Many factors took the markets lower late last week. Some in my opinion were relevant. Most were not.
Here is my litmus test: What Does This [news] Mean for a Factory Worker in Ohio? Think about it. Whether it is industrial production; average hours worked or other factors that impact a middle-class factory worker; those are issues that we should be worried about when it comes to the economy and the markets. I don’t care what any news means to a private equity investor in San Jose or special interest groups. If it impacts the factory worker in Ohio, my antennae go up.
Of course, I use Ohio as a proxy, but it could just as easily be Minnesota, Arizona, Nevada, South Carolina, Texas or New England.
Why is that? The factory worker in Ohio is representative of the working middle class. People who work with their hands and make or fix products which are economically necessary. People who buy pickup trucks and treat them with tender loving care. Not people who lease a new Land Rover every three years.
Uber is not an economic necessity. Automobile parts are.
Semiconductor chip production is important. Believe it or not, semiconductors are produced in and exported from the USA in abundance. They are to technology what corn is to agriculture.
Let’s also not ignore the American farmer. Which is why the USMCA is so important.
So last Thursday, October 18, the markets, which were rebounding nice and slow from the correction which bottomed on October 11; got hit with two news items; both of which in my opinion were not market relevant. Still, because of the 24/7 news cycle and power of the press, these matters were magnified into significant market events.
First was that United States Secretary of the Treasury, Steven Mnuchin, announced that he would not attend the Future Investment Summit in Saudi Arabia. This meeting was dubbed the “Davos in the Desert.” Please understand that the Davos (Switzerland) Economic Forum is a boondoggle for economists, business leaders and government economic ministers; i.e. elitists. Factory workers from Ohio, are not invited. I doubt they could find or care to find Davos on a map. The new summit in Saudi Arabia was going to be much the same – another elitist boondoggle.
Don’t mistake those two boondoggles with the Allen & Company Sun Valley Conference where deal-makers come to and have historically made deals. You want to be a fly on a golf cart there.
So why did Mnuchin pull out? The stated reason was because of the death of Jamal Khashoggi. Khashoggi was a Saudi citizen who died (or most likely was murdered) in a Saudi Embassy in Istanbul Turkey.
Why should this not come as a surprise? After all Saudi Arabia is one of the world’s largest sponsors of global terrorism. It’s a society managed by a close-knit few members of a royal family. Just a year ago several Saudi princes and ministers were arrested and confined to a luxury hotel on charges of “corruption.”
The circumstances of his Khashoggi’s death are unknown and likely suspicious. Certainly, according to reports, it was barbaric. Yet, we need to ask: How does this impact our factory worker in Ohio? It does not. Also, why should the US Government care? This was an act, however brutal, which was internal to a sovereign nation. If anything, the United Nations, should have gotten involved. That being a do-nothing anti-Semitic organization, did nothing.
Do you think that China or Russia or Congo or Sudan or [ fill in the blank nation ] does not commit similar atrocities? Don’t be naïve, those nations and many others do. However, as Khashoggi was a writer for the Washington Post, apparently, this has now become a material international event. Daniel Pearl’s beheading did not cause such a furor; though it should have. I can go on, but you get the point.
Now, if the US Government decides to penalize the Saudis, such a penalty could impact arms sales to that nation. However, let’s be honest. Whatever arms sales are lost now will just be deferred to the future. Do we really want to chase the Saudis to Russia or China for arms purchases? Buy Boeing (BA) if any arms sale “penalty” is imposed.
Expect more political outrage and pontification; but in the fullness of time, nothing will come of the Khashoggi event, that will impact our factory worker in Ohio.
Furthermore, Saudi sovereign wealth funds are heavy investors in US technology and private equity funds. Will that capital investment be curtailed as a penalty? Do you seriously think that California Senators Feinstein and Harris or the fifty-three Californian members of Congress will turn their back on Silicon Valley? Doubtful. I can’t say the same thing for factory workers in Ohio.
As an aside, despite all the Saudi brouhaha, crude oil prices declined again last week and are now about 10% below its recent multi-year peak.
The second bit of news, last Thursday, was rumors that the European Union would reject Italy’s draft budget. Also, not relevant to our foremen or women in Ohio. How many times do we have to take hits to the market for another PIG (Portugal, Italy Greece) problem? This is the same old game of duck-duck-goose in Europe that will resolve itself.
What did occur that is relevant to our factory workers in Ohio was the stealth $2 billion debt offering last Thursday (same day as discussed above) by Uber. Also, Netflix announced yesterday an intention of bringing its own $2 billion debt offering to market. This helps and hurts those factory workers. Having more fixed rate debt (at higher yields) will be good for their pension plans, in the long run. In the short run, perhaps some of the fixed income and stock market weakness was just an excuse by pension managers to raise cash for these debt issues. The Uber deal was well received. I expect the NFLX deal to be gobbled up as well.
A strong credit market is good for the stock market. If you don’t believe that then repeat it ten times over as a necessary mantra.
Here is what really matters – earnings. This week and next are the biggest period for third quarter earnings. Many diverse and economically relevant companies will report results such as McDonalds (MCD), Boeing (BA), Microsoft (MSFT) and Intel (INTC). The market has corrected, and its psyche is damaged. However, there is no reason to expect that we are headed into a recession or that the market is headed into a bear market.
Plus remember that a strong credit market is good for the stock market. Also, please don’t forget those factory workers in Ohio.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BA, MCD, MSFT & NFLX although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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