Taiwan Semiconductor Beats On Earnings and Revenue

Taiwan Semiconductor Manufacturing announced its quarterly results on Thursday, October 19, 2017. The company reported EPS of $3.47 versus the consensus estimate of $0.56. Revenue also beat coming in at $252.11 billion versus the consensus estimate of $249.49 billion.

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Jobs Report Shows 222,000 Jobs Added In June

The jobs report showed that non-farm payrolls jumped by 222,000 jobs in June, the Labor Department said on Friday, beating economists' expectations for a 179,000 gain.

Data for April and May was revised to reveal 47,000 more jobs than previously reported.

Wage growth was unchanged from May and softer than expected. Average hourly earnings rose by 0.2% month-over-month, and 2.5% year-over-year.

The Federal Reserve looks like they were right when they said economic weakness in the first half of this year was transitory although I'd like the July jobs report to confirm this. The Fed seems on track for a possible rate increase toward the end of the calendar year as well as toward a decrease in the $4.5 trillion balance sheet.

Jobs Report

President Donald Trump has vowed to boost economic growth and further strengthen the labor market by cutting regulation and slashing taxes.

May's jobless rate was 4.3%. A wider measure of unemployment, including discouraged workers and those who are working part time but favor a full-time job, inched up from 8.4% in May to 8.6% in June. It's pretty obvious that the trend in employment growth is strong enough to keep the unemployment rate trending down.

Wages are finally being raised by companies. I expect unfilled jobs to boost wage growth, which has remained low.

The labor-force participation rate inched up to 62.8%, from 62.7%.

While the hourly wage component is below consensus estimates, the more powerful headline payroll number coupled with upward revisions, suggest that wages should rise in the near to medium term. The gain in hours in the work week suggests that economic activity is picking up under the surface.

Average hourly earnings increased 0.2% in June after gaining 0.1% in May. That raised the year-over-year increase in wages to 2.5% from 2.4% in May.

Despite the lack of a big pick-up in wage growth and core inflation, the Fed will push forward with hiking interest rates. The unemployment rate is already unusually low and is likely to fall further over the coming months.

The increase in jobs reflected hiring of new graduates. Ultimately the millennial's are starting to get more jobs. Hiring in the service sector was strong. Health care hiring was up. The retail, construction and manufacturing sectors were weak but the economy appears strong enough to absorb these workers. There does seem to have been a modest deceleration of hiring within the last 12 months and an average of 187K a month job creation is high enough to absorb any remaining slack in the US labor market. The market needs to create 75,000 to 100,000 jobs a month to keep up with growth in the population.

Economists had expected employment gains of between 175,000 and 178,000.

The most shocking number in the jobs report came from the retail sector. Retail hiring rose for the first time since January, pausing an exodus of jobs from large department stores that are losing ground to ecommerce. There were 8,100 workers added in retail breaking its 4 month losing streak.

The employment gains of June exceeded the average for 2016, reinforcing views that economic growth is back on track in the second quarter.

The most important thing is that jobs are out there, and job hunters with marketable skills are in a good position to move on or move up.

Construction added 16,000 jobs.

The Fed raised its benchmark overnight interest rate for the second time this year in June. But with inflation retreating in May, economists expect another rate hike in December.

Wages are certainly weaker than anticipated, so it keeps alive the whole debate regarding the relationship between slack and inflation and how far the Federal Reserve should allow the unemployment rate to fall.

The most jobs were contributed by the medical sector. No jobs were added by the coal sector.

As the labor market reaches toward full employment, the pace of job growth is expected to slow. There is growing anecdotal evidence of companies struggling to find workers and so I expect these companies to raise wages to fill the vacant jobs.

Government employment rebounded by 35,000 jobs.

The automobile sector lost 1,300 jobs as slowing sales and inventories induce manufacturers to cut back on production.

US Manufacturing Grows At Faster Pace In June

The US manufacturing sector picked up in June according to the Institute for Supply Management report. In fact, it is the fastest growth in manufacturing in 3 years.

The ISM said its purchasing managers index climbed to 57.8 in June from 54.9 in May, with a reading above 50 indicating growth in the manufacturing sector. Economists had forecast a 55.2 print.

The positive surprise in US manufacturing came as the production index jumped to 62.4 in June from 57.1 in May and the new orders index surged up to 63.5 from 59.5.

The positive surprise in manufacturing shifts sentiment towards the Bulls. Remember, much of the bearish commentary over the last few months was supported by the fact that US manufacturing was contracting for all of 2017. June's surprise number breaks that bearish trend.

Needham Gives Applied Optoelectronics a Strong Buy Rating

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3D Printing Stocks For Playing Trump Trade War With China

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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.

Rising Wages and Rise of the Machines

As wages rise, more and more business owners are turning to machines instead of human labor. President Obama and Democrats have spent the last 8 years replacing high-paying jobs in the manufacturing sector with low-paying jobs in the services and health care sectors. But in all fairness, both Republicans and Democrats are to blame for outsourcing, offshoring, and the elimination of good-paying manufacturing jobs. Both Democrats and Republicans have demonstrated how not to build up a middle class that will support the economy.

Technology is a rising threat to jobs as more robots are used in the workplace. Since wages began rising in 2015, there has been a significant increase in the implementation of robots, starting with the fast-food industry.

In my home state of California, Zume Pizza has replaced its human chefs with robots, cutting labor costs in half. TechCrunch visited Zume Pizza for a tour of their robotic pizza factory.

In response to recent minimum wage hikes, Wendy’s is now replacing fast food workers with robots. The fast food chain announced it would start automating all of its restaurants by installing self-serve kiosks in 6,000 locations by the end of the year. Although McDonalds has already been experimenting with kiosks, Wendy’s announcement is the largest roll-out to date and will likely spark a trend leading to fully robotic restaurants.

Uber is experimenting with using self-driving cars in parts of America, and there’s a push to start using self-driving trucks for long-distance deliveries.

Research firm Forrester reports that robots could eliminate many positions in customer service, trucking and taxi service which amounts to about 6% of the U.S. job market.

Robots are slowly making their way into every industry. ICICI Bank Smart Vault now offers customers the ability to access their valuables 24 hours a day while reducing their labor costs to provide such a service.

Royal Bank of Scotland recently announced that it would soon unveil Luvo — a “human” AI that can answer questions online and mimic human empathy. This robot will be able to serve customers 24 hours a day, reduce the workforce and cuts costs.

A Swedish bank plans to use the robot Amelia for customer services. And companies in China, Japan, and Taiwan have already implemented Softbank’s Pepper robot.

Previous technological revolutions over the centuries have mainly focused on enhancing human productivity. My concern with the robotic revolution is that its goal is increasingly that of replacing human productivity.

Alex Tabarrok and Tyler Cowen of George Mason University, who had a significant impact on my life through their International Trade course, debate the issue of whether machines will take our jobs. Tyler Cowen agrees with me that the robotics revolution is one of the leading causes of concern for the future of the US economy. Alex Tabarrok's “don't worry, be happy” argument is the same one we heard regarding international trade in the 90s and about how it was going to create so many jobs in the US. After 20 years of economic data, we can now say that international trade was not so good for the US economy. Economists underestimated Game Theory and the “cheat” motivator regarding currency devaluation and government intervention in the free market.

Here is the debate between Tyler Cowen and Alex Tabarrok in its entirety and you can decide who you agree with more.

Terrifying US Pension Fund Charts

Pension funds in the US could be close to a collapse. There is an estimated $1.9 trillion shortfall in U.S. state and local pension funds because of low-interest rates and a sideways US stock market. Even stocks falling overseas is a problem for pension funds.

Credit Suisse published the chilling chart below on the funding gap at the largest 100 US pension funds.

Bloomberg writes

Pensions count on annual investment gains of more than 7 percent to cover much of the benefits that come due as workers retire. But public plans had a median increase of 1 percent for the year ended June 30, the smallest advance since 2009, when they lost 16.2 percent, according to the Wilshire Trust Universe Comparison Service.

Now it seems like there is a run on the Dallas Police and Fire Pension as employees try to claim benefits before the system becomes insolvent.

Pension funds are starting to drop hedge fund investments. Turn To 10 writes

Rhode Island plans to scale back its investments in hedge funds by more than $500 million over the next two years, and reallocate those funds to more traditional investments with lower fees.

Pension funds like Rhode Island are starting to be more defensive and are hunkering down. The problem though is that defensive US Treasury bonds mean way below 7 percent returns which means more shortfalls in funding are coming.

There's no way pension funds can stay above water in an environment with low-interest rates and with equity markets at valuations that are sky high.

But wait, Democrats say everything is good, just look at consumer confidence that came out this week at 104.1.

consumer-confidence

There is massive offshoring of good paying US jobs, stagnant wages, soaring costs of health care and education, contraction in manufacturing, falling retail sales, and consumers pensions are dangerously close to collapse. Meanwhile, consumer confidence is hitting multi-year highs? Consumer confidence is starting to look like just another tool of public manipulation that's out of touch with reality on the street.