After Liberation Day

Investing Strategies Falling Knives
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(Third times a charm - backed off posting … twice prior)

Emperor Trump has issued an edict - tariffs for all, big and small
The two day sell-off/carnage has left me numb
With all the Fear, Uncertainty, Doubt (FUD) would one even touch a US-based company or stock? Over the radio, I heard one suggestion - the good old defensive sector - utilities.

A different angle popped in my mind - beaten down foreign companies with less business in the US.

  • South Korean (actually Singapore) tech-related entity - Sea Limited (SE) would be one example.
  • MercadoLibre (MELI) would be another possibility - owned SE previously. But not MELI
  • An energy player e.g. Woodside Energy (WDS) - Yes, this one does have some US connections i.e. an LNG export facility in LA. But, WDS is trying to reduce its involvement in the project (which naturally will become more expensive with the tariff developments)
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Spotting companies that will do well when tariffs hurt competitors should be a good game.

Conagra tells us their products are domestic and not likely to be impacted by tariffs. But others say we must import the steel used for food cans. Hard to believe but could have an impact.

They also note that chicken shortages have limited their ability to supply some demand.

Imagine all that aluminum coming from Canada. They have cheap electricity. We don’t? Will Budwiser and Miller Coors be ok? Corona and Modelo products come from Mexico.

If imported alcohol gets expensive who benefits? Tequilla, Scotch, Canadian Whiskey costs will be up. Bourbon, gin, vodka, domestic wines should do well.

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I am thinking software.

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@pauleckler - Initially, I actually did think of beer/alcohol names in the same vein as utilities i.e. as a defensive play. Folks will likely still drink in bad times. I was still mainly thinking foreign, so I thought of Japanese and Indian beer producers. Yes, I guess Canada and Mexico names would be viable beer/alcohol candidates too.

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Glass is domestic. So beer in bottles will have a favorable differential vs beer in aluminum.

We discuss glass recycling on occasion. Essentially it is melted sand. Hardly worth sorting (for color) and shipping. But recyclers do collect.

They tell us not all sand qualifies as “glass sand.” Some sand is stretchier than others making it easier to make bottles.

And I don’t know details but heard recently that bottle caps are imported. A minus for glass bottles.

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Tech will be the biggest casualty in this tariff war.

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The whole economy is going to be a casualty.

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Oh Absolutely, when he posts “HANG TOUGH” I think we are going to have a bloodbath on Monday.

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I agree just trying to figure out what will start coming back first and I think it will be software because it will not have to deal with tariffs as long as it is in the United States.

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Nvidia’s biggest concern is tariffs from Taiwan and Taiwan Semiconductor has potential to manufacture in the US. And we are only talking about customers buying in the US. They have potential to set up data centers in Canada or Mexico or elsewhere to avoid the US tariff. Yes, some risk but I don’t see it as large.

We have already discussed iPhone. Impact to Apple not large.

Greatest risk is probably recession reducing income to invest in chips and software.

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Markets are still expecting the tariffs will be rolled back, and “Art of Deal” guy will strike deals favorable to US, etc. Even if he can, which is a big IF, it will take months to negotiate. You are looking at another 4 to 6 months of volatility and treacherous gyrations.

This was my theory even in mid-Feb and somehow I lost sight of it. Shame on me.

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This month during earnings and conference calls companies will tell us something of their vulnerabilities and expectations. We wait to end of quarter to see some hard numbers. Much depends on how competitors react.

Yes, we are in for months of adjustment. And then readjustment as trends develop. Not to mention readjustment of tariffs. And inventory accumulated in anticipation of tariffs.

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Don’t expect that. It is difficult to make any prediction or have a central expectation of the policy direction. Some may use this as an opportunity to reset the expectation lower, or a platform to beat the administration on the policy. But the truth is they will have very little idea of what to expect.

We are not yet internalizing it, what this administration is trying to do is, dismantling 40 years of world order build around global free trade. You have no idea what kind of shocks it will create, who will be impacted and how severely. For ex: countries export to US, and use their excess dollars to buy US debt. What happens, if they stop buying US debt?

Unlike the 1st term there are no guardrails. Looks like we need lots of damage before sane voices will find an audience.

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Companies have had time to investigate their tariff vulnerabilities, consider alternatives and probably have spreadsheets where the can plug in tariff numbers and get immediate impact on expected earnings. They probably also have pricing plans in place.

All this gets factored into earnings expectations next quarter and next year.

They can only guess how customers and competitors will react. That is the unknown. Or future adjustments to tariffs.

Some companies will share some of this. Some will admit the uncertainty.

Investors will be listening for clues.

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It is not that simple. Do you understand what 54% tariff on China means? Global supply chain is not something you can move overnight. For ex: India exports about $40 to $60B worth of auto components like fasteners. These are razor thin margin products, the manufacturer has no ability to absorb any price hike, either you completely pass it on, or just stop exporting to US and focus on the rest of the world.

So you cannot assume, ok auto parts retailers are going to benefit, and used car companies are going to benefit, because we don’t know what are the 2nd and 3rd derivative impacts on these players.

The global supply chain is build on Just-in-time supply. We say what COVID did to the supply chain and the inflation. We are looking at 5%, 6% long-term rates. I am sure that is not what administration is expecting, but we may get it. That is one scenario…

You cannot dismantle a system that is build and refined over 40 years and expect everything will be fine…

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Do you think that the rest of the world can consume as much product as the U.S. consumer? Or are you thinking that the rest of the world has to scale back production because they can no longer afford to ship product to the U.S. consumer?

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US consumer is a big economic group. The trading partners will be willing to sacrifice some profits for access to the market, but no one is going to do business with US for loss. Those economic concessions of reduced margin is already extracted by many big retailers like Wal-Mart, Costco.

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Did you know that a lot of corporate debt comes with covenants? For example, AES—a company I recently wrote about in detail—has revenue and EBITDA covenants. They were at risk of breaching these, which could push them out of investment-grade territory. That would lead to some of their debt being repriced. While AES could manage that to some extent, a significant portion of their debt is callable, which raises the risk of bankruptcy. As a result, the company has essentially shelved its expansion plans and, importantly, decided not to retire some of its older coal plants, all in an effort to stay compliant with their revenue and debt covenants.

Many companies can’t adjust to these kinds of disruptions in just one or two quarters. That’s why uncertainty is so damaging to business—not only does it derail future plans, but when foundational assumptions from the past are no longer valid, the entire business model can suddenly become unsustainable. This, in turn, creates a cascading effect that impacts suppliers, vendors, banks, and more.

I’m not trying to sound overly pessimistic, but the reality is that many of the assumptions we used to rely on have now been thrown out the window. That brings significant risks—risks that haven’t been properly game-theorized or accounted for.

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Nope. So let’s take the case of the small parts manufacturer in India, who cannot eat the cost. Presumably fewer cars will be sold, in toto, and it’s impossible to tell which will do better and which will do worse, so the manufacturers will pause, or at least lessen their orders until things settle out.

The guy reduces production which means he lays off a couple people. He also orders fewer raw materials, so the raw materials producer produces a little less until things become clear. Lather, rinse, repeat.

As opposed to the idiotic “manufacturers have had time to investigate their tariff vulnerability” upthread, even behemoths as big as Ford and Boeing, with buildings full of accountants and MBA planners haven’t figured it out, you think the small parts guy in Boise or Vancouver has?

This is how recessions get started: everybody cuts back just a little, because: fear/uncertainty. But when everybody cuts back just a little, the fear comes true, and everybody cuts back a little more, because: more fear. Yes, rinse, repeat.

This is nothing something you cure overnight. Many companies will go under (I own shares in a private company which has loan covenants with its banks, and they are already perilously close to the edge, the result of a profligate CEO and his captive board). That’s roughly 3,000 employees who, if it goes upside down, will be looking for work at the same time as 30,000 or 300,000 others. Who will all cut back a little because they have no paycheck. Hop yourself back up a few paragraphs, and see the “lather, rinse, repeat.”

We have always come out of recessions and we will this one too, but not until terrible damage is done and that will take time to repair. This is unlike the fiasco of 2008, when there was serious rot and fraud in the banking industry which could be purged no other way; this one is entirely self induced. The US economy was doing well, inflation was down, employment was up.

The fiction of “we’re being ripped off” because of “trade deficit” is (largely) nonsense, and where it wasn’t it should have been targeted with pinpoint accuracy, not a blunderbuss approach to the entire world.

Madness.

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Whoa hang on a minute they moved it from China to Vietnam because of the last spat and now Vietnam has a 46% tariff on them. The only place the can go is the United States and garments are going to be made in the United States.