is an increasing standout. Like longtime recommendation Applied Materials (AMAT-$59), it produces equipment for semiconductor makers and fabrication of integrated circuits worldwide. These companies trade at quite reasonable valuations, based on historic ups and downs in this industry. These cyclical variations have abated, making Lam undervalued at 16 times trailing earnings. On estimated fiscal year earnings of $16.66, its forward multiple is only 12.6 times.

In an effort to expand investor interest in its stock, it announced on March 6 a program of increased capital returns to its investors. Lam increased its quarterly dividend by 120% to $1.10 a share with a bias toward further dividend increases together with a $2 billion share repurchase authorization.

When the market hit bottom in March 2009, the five largest companies in the S&P were Exxon, Proctor & Gamble, Johnson & Johnson, AT&T and Chevron. Now, it’s Apple, Microsoft, Alphabet, Amazon and Facebook. The economy is changing. Jobs are plentiful and wages seem to be finally picking up. Corporate earnings are strong and tax cuts should provide additional stimuli. Tariffs may put the brakes on some industries but those oriented to the future still have green lights.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

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