U.S.-China Tariffs Won’t Destroy This Bull Market
In today’s Market Talk, Amber Lancaster, Ian Dyer and I discuss:
- Why the fearmongers are wrong about the U.S.-China tariffs’ effects on the market — you don’t need to panic.
- What we learned from Uber’s initial public offering.
- Why the future of media is in mobile and virtual-reality gaming.
May 13, 2019
Amber Lancaster: Welcome to this week’s Market Talk. I’m Amber Lancaster, joined by Paul Mampilly and Ian Dyer. Each week we look forward to sharing our viewpoints with you, our readers, and giving insight into what’s on our radar.
Today’s outlook is for the week of May 13, 2019. I’ll begin by sharing with you what I’m watching and then we’ll hear from Ian and Paul. But, before we get started, don’t forget to subscribe to this channel — the Paul Mampilly YouTube channel — so you’ll never miss our weekly market updates. As investors, we’d love to know your thoughts and questions on the topics we’ll cover today. Be sure to comment below so we can follow up with you.
Today I’ll cover three major topics. The first will be my take on the recent ongoing U.S. tariff discussions, the upcoming U.S. economic releases for the week and the earnings front in general. The second will be my story of the week. The third will be the latest performance numbers on the Disruptification Index.
As the U.S.-China trade discussion continue I thought it would be helpful to show how the 10% tariffs on imports enacted back in 2018 affected the U.S. consumer. Bloomberg created this telling chart that demonstrates how U.S. households were “well insulated from the 2018 tariffs”. In all, the 2018 tariffs were deliberately targeted at Chinese supplies, versus the U.S. consumer.
This chart ultimately depicts the impact of this initial round of tariffs on the U.S. consumer. As you can see by the black line, the core consumer price index stayed in a tight range ending 2018 at 2.1%. This was in line with the range reading since 2012. Overall, consumer sentiment inflation expectations looking forward five to 10 years, as seen in the green line, remained flat at 2.5%.
The effect of the new round of import tariffs on China imposed on Friday remains to be seen. As well as China’s reciprocal tariffs on U.S. imports. It’s important to note, the negotiators have given themselves wiggle room for a few weeks. The reason why? These U.S.-imposed tariffs on Chinese goods that went into effect on Friday would affect container ships leaving Chinese ports on or after midnight this past Friday.
These ships carrying tons of goods that were currently in transit before that time will not be taxed at the new 25% rate. It takes container ships up to three weeks to make the overseas journey. It’s possible a deal could be struck during this transit time.
Looking forward to this week’s economic releases, it will be another fairly light week with most of the econ releases taking place starting Wednesday. Here are the most significant releases for us to keep our eye on. As you can see in the graphic, on Wednesday retail sales advanced month-over-month for April will post at 8:30 a.m. Empire manufacturing for May will post at 8:30 a.m. and industrial production month-over-month for April will post at 9:15 a.m.
On Thursday, we’ll see April’s housing start numbers at 8:30 a.m. On Friday, the May preliminary release for the University of Michigan Sentiment and the April release for the Leading Index will both be released at 10 a.m.
As I mentioned last week, earnings season is winding down. Check out this list of some of the top U.S. securities reporting earnings this week per Bloomberg. There will be a total of just 21 releases. These companies include Cisco Systems, Walmart and Deere and Company.
Now my story of the week focuses on a new entrepreneurial undertaking being proposed by Amazon. Amazon is now encouraging its current employees to quit their jobs and start delivering packages. You may recall in recent weeks that Amazon announced they are moving to a one-day shipping for their Prime members.
This is a massive undertaking that will have implications across the retail sector. To meet this challenge, Amazon announced today that if one of their employees quits their current job Amazon will pay them $10,000 in startup costs. With the deal, the company will also pay three months’ worth of salaries. This offer if available to full-time and part-time Amazon employees as well as warehouse workers.
As you can see in this graphic, Amazon projects these new entrepreneurs to earn potential annual revenue from $1 million to $4.5 million with a potential annual profit of $75,000 to $300,000. The fundamentals for this program began a year ago. There have been success stories. The AP is reporting the pilot program that was opened to the general public has already produced 200 Amazon delivery businesses.
One business startup founded in Atlanta just eight months ago already has 120 employees and 50 vans delivering to up to 200 locations per day. In all, Amazon’s big picture goal is delivering more of their products without depending on outside carriers like UPS or the post office. If you have an entrepreneurial spirit, this may be a startup idea for you.
Lastly, turning to our Disruptification Index, this chart shows it continues to outperform major indices year to date. As of Friday, May 10, close, the index is up 21.9% versus 11% on the Dow and 14.9% on the S&P 500.
That’s it from me. Ian, what are you watching today?
Ian Dyer: Thank you, Amber.
This week I want to talk about the macro numbers of some economic numbers that came out last week. For example, on Tuesday we saw that there was a reported 7.5 million job openings as of March. That is a huge number. It’s a record high. It’s about 2.85 million more jobs than we had before the financial crisis back when the economy was going pretty fast in 2007.
It’s significantly higher than that and within that report there was a bunch of encouraging data. For one, in the transportation and warehousing industry there were 87,000 more job openings in March. For construction there was 73,000 more job openings and real estate had 57,000 more job openings.
These are industries where you want to see that job growth. These are the industries that drive the economy. You have things like construction and real estate that are huge parts of the economy. Instead of shrinking, you see growth in both hiring and job openings. This is some really encouraging data for job openings.
Then the jobless claims number was 228,000, which was a little higher than what we’ve been seeing recently. Although, it’s still the lowest we’ve seen snice 1974. That’s a 45-year low in terms of jobless claims. Now, compared to 2007, there are two million more job openings than unemployed people. In 2007, there were 2.5 million more unemployed people than job openings.
Even though a lot of people are comparing right now to 2007, it’s a lot different. It’s a lot more encouraging to see that many job openings compared to a smaller number of unemployed people. That’s exactly where we want to be. Month after month it continues to get better.
We believe there is no recession on the horizon. You can’t measure that yet because we are seeing continuing improvements in all sorts of economic data, especially the job market which is a fundamental part of the economy. Without that impact in the job market, you can’t really have a recession. That’s what I have for economic data.
I also want to talk a little but about gaming in terms of disruption. The overall media sector on a global scale is being disrupted by gaming. Last year, gaming became the number one form of media in the world, passing TV for the first time ever. In 2018, there was about $116 billion generated in the global gaming industry.
It grew about 10.7% year over year compared to TV revenue that actually fell 8% in 2018. It’s impacted by streaming, Netflix, Amazon video, all those types of things are hurting the TV industry. In turn, we’re seeing gaming starting to thrive. By 2025, the gaming industry is expected to generate about $300 billion in sales per year.
That’s only six years and it’s expected to almost triple in that time span. This is an area that’s going to see high growth being driven by mobile gaming as well as AR and VR which are augmented and virtual reality. Usually those two are combined into one industry. When I talk about AR or VR separately, the numbers have to do with the whole industry in general.
I want to give a couple facts about mobile. Within the United States, about 164 million people play video games. More than 60% of that population plays games on their phones. They’re all part of the mobile gaming community. One of the top, most revolutionary mobile games we’ve ever seen is Pokémon Go.
Even though you haven’t heard much about it recently since it caught fire in 2016 and 2017, over the course of that game‘s lifetime it has generated about one billion downloads. Actually, it’s still generating a lot of revenue even though it’s free. Last month, Pokémon Go brought in about $65 million. So far in 2019, it’s brought in about $270 million.
Even though the game is free, users can buy all kinds of stuff within the game. That’s called “freemium” and that’s another big trend driving gaming, especially in mobile. You have a free game app and you can charge for things in the game. People pay a lot because it’s only a couple dollars at a time.
That’s something that’s really driving sales in the mobile gaming industry. We’ve seen that for Pokémon Go and things like Candy Crush that has generated about 3 billion downloads since 2013 when it came out. These are just a couple examples of how mobile gaming is starting to grow.
In terms of VR, we’re seeing huge growth in that industry as well. Especially through headset sales. The AR/VR industry generated about $12 billion last year, which is triple what it did in 2015. That is exponential growth we’re seeing in VR and AR. This year it’s supposed to grow from $12 billion to $20 billion.
It’s pretty amazing that it continues to do this. For years there was a lot of hype and a lot of expectation surrounding this industry that didn’t pan out. Now, we’re starting to see that growth materialize and these technologies are starting to be used. I wanted to give a few numbers for VR that we saw last holiday season. These blew away any record we saw before.
In the last quarter of last year, some of the big ones like PS VR, the headset you can use with a PS4 or PS3, there were 700,000 sales of that headset in that quarter alone. Then Oculus Go had 555,000 sales. Another one called HTC Vive had 130,000 sales although that one was actually the revenue leader because it’s much more expensive. People still buy it.
If you add all that up, that’s almost 1.5 million headsets sold in just one quarter. We’re really seeing this start to take off. We believe gaming is going to start to grow even more, especially with these revolutionary new industries of mobile, VR and AR.
Make sure you keep an eye out for the article I’m putting out Thursday. It’s going to go into a lot more detail into these industries. I’m going to also give an opportunity to invest in the industry as well. Make sure you keep an eye out for that.
That’s all I have for this week. Paul?
Paul Mampilly: Thanks, Ian. Nice plug for your article this week.
If you are checking on markets today you will see that there is a lot of scare in the market. I just got a text alert on my phone saying the market is down 1.7% at the open. It just made me think it was just about a week ago we were at all-time highs. It does show you how fickle the mindset of investors is.
We can go from being OK with all-time highs and then suddenly they’re all out. When you see these big drops essentially overnight, it tells you that some number of investors are clearing their stocks out of their portfolios and they’re willing to take low prices for it. The bet they are making is that these trade wars are going to be long-term events that are going to depress the values of stocks and by doing so reduce the demand of stocks.
However, remember we just had a 10-year high number for productivity which is really something that economists have been so negative about for 20, 30 maybe even 40 years. It’s a big deal, especially when we’ve got all this stuff going on with technology that we always talk about — Internet of Things, artificial intelligence, block chain, robotics.
This is a manifestation of this. We also had a GDP number of 3.2%. This happened in an environment where we already had tariffs. Lower than we have today. They were 10% and now we’re going to jump to 25%. We’ve also seen people learn to adapt to this environment where it’s harder and harder to do business with China.
Unemployment is low. There was an article in the Wall Street Journal this weekend about how small businesses are struggling to add people. It takes, in some cases, six months to be able to find anybody to fill positions. Housing, even though we haven’t touched on it, Zillow had a very good quarter.
They are the tip of the spear of the disruptification of the real estate industry. There’s something else going on there too. Housing, like many other parts of our economy, is being disrupted. It’s also transitioning to the other big megatrend theme that’s demographic. This shift of focus to the millennial generation.
It’s moving from the Boomer luxury set to the millennial starter and step up housing model. People are buying their first home or people are stepping up to their first bigger home from there.
I would tell you that all bull markets ride a wall of worry. If you think back, there were issues around the euro, U.S. debt was downgraded, there was the debt ceiling in 2010 and 2011. There has been so many things. I try to make a list and it’s impossible, no one can remember it all. Greece was a big deal for a while, Brexit — there has been thing after thing.
On a monthly basis, the United States exports about $26 billion dollars to China. Within the context of our economy, that’s still fairly small. Within the context of any single company, it can be fairly large. On the flipside, China exports about $126 billion.
It’s a lot bigger deal for them than it is for us. There’s no question it’s a negative for us on the margin. It could reduce GDP by a quarter, a half, maybe worst-case scenario it would be 1%. However, we have a lot more room to give on that front. You should also remember that in terms of the markets, the markets always anticipate. They never wait for the event.
When you see markets moving down today, they are anticipating that some amount of the worst-case scenario might happen and they priced that in. However, we can also have things like the Federal Reserve cutting rates. If they did, that would be a big boost to valuations because interest rates are the critical factor in valuing stocks.
You just always remember there is always a rolling mechanism to how people think about markets, anticipate markets and trade markets.
You know we’ve been talking a lot about IPOs on Mondays. Uber came public at $45 and it kind of fizzled. The first opening trade was at $42 and I just checked this morning and it was down another 7% or so. Amber, Ian and I have been looking at Uber. We actually liked the IPO but we anticipated what was going to happen.
We’ve been keeping track of everything going on. We worked out using five or six years’ worth of IPOs that there are some critical factors to getting an IPO right. We are going to use everything we have learned and put all this knowledge into an IPO service. My publisher and I are looking to start it somewhere in the next couple of months. Watch out for that.
I’m going to skip the popular company stuff because I know most people are probably focused on the trade wars. I wrote an article back in June 2018 focusing on companies that would be affected by the trade war. In it I named Boeing, Apple, General Motors and Walmart. Most of them have two-way exposure.
They both manufacture in China and they also are looking to get Chinese customers themselves. They have two-way exposure because they are manufacturing parts there, which now will be tariffed at an increase in price when they’re brought back into the United States. I think some people have waivers for it.
It’s never a straight calculation but the big global companies have the greatest exposure. A small company, it’s very difficult to manufacture in one or two locations in the United States let alone have a gigantic footprint of manufacturing outlets. Generally speaking, it’s going to be the global companies that benefitted from the last boom that are going to be most affected.
A large part of being focused on disruptifying companies is that they are fairly new. For the most part they actually have a lot less global exposure. I would expect our stocks to go down less. However, our stocks are volatile. Any given day that bet might be off.
You also know that I have been telling you I am optimistic on cryptos. This weekend I was blown away to see Bitcoin surge 15-20%. It went from the high $5000s and hit $7500. If you remember, I made a video calling the bottom when it was about $3800. It’s nearly doubled since then. The argument for Bitcoin comes down to this: In previous times of uncertainty, people would go to buy precious metals, but today people want Bitcoin.
That’s really clear. When you see the trading that’s going on it’s really coming globally. Financial markets are closed in the United States on the weekend so this movement is being driven by global markets, people who are buying Bitcoin from around the world. I just wanted to give you guys an update.
Some of the other cryptos I think will actually fall. This will be the beginning of the sorting out process that separates the wheat from the chaff.
That’s all I have for this week. Back to you, Amber.
Amber: Thank you, Paul. Thank you, Ian. Spot-on insights as always. Thank you to our viewers and readers for tuning in to this channel — the Paul Mampilly YouTube channel. Please be sure to subscribe to our weekly updates to stay up to date on current stocks and companies that Paul and the team are looking into by clicking the subscribe button below. Until next week, have a wonderful week. Take care.
As I’ve learned from my years of experience on Wall Street, bull markets often walk along a wall of worry.
On either side of the wall are people’s fears that a bullish market could shift at any moment due to outside factors. That type of fear is what we’re seeing today amid the U.S.-China tariff talks.
But this isn’t the first time a global event has caused the market to anticipate a big shift.
Take Brexit, for example. When Great Britain first announced its plans to separate from the European Union, the market reacted similarly to the dip we’re seeing now.
And I believe, like the aftermath of the Brexit announcement, the market will bounce back to match the current state of U.S. industry improvements.
In this week’s Market Talk, we also discuss:
- With Amazon introducing a brand-new shipping policy for Prime members, the company’s offering employees a lucrative entrepreneurial opportunity.
- After bitcoin’s stock price surged over the weekend, it’s safe to say I’m optimistic about cryptocurrency’s future.
- As of March, there are a reported 7.5 million job openings in the U.S. And with record-low unemployment rates right now, this is great news for those entering the job market.
Editor, Profits Unlimited