Stocks to Fire From Here


The stock market could be about to come to life just in time for Christmas. Get ready to start hunting for some trades.

You know the likely reason. The G20 meeting in Buenos Aires is just gone. That has delayed the escalation of the trade war, via increased tariffs, another 90 days.

The market should like this.

And an obscure Sri Lankan delegation to the Midwest of America says Trump will not overplay his hand from here.

That’s if he wants to keep the top job.

What’s Sri Lanka got to do with any of it?

Today’s Profit Watch explains all, including the market you need to watch as a guide over the next three months…

A lot of Americans can shrug off the effects from tariffs. That’s not so for US soybean farmers.

China has hit them right in the solar plexus in response to Trump’s trade policy.

Chinese buyers have switched to beans from Brazil.

US soybean exports to China are now down 94% from last year’s harvest.

US farmers are left to stockpile their beans under tarps and hope they don’t rot before a deal is done.

That’s not a place any farmer wants to be.

Now, President Trump promised to subsidise them while he negotiates with China.

However, even so, US soybean farmers are still losing money.

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They’re further worried that the American industry’s relationship with China will be crippled for good, regardless of how things play out.

Twenty years of nurturing clients could be undone in six months.

And any farmers who hedged their production at higher prices will still be sweating.

The trade was has dragged on for longer than expected. Eventually, hedges expire. US soybean prices are now around a decade low.

All this is exacerbating a dismal period for US farmers. The net farm income figure is down 47% over the last five years.

I mentioned Sir Lanka earlier.

It turns out that US soybean farmers in Illinois are so desperate to make sales that they flew in a government delegation from Sri Lanka.

Take a look at this comparison…

China imported 32 billion metric tonnes of US soybeans last year. Sri Lanka imported about 3,000.

Point being: Trump’s actions have US farmers begging for the global scraps that are left with the Chinese market out of the equation.

This plays out in the political sphere alongside the economic one…

Trump’s self-interest will ‘trump’ everything else

The Midwest is American farming country. Trump basically carried every state here in the 2016 election. By slapping tariffs on US soybeans, China attacked his political base.

They’re hurting.

Corn and cotton prices are also well down from their highs.

Trump’s team must know this and take it into calculation.

Trump will soon be considering his next election campaign for 2020.

Tariffs hurt both his supporter base and US corporate earnings. He has every incentive to ease off.

There’s also another wildcard China can play against Trump.

Beijing spared US oil in its initial retaliatory tariff moves.

China is the world’s largest oil importer. If it shut off US energy exports, the West Texas benchmark index would likely trade at a huge discount to the global Brent price.

Such a move from China could potentially bankrupt many US energy firms and unleash carnage in the American corporate debt market. Energy firms accounted for 29% of high yield (‘junk’) bonds issued this year.

Oil at US$50 keeps US firms alive. Anything lower than US$40 and trouble starts.

China can find willing sellers in Iran and elsewhere.

It’s notable that one of the touted commitments at the G20 was for China to buy ‘very substantial’ amounts of US agricultural products, alongside energy and industrial goods.

These are the key sectors for Trump. I suggest keeping an eye on the price of soybeans over the next quarter. If we see this lift, it could mean the market pricing in a final resolution to the trade war.

However, the immediate effect of this G20 meeting sets the stage for the US stock market to rally and take up the global periphery markets like Australia.

The trade war spat between China and the US has weighed on the market all year. The markets don’t like the uncertainty something like this generates.

It’s certainly killed a lot of sentiment across the Aussie market. I’d almost use the word ‘malaise’ for most of 2018. Even good company announcements haven’t generated much excitement.

That’s not to say 2018 has been a total write-off. I’m very happy with a lot of the companies and opportunities I’ve unearthed this year.

But speculation is best in markets with lots of momentum and volume. They’ve been scarce since the major market drop in February.

However, the outlook looks much brighter from today.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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