Bullying the Bears: China, Mexico and Forward Earnings

Mike Williams | 27th January 2017
Categories
Letter from America

For the past eight years we have essentially been made to believe that China was going to rule the world, right? 

It won't.  

The most applicable scenario to underscore that point goes back to what I learned as a kid; that the one thing the bully on the playground usually did not want you to do was challenge him.  

And if you did, you more often than not found he wilted quickly.

As one step to negotiating better position, Trump has found the right button to push to get the Chinese leaders’ attention on both trade and geopolitical issues that he wants to negotiate with them. 

In short, challenging their “One China” policy is certainly agitating them, and that will work to our advantage in the end. 

And Mexico?

Well, the Good Lord knows they took a heap of garbage during the coverage of the election.

Trump was clearly not friendly at all. 

But that is what tough negotiations require at times.  We’d better get used to it.  

Oddly enough, surprising the press again despite all of that abuse is the country’s President Enrique Peña Nieto, who said on Friday that, "He wanted to strengthen relations with Trump." 

When Trump said recently that he will begin renegotiating the North American Free Trade Agreement (NAFTA) during scheduled meetings with Peña Nieto, we should have been happy instead of worried.  

So ignore the garbage in the headlines and pray for a correction.  You may very well get few to take advantage of in the years ahead. 

Forward Earnings

Let's close out today with a few items:

  • Forward earnings rose for all three indexes last week and were at record highs for LargeCap and MidCap. The SmallCap sector remains just a tiny 0.1% below its record high three weeks ago. 
  • The yearly change in forward earnings for all three indexes has been edging higher from six-year lows in early 2016 as y/y comparisons have eased and the adjustments have been made from the energy shift.
  • Dr Ed Yardeni reminds us that, "In the latest week, LargeCap’s forward earnings improved to a 25-month high of 6.4% y/y from 5.6%, which compares to a six-year low of -1.8% in October 2015; MidCap’s dropped to 6.2% from a 23-month high of 6.3%, which compares to a six-year low of -1.3% in December 2015; and SmallCap’s improved to a 27-month high of 10.1% from 9.4%, which compares to a six-year low of 0.3% in December 2015. Growth rates now expected for 2016 and 2017: LargeCap 0.7% and 12.3%, MidCap 1.8% and 12.7%, and SmallCap 6.2% and 15.5%."

In summary?   

Things are improving.

And this does not yet even account for the massive benefits heading our way in America as taxes get reduced and regulations / costs fall away. 

Add a pinch of repatriation cash and the engine really starts running better.

Closing Thoughts

We can assume we are stepping out onto a ledge with nothing but risk ahead  

…or...

We can assume we are taking the first step into a new garden, filled with lush opportunity on a long and winding road of change ahead. 

Pause and think about demographics, not economics. 

And stay focused on the Barbell economy that’s passing the economic baton from the Baby Boomers onto the Millennials of Generation Y. 

The pace of that process is set to quicken, and demand, the likes of which we may not remember well, is heading our way in the pipeline. 

Until we see you again, may your journey be grand and your legacy significant.