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China Syndrome: Stocks Melt Down as Trade Tensions Flare

The U.S. and China engaged in a tit-for-tat exchange Friday that further inflamed fears of a trade war. The Dow Jones Industrial Average, S&P 500 and Nasdaq all plunged today, in volatile trading. The three indices posted losses for the week.

Technology stocks continued to suffer, amid the worsening Cambridge Analytica scandal. Facebook (NSDQ: FB) sharply fell again today, losing 3.34%.

After a prolonged “Trump rally” that seemed immune to bad news, we’re now in the midst of a “Trump slump.” Headline risk is proving a greater determinant than usual in the markets. U.S. and global stock markets have dipped into correction territory, as the world braces for trade war. The CBOE Volatility Index (VIX) jumped 9.38% today, its highest level since March 2.

Special Counsel Robert Mueller’s investigation into Russian election meddling, the mind-boggling rate of personnel turnover in the White House, rising interest rates, stirring inflation — all of these factors weigh on investors. But the top concern, by far, is the brewing battle between the U.S. and China over trade.

The world’s two largest economies are edging closer to a trade war. The consequences could be disastrous for corporations, national economies and investors.

For the first time since Donald Trump’s surprise victory in November 2016, the financial community is worried about the occupant in the Oval Office. At first, Wall Street welcomed his pro-business agenda and vow to cut taxes and regulations. These goals are straight from the traditional GOP playbook. But then along came tariffs. The recent wave of protectionist measures has crushed equities. The Dow today closed at its lowest level since November 2017.

Enter the dragon…

President Donald Trump on Thursday launched tariffs and penalties on up to $60 billion in Chinese goods. These measures are in addition to recently imposed tariffs on steel, aluminum, solar components, and washing machines.

The White House declared temporary exemptions from the tariffs for the European Union, Canada, Mexico, and South Korea, making it clear that the U.S. is singling out China as the target.

China struck a defiant tone on Friday. The Chinese commerce ministry asserted in a statement released today:

“China doesn’t hope to be in a trade war but is not afraid of engaging in one. China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.”

Trump’s presidential memorandum on Thursday provides for a 30-day consultation period that only starts once a list of Chinese goods is published. Will Trump follow his usual pattern of talking tough at first and then relenting? Trump has a history of either moderating or dropping his initial stands. The consultation period creates a window to address Trump’s allegations of China’s intellectual property theft and mandated technology offsets.

Trump says the planned tariffs are in response to China’s “economic aggression.” On Friday, the U.S. filed a complaint against China at the World Trade Organization (WTO) over China’s alleged theft of U.S. intellectual property.

Critics of China’s trade practices have a solid case. Evidence abounds that China purloins American technology and strong-arms U.S. companies into handing over intellectual property. But most economists insist that tariffs won’t solve the problem. The matter requires skillful negotiating by people who actually understand the intricacies of international trade.

Can a trade war be averted? To date, Washington hasn’t handed Beijing any action list to remedy the Middle Kingdom’s supposed trade abuses. The “art of the deal,” so to speak, wasn’t apparent in the U.S. Trade Representative’s statement today:

“China appears to be breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends. China also appears to be breaking WTO rules by imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology.”

China’s commerce ministry said on Friday that the country was planning measures against up to $3 billion of U.S. imports, with a list of 128 U.S. products that could be targeted.

Trump’s “America First” policy strives to get tough with China. But it begs the question: How does a nation get tough with its banker?

China is by far the biggest foreign holder of U.S. Treasury securities. The U.S. debt to China is $1.17 trillion. That’s 19% of the $6.26 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $21 trillion national debt is owned by either the American people or by the U.S. government itself. In other words, China wields enormous financial leverage over the U.S.

At a presidential campaign event Trump once said: “I beat the people from China, I win against China. You can win against China if you’re smart.” Investors increasingly have their doubts about those sentiments. Stocks are now on track for their worst month since January 2016.

Friday Market Wrap

  • DJIA: -1.77% or -424.69 points to close at 23,533.20
  • S&P 500: -2.10% or -55.43 points to close at 2,588.26
  • Nasdaq: -2.43% or -174.01 points to close at 6,992.67

Friday’s Big Gainers

  • New York & Co. (NYSE: NWY) +25.90%

Apparel chain beats on earnings.

  • At Home Group (NYSE: HOME) +19.69%

Décor retailer posts strong operating results.

  • Community Health Systems (NYSE: CYH) +4.62%

Hospital operator reports smaller-than-expected loss.

Friday’s Big Decliners

  • Glaukos (NYSE: GKOS) -13.81%

Medical device maker faces cost containment pressures.

  • Xinyuan Real Estate (NYSE: XIN) -11.00%

Analysts skittish about China-based real estate developer’s new deals.

  • Forest City Realty Trust (NYSE: FCEA) -6.39%

Real estate firm replaces several directors and calls off its sale.

Letters to the Editor

“Is there good news for my heirs in the new tax bill?” — Richard F.

The tax overhaul bill signed by President Trump in December includes major new opportunities starting in 2018 to minimize the tax cost of transferring wealth.

The new law doubles the exemption base for gift, estate and generation-skipping transfer taxes but provides that starting in 2026, the exemptions revert back to the pre-2018 levels.

The exemptions would continue to be indexed for inflation but by a different, less generous measure than applicable under existing law. For details that apply to your particular circumstances, consult your accountant.

The tax filing deadline is looming. Questions about taxes? Drop me a line: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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Stock Talk

Andy (Vegas)

Andy

I couldn’t help but feel an anti-administration bias in your article. The Mueller reference has produced nothing against Trump so far in over 14 months. The only evidence of collusion uncovered so far has been by the DNC and the Clinton campaign employing a non-registered foreign agent (Steele) who colluded directly with the Kremlin. The FBI is littered with firings due to leaks, lies, and unprofessional conduct. Even the FISA court could not escape the appearance of impropriety when messages of Strzok were revealed. Shameful.

As to rising interest rates’ contribution to the “Trump Slump”, they seem to be long overdue. Many argue that Yellen delayed taking prudent action to prop up the prior administration, leaving a bigger mess for the next.

‘The mandate of Janet Yellen in the Federal Reserve can be considered the “lost opportunity”. Yellen and the Federal Reserve delayed urgent and justified rate increases due to fear of market reaction and likely political tacticism in the face of U.S. elections.’ – Dr Daniel Lacalle, Doctor of Economics, Professor of Global Economy and Finance, as well as a manager of investment funds. Living in London, on Mar 22, 2018, http://www.dlacalle.com/en/author/daniel-lacalle/

Dr Lacalle also had the following to say about US protectionism on Mar 3, 2018

“Between 2008 and 2016, no G-20 country implemented more protectionist measures than the United States. But it was the Obama Administration, so nothing happened… The first thing we must understand is that the United States has been subsidizing and bailing out the excess capacity of other countries’ industries for years.
In 2017, China was responsible for more than half of the world’s steel production, some 800 tonnes, and has an excess capacity of more than 300 tonnes per year. In the case of aluminum, it is similar. China has increased its production from 10% in 2000 to more than 55% of the global total.”
http://www.dlacalle.com/en/tariffs-are-the-worst-way-to-combat-protectionism/

Tariffs are never good. They hurt consumers most. Some would call China’s protectionist policies outright theft as they demand disclosure of intellectual property and relinquishment of 50% of business for access to their markets. Last I checked, Trump wasn’t making that demand.

Deutsche Welle outlines some of the treatment Trump is battling with China, (http://www.dw.com/en/chinese-trade-barriers-move-into-trumps-focus/a-42968473):
——————————————————-
“This year, (China) has also adopted a series of cybersecurity regulations that requiring foreign business firms to provide sensitive intellectual property for government checks. Local regulators have been tightening rules on foreign data and cloud services, implementing new surveillance measures and increasing scrutiny of cross-border data transfers. Laws that came into effect in 2017 require firms to store data locally.

China imposes a 25 percent duty on imported vehicles, versus a 2.5 percent import tax in the United States. Carmakers can only operate in China through partnerships with local companies, which must hold at least 50 percent in the joint venture. The policy serves to gain access to foreign companies’ car-making technologies.

In 2012, the World Trade Organization (WTO) ruled China was discriminating against foreign payment card companies, and despite pledging last year to give “full and prompt market access” to international payment network operators, no US firm has yet been granted a license.

Movie producers also get only about 25 percent of box office revenues, compared to around 40 percent they received in other markets.

Since the beginning of 2017, ethanol producers from the US and Brazil are facing steep import tariffs on their products in China. Moreover, Beijing slapped hefty punitive duties on distillers grains (DDGS), a byproduct of ethanol production used as an animal feed ingredient.

China requires rail equipment suppliers to its domestic train networks to prove that at least 70 percent of their supply chain is in China.”
—————————–

Perhaps it was not your intention – or perhaps it was my own sensitivity – but the article seems to have an anti-Trump slant. The bias doesn’t seem to illuminate any particular financial advantage, so it comes off simply as mean spirited. There is no discussion of trade barriers imposed on America, so the less informed reader could come away that President Trump is simply a loose canon. Canada is protectionist of their daily industry. Mexico has 20%+ tariffs on whiskey. Japan and Europe both have higher tariffs on American motor vehicles than America places on theirs. No one’s hands are clean.

Your article ends by fearing China and ridiculing our President. China is not without its own debt problems. Anbang is China’s AIG, and it isn’t their only problem. Banning citizens from travel for up to a year due to their “social credit” surely doesn’t warrant admiration (President Xi Jinping’s plan based on principle ‘once untrustworthy, always restricted’ to come into effect on 1 May – https://goo.gl/uMwUns).

This article could have conveyed that markets will be volatile as long as public trade posturing continues. If you feel that a crash is imminent, that would be valuable insight as well. We’re all here to get finance advice not political viewpoints.

John Persinos

John Persinos

Andy: No anti-administration bias in my article was intended. I strive to strike a non-partisan stance, which is increasingly difficult in these highly partisan times. My intention in the article was to demonstrate the concerns exhibited by leaders on both sides of the aisle. Conservative Republicans who ordinarily are allies of the president have used very strong and negative language to condemn Trump’s tariffs. I did not come close to using any of this strident language.

Keep in mind, perceptions these days are colored by a person’s news source. Media have become “niche-fied” according to a person’s proclivities and demographic profile. Hence the Cambridge Analytica scandal.

People who get most of their information from conservative media such as Fox News see the world one way; people who get most of their news from the liberal New York Times see the world another way. Voters tend to live in their own echo chambers, in which the partisan data they receive buttress their preconceived biases. Some voters live in an “alternative reality” that’s divorced from the facts.

That’s why on a daily basis, I scour a very wide variety of news sources, from left to right and everything in between. I also interview sources on the telephone. I started my career as a daily newspaperman and I still rely on the quaint device of the telephone to reap information.

I distill all of this disparate data into a single, coherent narrative every day for Mind Over Markets, to provide interpretive analysis that’s as objective as possible. My ultimate goal: to help readers make smarter, more profitable investment decisions.

To distinguish from the “fake news” out there, a person must be educated and informed enough to place a news item into context. They also must possess critical thinking skills (sorely lacking in today’s society) and derive news from several sources, not just one (and certainly not just from the opinionated “hot house” of cable television).

The ephemeral and wide-open nature of social media makes it very easy to spread disinformation and propaganda. Perhaps it reflects my age, but I also make a point of regularly reading hard copy publications, such as the conservative magazine The Economist. Indeed, it’s my favorite magazine.

I was not expressing a political viewpoint in my article. That was not my intention. The vast majority of economists — and I truly mean the vast majority — think tariffs are wrong. Many have used harsher language to describe the tariffs. As I’ve often stated, my agenda is not red or blue, Republican or Democratic — it’s green, as in money, as in profits.

If you look up previous columns of mine, you will see that in the past I’ve amply highlighted China’s problems and transgressions. And I’ve also given Trump’s pro-business policy it’s due, when warranted. And yes, I’ve warned in recent weeks that the correction is probably far from over.

Thanks for your letter. I value an engaged readership and I appreciate the trouble that you took to respond to my column. You express valid and well-informed viewpoints in your letter.

To show my willingness to foster diverse viewpoints and to get a dialogue going with readers over the politically sensitive topic of trade, I will publish an excerpt of your letter in a future Mind Over Markets. Have a great day and thanks again for your readership.

John Persinos

John Persinos

Andy, a final note. The article of mine that you reference also stated this:

“Critics of China’s trade practices have a solid case. Evidence abounds that China purloins American technology and strong-arms U.S. companies into handing over intellectual property.”

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