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Kudlow Is Trump's One-Man Plunge-Protection Committee

Kudlow Is Trump's One-Man Plunge-Protection Committee
Kudlow & Co., LLC

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Monday, 09 April 2018 09:35 AM Current | Bio | Archive

Trade I: Kudlow Agonistes. The stock market continues to be buffeted by mounting trade tensions between the US and China.

Let’s review a few of last week’s key developments:

(1) Tuesday, April 3. On Tuesday, the USTR announced approximately $50 billion in proposed tariffs on imports from China as an initial means to obtain the elimination of policies and practices identified in the USTR’s investigation of China’s unfair trade activity. The DJIA actually rose 1.6%, after falling 1.9% the previous day (Fig. 1). Daily swings continue to be much greater than during 2017 (Fig. 2).

(2) Wednesday, April 4. Last Wednesday, stock prices were diving in the morning after China said it would impose an additional 25% tariff on about $50 billion of US imports, including soybeans, automobiles, chemicals, and aircraft. The move matched the scale of proposed US tariffs announced the previous day. The US is allowing 60 days for public feedback and hasn’t specified when the tariffs would take effect, leaving room for talks. Chinese Ambassador to the US Cui Tiankai said Wednesday his country is ready to negotiate: “Negotiations would still be our preference, but it takes two to tango.” (The Chinese written response also included this zinger: “As the Chinese saying goes, it is only polite to reciprocate.”)

Stock prices rebounded sharply before the close on Wednesday after National Economic Council Director Larry Kudlow said that there is no trade war with China. “None of the tariffs have been put in place yet, these are all proposals,” Kudlow said in an interview with Bloomberg. “We’re putting it out for comment. There [are] at least two months before any actions are taken.” Kudlow suggested there are trade negotiations underway between China and the US.

The DJIA fell more than 2.0% on Wednesday’s open. Yet it finished the day up 1.0%.

(3) Thursday, April 5. Stock prices continued to rise on Thursday, with the DJIA up 1.0%. Thursday evening, the White House released a statement upping the ante in the war of words with China: “Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers. In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under [S]ection 301 and, if so, to identify the products upon which to impose such tariffs.”

(4) Friday, April 6. Stock futures tanked before Friday’s open. China’s commerce ministry on Friday said it would fight the US at “any cost” after Trump threatened to impose tariffs on an additional $100 billion in Chinese imports. The President’s statement said he is committed to “level[ing] the playing field” after an investigation by the USTR found that certain Chinese policies have given the country an unfair advantage over the US.

I was on Bloomberg TV from 9:00-10:00 a.m. on Friday. The show was hosted by Jon Ferro, who interviewed Kudlow at 9:30 a.m. Jon repeatedly interrupted Kudlow, asking for him to confirm that China and the US are discussing trade issues. Kudlow didn’t do so convincingly. After the heated interview, I said that Kudlow seems to be the Trump administration’s “one-man plunge-protection committee.” I expressed some concern that he didn’t confirm that serious negotiations were actually taking place.

Later on Friday, Kudlow met with reporters at the White House. The Hill reported that Kudlow joked that he’s “gotta beat” former Communications Director Anthony Scaramucci’s 11-day tenure in the White House. According to Politico, when Kudlow was asked by reporters Friday when he first learned of the President’s decision to instruct his top trade official to consider the new tariffs, Kudlow took a lengthy pause before responding: “Last evening.” The White House statement announcing the move went out shortly after 6:30 p.m. EST on Thursday.

The DJIA sank 2.3% on Friday. It was down 0.3% for the week. Larry had a tough first week in his new job. Let’s hope he doesn’t get “Mooched.”

Trade II: Trump’s War Games. While Trump has been heating up trade tensions with China, he also has imposed more sanctions on Vladimir Putin’s oligarch pals. He is sending the National Guard to our border with Mexico to stop a “caravan” of woebegone desperados, women, and children from crime-infested Honduras. He is having second thoughts about withdrawing US troops from Syria. Palestinians in the Gaza Strip are picking a fight with the Israelis, presumably incited by Trump’s decision to recognize Jerusalem as Israel’s capital. Oh, and there are Stormy and Mueller lurking in Trump’s shadow (i.e., the alleged Stormy Daniels affair cover-up and Special Counsel Robert Mueller’s investigation into the Trump campaign’s Russia ties).

There’s never a dull moment at the White House. Trump certainly knows how to keep the drama going with his daily tweets. The stock market has tuned it all out, with the exception of Trump’s protectionist initiatives. Investors always must find the signal and tune out the noise.

There are two important conflicting signals right now emanating from the White House: The pro-business signal has been powered by deregulation and tax cuts. The protectionist signal raises the prospects of a trade war, which would be bad for business.

Joe and I aren’t tuning out the protectionist signal, but we are going to stick with the bullish signal for business, as most clearly measured by S&P 500 earnings. We expect it will prevail over the bearish signal, which we expect will soon turn into background noise. In other words, we don’t expect that the war of words over trade will turn into an outright trade war. It should remain a war of words until negotiations quietly resolve the issues raised by the USTR.

Strategy: Technicals & Fundamentals. Friday’s big selloff brought the S&P 500 back down to its 200-day moving average. However, Friday’s close of 2604.47 left the index slightly above its 2018 low of 2581.00 on February 8 (Fig. 3 and Fig. 4). If it closes at a new low for the year today, then Joe and I will have to conclude that the 10.2% correction since January 26 didn’t end on February 8, but remains underway. All of us also will have to worry about the potential for the correction to turn into a bear market if it continues to drop by 20% or more from its record high.

We are counting on the current earnings season, which has just started, to deliver better-than-expected Q1-2018 earnings. We’ve noted before that analysts raised their 2018 estimates significantly during the previous earnings season based on guidance provided by management. That guidance might actually have been too conservative since managements are usually advised by their lawyers not to hype up earnings expectations. Now consider the following:

(1) Expected 2018 earnings. The analysts’ consensus earnings estimate for the S&P 500 jumped $11.73 per share, or 8.0%, from $146.26 just before the passage of the Tax Cut and Jobs Act (TCJA) on December 22, 2017 to $157.99 during the week of March 30 (Fig. 5). This estimate has been flat since then. Let’s see if it gets revised still higher in coming weeks, as we expect.

(2) Blue Angels. S&P 500 forward earnings, which is the time-weighted average of the consensus estimates for 2018 and 2019, rose by $11.18 per share since TCJA passage (Fig. 6). We derive our Blue Angels by multiplying forward earnings by forward P/Es of 10.0 to 19.0 in increments of 1.0 (Fig. 7).

This analytical framework shows that the drop in the P/E during the current correction was offset by the jump in the forward earnings, bringing the S&P 500 back to where it was just before the TCJA was passed (Fig. 8).

(3) Weekly fundamentals. While stock market volatility clearly has been driven by trade war chatter, the underlying weekly fundamentals for the stock market remain very strong. Our Boom-Bust Barometer (BBB) rose to a new record high in March (Fig. 9). It is equal to the CRB raw industrials index divided by initial unemployment claims (Fig. 10). The Weekly Consumer Comfort Index (WCCI) rose to the highest reading since February 17, 2001.

Our BBB has been highly correlated with the S&P 500 since 2000 (Fig. 11). So has our Fundamental Stock Market Indicator (FSMI), which averages the BBB and the WCCI (Fig. 12).

By the way, both our FSMI and BBB are highly correlated with S&P 500 forward earnings (Fig. 13 and Fig. 14).


Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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EdwardYardeni
Kudlow seems to be the Trump administration’s “one-man plunge-protection committee.” I expressed some concern that he didn’t confirm that serious negotiations were actually taking place.
kudlow, trump, plunge, protection, committee
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2018-35-09
Monday, 09 April 2018 09:35 AM
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