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Headlines of the Week

By Mark Bern, CFA


·        North Korea denuclearization.
·        Trade negotiations.
·        U.S. pulls out of Iran Nuclear Pact.
·        New services coming soon!
North Korea
President Trump may not get everything he would like but it appears likely that he will get more concessions from North Korean leader Kim Jong Un than any previous president has obtained.  He has created more leverage and leaned on China effectively for help.  Kim may not give up all of his nuclear ambitions but it is very likely, in my humble opinion, that he will give up testing and development of long-range missiles that could endanger the U.S.  The hope of regional U.S. allies, of course, that North Korea is willing to give its bombs as well. 
The biggest uncertainty that looms in the air presently is the apparent discord between China and the U.S. over trade.  But I believe that an agreement with North Korea will probably get done prior to any conclusions in negotiations with China.  If a trade war were to break out between the U.S. and China, both would suffer but China’s economy would suffer more.  So, it behooves this Administration to bring negotiations with North Korea to a conclusion quickly while the leverage with its benefactor remains in place.  A trade war could unravel any deals with either party.  I could be wrong, but I don’t expect that to be the end result.
Trump and the Republicans will want to get this done before the mid-term election for political reasons.  The American people will want it done for security reasons.  The President could sign the treaty without the consent of Congress, similar to how the Iran treaty was handled by President Obama.  But then the treaty could be overturned by the next Administration.  With passage through Congress it would become binding upon all future administrations.  It is a big difference. 
If the treaty goes before Congress for approval I would expect Democrats to attempt to slow the process but such a maneuver could prove damaging to their campaigns.  If they can come up with a plan to neutralize the fallout they could try to block it, but I suspect that to be too risky.  So, the more probably outcome will be stalling the vote, if possible, until after the elections.  How it all plays out will depend upon polling of voters. 
Democrats will probably demand minor changes to the agreement publicly calling them absolutely necessary, just as Republicans conceivably would if the tables were turned.  In the end, it could come down to the President signing without Congressional approval in order to garner the win going into the mid-terms.
Trade Negotiations
You already know my expectations from my previous musings, so I won’t go into great detail on everything, but it seems important to explain what is going on at this point in the process.
The President allowed temporary waivers of tariffs on steel and aluminum for Canada, Mexico, the EU (European Union) and other allied trade partners.  The important word in that last sentence is “temporary.”  If those trade partners come up with concessions that remove trade barriers against U.S. companies in time the waivers could become permanent.  But, if they do not, time is running out and the waivers will expire.  This is a negotiating tactic to level the trade playing field and reduce the one-sided concessions historically accepted by the U.S.  It may or may not work with the EU and Japan but I give it a better chance with Mexico and Canada because those countries exports to the U.S. of those commodities are significant and meaningful to their respective economies.  The states that could be hurt the most from an increase in steel and aluminum import costs (due to tariffs) are Missouri, Louisiana, Connecticut and Maryland. 
Overall steel and aluminum imports account for only about 2% of U.S. imports and idle domestic capacity could easily come back online to fill any gap were the price to be more stable (without the potential for subsidized imports) at reasonably profitable levels.  The states that could be hurt the most from an increase in steel and aluminum import costs (due to tariffs) are Missouri, Louisiana, Connecticut and Maryland.  These states imports of those two commodities range from 7.5% to 5.5% of all import costs, respectively. 
EU GDP growth slowing in 2018                      
Last year ended with stronger growth in aggregate for the EU block at 2.4% for 2017.  But the first quarter of 2018 has slowed considerably, clocking in at 1.7%.  The first quarter is often slower than the rest of the year so expect GDP growth for the EU closer to 2.0% for the full year.  That is far below the expectations for 2018 from forecasters at the beginning of the year which averaged around 2.5%. 
Such a disappointing showing is likely to encourage the ECB (European Central Bank) to continue its quantitative easing program into 2019.  That is good for global growth for as long as cheap money is still available institutions will borrow and reinvest wherever a better return can be had. 
It also means that the Euro is likely to devalue relative to the USD (U.S. dollar).  That will probably have negative consequences for many emerging market investments where much of the debt in those economies is denominated in USD.  But, because the trend is likely to be gradual the turmoil should be contained having little affect on the U.S. economy.
Iran
I suspect that the President wants Iran to denuclearize, as what we may see in North Korea.  But, in order to achieve that outcome, he had to tear up the original agreement because it only puts off the inevitable. 
The argument on the other side of the coin is that the current agreement could be extended when it was originally scheduled to end.  But now we will never know if that were possible or not.
What I hope President Trump wants to achieve is a better, more permanent agreement that will forestall a nuclear race in the Middle East.  I think that he believes that this would be the eventual outcome if nothing were done.  But that would have impossible as long as the current deal existed because Iran would have absolutely no incentive to amend the agreement. 
So, the President decided to pull out of the deal, against the advice of leaders around the globe, and attempt to create a position of strength from which to conduct future negotiations.  Iran could take a similar stance and try to advance its nuclear program.  This may turn out to be a contest of will and we can only hope that the President is right and much smarter than most of us believe.
As always, I attempt to remain neutral politically.  Is he crazy or crazy like a fox?  We shall see.
New Service from Bern Factor LLC coming soon
In a few weeks I hope to announce three model portfolios that individual will be able to invest into directly through foliofn.com.  The platform allows fractional shares and charges no transaction costs.  I am also happy to say that there will be no front or back end loads.  The only fee associated with investing in the model portfolios will be an annual management fee of 1%. 
Of the three portfolios one will be focused on growth while the other will have a dividend growth orientation.  The third model portfolio will be an index of 400 stocks representing the best company (by my assessment) from each industry.  There are 440 SIC codes (standard industrial classifications) identified.  The index will include all but the 40 industries that I determine to possess the least potential for growth in the coming year.  This model portfolio will be equally weighted and designed to provide much better diversification than any other index now available.  The components included will be adjusted and the portfolio rebalanced once each year in May.
I will manage all three portfolios with a long-term horizon and total return in mind.  But I will reconstitute each at least once per year based upon what I determine to be the best mix for the next twelve months.  More information and detail are to come as each model portfolio launches.

Respectfully and Candidly,
Mark Bern, CFA


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