Small Cap Stocks Will Outperform In a Trump Administration

Small cap stocks are the place to be in a Trump Administration. Trump’s economic policies will negatively impact large multinational corporations like Apple. Small cap stocks are all about domestic companies.

Small cap stocks generate most of their profits inside the US, exactly where Trump’s economic agenda is targeting.

Since Election Day, small cap stocks on the Russell 2000 Index have surged 12.3%, far better than the 3.05% gain for the large-company S&P 500 stock index, and the 3.6% gain for the Nasdaq.

A massive amount of money is moving into small caps. The Russell 2000 has closed up for 14 days straight since Trump won the election.

Stocks With Bullish Money Flow 11-22-16

Stocks with a positive divergence between the money flow and price for November 22, 2016. Tickers: TAST, HWKN, RETL, WLH.

Carrols Restaurant Group Stock Chart

Comments: Nobody knows why this stock is moving higher. Don’t like chasing stocks without a clear catalyst. Not saying one isn’t there, just not one that I’ve found. Could have big news coming.

Hawkins Inc Stock Chart

Comments: Blast off! Excellent sales growth. Have no idea why it’s moving higher as no insider buying or institutional buying has been made public yet. Could have big news coming.

Direxion Daily Retail Bull 3X ETF Stock Chart

Comments: Large increase in open interest. Hopes a robust consumer can carry the holiday season are boosted by several encouraging retail earnings releases today from BURL, CHS, DLTR, SIG, MOV.

William Lyon Homes Stock Chart

Comments: Horizontal breakout. Excellent valuation: P/E 12.3, forward P/E 8.13. The new home sales market is a top performer for 2016.

Disclosure: I do not hold any positions in any stocks mentioned.

Stocks With Bullish Money Flow 11-21-16

The stocks below have formed a bullish divergence between the Twiggs Money Flow and price on November 21, 2016.

Aceto Corp Stock Chart

Comments: Coming up to horizontal resistance (red line). Breakout of horizontal resistance will take the stock to $21.50, a quick cha-ching play.

CVR Partners Stock Chart

Comments: Broke above 50-day moving average but formed doji on 11/21/16, not a convincing break. If we have another up day, and the Twiggs Money Flow goes positive above the 0% line, $6 is next target, then $6.80. Nice to see Insider CEO and President Mark Pytosh buying on November 4, 2016, at $4.20.

iPath Bloomberg Livestock SubTR ETN Stock Chart

Comments: I don’t have a clue why cows are flying over the moon. Maybe it just got too cheap, and some are expecting food inflation down the road. I have no idea but money flow looks awesome.

ZAGG Inc Stock Chart

Comments: Up against the 200-day moving average (red line) at 7.36. If it breaks above 200-day moving average, next resistance is $8.20 area (red horizontal line). Forward P/E is 12.72. Excellent quarterly revenue growth of 86% YoY. Sales in 2015 were $269.3 million. Sales in 2016 are forecast to come in at $365.6 million, awesome!

Disclosure: I do not hold any positions in any of the stocks mentioned above.

Verizon Gets Approval For XO Communications and 5G Deployment

Verizon wants to maintain its lead on coming 5G technology by purchasing XO Communications’ fiber optic network. Fortune writes

The carrier has said it will likely go national with cable TV and Internet service offered via 5G, which can carry signals at speeds of two to five gigabits per second—20 to 50 times faster that common 4G networks.

The problem though is that Verizon will still have to build out 5G towers because 5G wireless cannot travel as far as 4G wireless. A carrier can have the fastest fiber optic network in the country, but until they build 5G towers that connect wireless customers to that fiber optic network, it’s useless for mobile smartphone users.

So why did Verizon just spend $1.8 billion of investors money on XO Communications? Verizon will use XO Communications’ nearly 26,000 miles of fiber optic cables to expand its consumer and business wired internet service offering. Verizon wants to grab market share from companies like Comcast in the home and business ISP market.

Verizon will no doubt have a significant role in the IoT industry as billions of more devices go online over the coming decade.

Verizon Stock Chart

The Twiggs Money Flow is rising nicely, but it is still below the 0 line. Nevertheless, I see the positive divergence on the money flow as a sign the bottom in Verizon stock is near. Verizon stock has sold off over the last five months giving an excellent valuation of P/E 14, and forward P/E of 12. The annual dividend yield on Verizon is a sweet 4.8%.

I see Verizon as a long-term hold on the growing IoT industry.

Disclosure: I do not hold any position in Verizon stock at the time of publishing this article.

Can I Just Say It, Autonomous Driving Is Stupid To Average Consumers

Autonomous driving is dumb. In my surveys of asking family members and friends, there’s a whole ZERO percent interest in autonomous self-driving cars.

Most Americans don’t even want a chip on a credit card let alone a car that drives itself.

Technology companies think they are smarter than consumers. Tech companies believe that once they wow us with the reality of self-driving cars, we’re all just going to go out and buy one like a bunch of sheep, sheep led to the slaughter like this guy.

Josh Brown, a Navy Seal who served on Seal Team 6 (the unit that killed Osama Bin Laden), died from autonomous driving technology.

The big news last week was that Intel announced that it would be joining the push to create fully autonomous vehicles, investing over $250 million in the next two years to facilitate this development.

Tech gone wrong is tech that develops without much concern for producing what the public wants. Reality check: the average person doesn’t care about autonomous driving and believes it’s downright dangerous.

How are autonomous cars going to respond to an ambulance racing through an intersection? What about an electrical component on a circuit board in the autonomous driving car going out? Are you going to have about 2 seconds to grab the wheel to take control before a crash occurs?

Capitalism sometimes gets out of whack where you have greedy geniuses running around trying to force the public on a ‘fantastic’ new technology. Remember the tech wearables market that was supposed to explode higher? The only thing it did was implode. Intel is laying off a major portion of its wearables group.

Technology bloggers like to write about new technologies like autonomous driving cars. Mainstream media groups like to report on autonomous driving cars because it’s something interesting that people like to read about in horror and fascination. But where the rubber meets the road is what consumers want. In all the self-driving car hype, I see little evidence that consumers are willing to spend thousands of more dollars on a self-driving car.

I see billions of dollars being spent on autonomous driving technology and I see tepid consumer interest at best. That’s a dangerous combination for investors, and I think we could see the autonomous driving car fad die out after tech companies finally realize that most of the public doesn’t trust or want self-driving cars.

Biotechnology Won Big On Election Night Here’s Why

Hillary Clinton and Democrats promised to wage war on pharmaceutical companies and do things like price controls on drugs and products of the biotechnology industry.

In California, there was a ballot measure to impose price controls on the sale of pharmaceutical drugs in the state.

Both Hillary Clinton’s probability of winning, and California’s ballot measure to impose price controls on the sale of drugs, weighed on pharmaceutical and biotechnology stocks leading up to the election.

Donald Trump did not promise a war on pharma. Trump promised increased funding for research and development and modernizing the FDA to ease the development, commercialization, and costs of bringing life-saving drugs to market.

Donald Trump won, and biotech stocks have been rallying ever since.

Democrats created shortages in the health care industry with ObamaCare, and they almost created the same shortages in pharmaceutical drugs. Let’s look at why price controls create market shortages.

Price Control

A price control (or a price ceiling) occurs when the government puts a legal limit on how high the price of a product can be. For a price control to be effective, it must be set below the natural market equilibrium.

Using a hypothetical perfectly competitive market called pharmaceutical drugs, let’s examine the microeconomics of price control.

When a price control or price ceiling is set, a shortage occurs. The red horizontal line markets the price ceiling that is set by the government.

The price control forces the price down from P to P2. At the lower price, more people can afford the drug and so the quantity of the drug demanded goes up from Q to Q2 (point A).

The suppliers of the drug (pharmaceutical company) immediately cut back on supply (point B) as they are now paid below what the equilibrium market price established. Instead, these suppliers focus on supplying most of their drugs to other consumers, perhaps in other states that pay the full market price for the drugs they make. A shortage is created by the difference in the quantities of drugs demanded, versus the quantities of drugs supplied as illustrated by the shaded area. Shortages within the pharmaceutical industry would likely result in deaths, depending on the drugs needed.

The government set a price ceiling of P2 and so quantity supplied contracted to point B. However, at that supply level, consumers would be willing to pay a price of P3. Since P3 is greater than P2, deadweight loss occurs. The deadweight loss is the elimination of trading between both suppliers and consumers.

Price controls are a bad idea. If the government sets a price ceiling, there will be a shortage.

Microeconomics of the Monopoly

Donald Trump said he would block the AT&T and Time Warner merger if he becomes president, arguing that such media combinations leave too much power concentrated among too few companies. What Trump is describing is monopolistic behavior. As Bloomberg writes

Trump also suggested he would favor a breakup of NBC and Comcast Corp., a merger completed in 2013. Such deals, he said, are “poison” to democracy and result in companies “telling the voters what to think and what to do.”

The problem of monopolies is growing beyond just the media industry.

Technology giants are continuing to gobble up the competition. As Bloomberg reports

30.3 percent of the market capitalization of the Nasdaq is now accounted for by just five companies — Apple Inc., Alphabet Inc. (Google’s parent), Microsoft Corp., Amazon.com Inc. and Facebook Inc.

Let’s examine what a monopoly is from a microeconomics perspective using a hypothetical Lemonade market.

Here’s the market for Lemonade in a perfectly competitive equilibrium at a price of Pe and the quantity of Qe. Now, because there are numerous buyers and sellers in this perfectly competitive industry, what do you suppose will happen if any one firm tries to raise its price above Pe?

In a perfectly competitive market, any Lemonade vendor that attempts to raise his price above the equilibrium established by supply and demand would see his quantity demanded quickly fall to zero. Such a vendor would rapidly lose market share as his customers would go to the cheaper priced competition.

The consumer surplus is the triangle C, and the producer surplus is the triangle E. Consumer surplus measures the difference between what consumers would have been willing to pay and what they actually pay. The producer surplus is the difference between the price at which producers would have been willing to supply a good and the price they actually receive.

Now suppose a monopolist corners the Lemonade market and raises the price to Pm. In this case, quantity falls to Qm.

Consumers have to pay more for less quantity, and the rectangle B is transferred to the monopolist. That means consumers are poorer and the monopolist is richer.

What portions of consumer and producer surplus represent the loss of allocative efficiency from monopoly pricing?

The efficiency loss on the consumer side comes from the consumption of lemonade that is forgone under monopoly pricing. The loss of efficiency on the producer’s side comes about by a reduction in output and an undersupply. The loss of consumer surplus is measured by the triangle C while the loss of producer surplus is measured by the triangle E. Together, the triangles C and E measure the loss in allocative efficiency from the monopoly pricing. The loss in allocative efficiency from the monopoly pricing is called the deadweight loss.

Monopoly

A monopoly exists when there is only one seller in the market selling a product for which there are no close substitutes.

In such a case, the monopolist is not a price taker as was our perfectly competitive Lemonade firm. Instead, it is a price maker which means that it exerts considerable control over what the market price will be. The monopolist has this power because it controls quantity supplied in the market.

The market structures of most industries in the US fall somewhere in between a monopoly and pure competition as illustrated below.

From this example, you can see why relatively free, democratic governments do not like monopolies. Monopolies not only transfer income from the many to the few, monopolies also create an efficiency loss in the process.

Through microeconomics and supply and demand graphs, we have proven that a perfectly competitive market yields the most efficient use and allocation of resources, as embodied in productive and allocative efficiency.

Trump Administration and Tariffs Versus Quotas

Protectionist policies in the form of tariffs and quotas are coming from a Trump Administration. It seems appropriate then that we examine tariffs and quotas from a macroeconomics perspective.

The two most common ways of restricting trade are with tariffs and quotas. From a political point of view and to prevent a trade war, a Trump Administration should consider the use of quotas over tariffs in some cases.

This figure illustrates the domestic market for food in Europe.

The equilibrium between supply and demand occurs at point A at a price of $8, and quantity of two hundred. Now, suppose that food is available in an unlimited amount from the rest of the world, at a price of $4 per unit and Europe doesn’t like this because it hurts their farmers.

The world supply curve is represented by the red horizontal line. In the absence of any transportation costs, the food price in Europe must be equal to the world price of $4. At the $4 price, you can see that European domestic production is measured by the line segment B, C and will be one hundred units, considerably less than before free trade.

American imports are measured by the line segment C, D and are equal to two hundred units, and revenues from the sale of these imports are equal to the shaded area C, D, E, F.

Now let’s say that European trade ministers impose a tariff of $2 per unit on food imports, where a tariff is a tax levied on imports. What happens now to domestic production and imports?

Clearly, domestic producers win because their production not only rises by fifty units, but their profits rise by the shaded area B, C, H, G.

European food consumers lose, not only because the price of food rises from $4 to $6, but also because they consume fifty fewer units of food. In fact, the total loss to consumers is measured by the area B, D, I, G.

The other big loser is the American food industry, which now exports one hundred fewer units and loses revenues equal to the shaded areas C, J, L, E and K, D, M, F.

The winner is the European governments that imposed the tariff. They collect tariff revenues, equal to the area H, I, J, K.

The Politics of Tariffs

From a political perspective, a relatively small handful of people in one domestic industry, farming, have gained a considerable profit at the expense of a much larger, but politically less powerful group, food consumers.

This protectionist tariff has also considerably harmed food producers in America, and this group is unlikely to remain silent on the tariff.

Why Quotas Trump Tariffs Politically

One likely result is that pressure will build politically in America to retaliate against European food tariffs with protectionist tariffs of its own, perhaps on European clothing imports. There is a way for Europe to avert this trade war and it’s with a quota which is an exact quantity limit on imports.

An equivalent quota, in this case, would be a one hundred unit limit on American food since that is the level of imports after the $2 per unit tariff.

Under a tariff, the shaded area H, I, K, J goes to the European governments in the form of tariff revenues. However, under a quota foreign exporters (American food producers) will be able to capture these revenues which will mostly offset their losses from selling fewer exports. The result in America will be far less political pressure from food producers for retaliatory tariffs.

Deadweight Loss

Whenever a government interferes in a free market, there is usually deadweight loss. There is deadweight loss associated with the imposition of a tariff or quota. In fact, the loss is the same regardless of whether a tariff or quota is used.

The shaded area C, H, J, represents the loss in producer surplus. In this case, too many European resources are being diverted into the inefficient production of food, at the expense of production in other sectors. At the same time the shaded area K, I, D represents the loss in consumer surplus and the loss in consumer satisfaction, from consuming fewer units of food. Together the two shaded triangles measure the total deadweight loss from tariffs or quotas.

Source: This lesson was made possible by the University of California Irvine and my favorite professor Dr. Peter Navarro, now economic advisor to the Trump Administration.

What The Trump Win Means For Multinational Corporations

I predict that a Trump win means down for the economy at first, then upward as the US consumer strengthens from domestic job growth.

The down first move in the economy will come from inefficiencies caused by forcing multinational corporations to bring domestic production facilities back to the US or face steep tariffs.

Several traders have emailed me asking what stocks are good to short or go long in a Trump Administration.

Here is how a Trump win is likely to impact industries negatively.

IoT Industry

Tesla is the big driver of autonomous vehicles. Tesla is shipping all new Model 3 cars with the hardware for full autonomy. These autonomous cars are also electric cars. Tesla’s new Model 3, after tax credits, was priced for under $30,000. The Trump Administration is likely to be unfriendly towards companies like Tesla that benefited under the Democrats crony capitalism. The Trump Administration will likely offer few proposals for combating climate change. Trump will likely not pursue “green policies,” which means the discontinuation of “green” tax credits like the kind Tesla benefits from. Without these generous tax credits, Tesla automobiles will be more expensive which will slow purchases and slow the spread of the self-driving car.

Industrial IoT trends have been towards automation and replacing human workers with machines and robots. Trump has promised to renegotiate trade deals to bring manufacturing jobs back to the US. If IoT trends are taking away US jobs, it’s a pretty good bet that a Trump administration will advocate against industrial machines and robots that replace human labor.

Payments Industry

Trump has threatened to cut off remittance send from the US to Mexico until Mexico pays for a border wall. Trump is considering forcing Mexico to pay for the wall by invoking the US Patriot Act to cut off portions of the flow of money between the US and Mexico until Mexico makes a one-time $5 billion to $10 billion payment for the wall. Mexico is the largest receive destination for US remittances, cashing an estimated $25 billion in 2015. Western Union recently doubled the size of its retail network in the country, and MoneyGram unveiled a product in partnership with Walmart to make it easier and less expensive to send money from the US to Mexico. Cutting off the flow of money from the US to Mexico, even temporarily, would negatively impact Western Union and MoneyGram.

A Trump Administration will focus on bringing manufacturing back to America, specifically targeting firms like Ford and Apple to build products in the US rather than in Mexico or China. To implement a plan of bringing manufacturing back to the US, a Trump Administration will need to use tariffs and issue tougher manufacturing restrictions. This will likely cause a major decrease in international business spending as more businesses are either unable to make transactions due to restrictions or unwilling to pay the extra fees.

Technology Industry

Net neutrality is the concept that all data transmitted over the internet should be treated equally. Trump has not released official statements about the topic of net neutrality, but he has expressed distaste for President Obama’s approach. A Trump Administration could push to change the FCC’s net neutrality rules which would result in different price points for various data types and enable service providers to throttle data delivery.

In a Trump Administration, technology companies will likely be forced to change encryption policies to provide backdoor access to the US government. Trump supported the court order calling for Apple to facilitate access to an encrypted iPhone used by the San Bernardino shooter and asked consumers to boycott the company until it complied. Civil liberties groups are likely to take the Trump Administration to court. Requiring companies to provide backdoor access to the US government would violate consumers’ trust and likely lead to a decline in users of these companies’ products at first. Over time, though, consumers will likely not care.

Policy changes by a Trump Administration would harm tech companies that manufacture overseas, like IBM and Apple. Apple’s iPhone is likely going to become much more expensive for US consumers.

Apple and Google make more of their revenues overseas than within the US. Higher tariffs and protectionist policies could make it more expensive for tech companies to move and sell their products around the world. The broader use of trade tariffs would likely spur more countries to invest in domestic technology sectors within their own countries and to reduce their reliance on US technology providers, which would further hurt US tech multinational corporations.

Large mergers between service providers and digital content companies could face greater scrutiny. Trump said that the $85 billion AT&T and Time Warner merger would not be approved by a Trump administration because “it’s too much concentration of power in the hands of too few.” A Trump Administration could lead to a decrease in M&A activity.

The technology sector has been granting more H-1B immigration visas to highly skilled workers with STEM backgrounds.

A Trump Administration will likely include fees that will make it more expensive for companies to hire foreign workers through the H-1B visa program. If such fees are enacted, it would likely drive up wages for highly skilled IT talent even further across the technology sector.

E-Commerce

Protectionist policies and tariffs will increase the cost of goods. Trump wants to tax US companies that choose to manufacture goods overseas. Such a policy would harm retail companies that manufacture their goods overseas. Most retail companies will raise their prices to offset these tax penalties and the added cost of building manufacturing plants in the US.

E-commerce companies are pushing to deliver products to consumers as fast as possible. Think Amazon, and it’s Amazon Prime membership with free two-day delivery as well as its drones for remote area deliveries. This fast delivery involves automation within distribution centers. A Trump Administration will likely move to protect American workers from being displaced by machines thus forcing e-commerce companies to invest in traditional forms of labor over cheaper and faster new ones.

While a Trump Administration will be great for the US economy long term IMO, short term, I think we get a pullback in the economy while corporations adjust to higher costs and lower sales.