Technology or Toilet Paper?
The world?s largest maker of toilet paper, Kimberly-Clark (KMB) currently earns a net profit margin of 5.45% and trades at a price earnings multiple of 20.68X.
Apple (AAPL), the world?s largest technology company, earns a net profit margin of 22.3% and trades at a price earnings multiple of 13.51X.
These numbers suggest that making toilet paper is 6.26 times more profitable than selling iPhones.
But it isn?t.
So is the future of the world economy in toilet paper? Should we toss out iPhones in the dustbin of history and unload the stock?
That may be the answer, at least for the short term.
Or are we seeing nothing less than a wild mispricing of sectors and shares that will eventually correct itself?
I vote for the latter.
However, financial markets of any description are facing unusual circumstances on every front.
The newly elected president?s disdain for Steve Jobs' creation is no secret.
Only yesterday, he demanded that Apple shut down manufacturing in China and build the world?s biggest factory in the US. That would raise Apple?s labor cost from $3 to $35 an hour.
Needless to say, that is impossible.
To do so would increase the cost of iPhones from $700 to $5,000 which was about what I paid for a Motorola analogue brick phone in 1990 and the service was lousy.
The bulge left in the pocket of my Burberry raincoat is still present and, no, it?s not because I am glad to see you.
The great irony here is that the iPhone has never been made in the US.
It was not a product the manufacture of which was offshored. IPhones have to be made in China or they can?t be made at all. Tens of thousands of cutting edge technology products can be similarly described.
That leaves the hapless company to face the 35% import duty from China threatened by Mr. Trump.
It would be far cheaper for Apple just to pay the duty and then pass the cost on to consumers, which would then raise the cost of an iPhone from $700 to $800. Fewer iPhones would be sold, but not my much.
Apparently, no one has told Trump yet that this arbitrary duty would be illegal under the terms of the World Trade Organization (WTO), an organization created by the United States to enforce international trading rules.
So, what if Trump then withdraws from the WTO? What if he pulls the United States out of the United Nations, another libertarian panacea?
He could do this, since honoring agreements does not seem to be in Trump?s DNA, as his long string of business defaults and bankruptcies attests.
International trade would continue, just without us. That would leave China to take over the rest of the world market. Our economy and stock market would suffer, as well as our defense alliances.
Of course, we really don?t know what Trump is going to do.
But the early indications are horrendous.
He attacked Boeing (BA), knocking 11% off its stock price in minutes which, by the way, has created more high paying jobs exporting aircraft to China than any other American company.
The Carrier bail out means that tax payer money will be siphoned out of the east and west coasts so a company in Indiana, the Vice President?s home state, can build air conditioners at noncompetitive prices.
The union leader then confirmed that it was only 700 jobs that were saved for $7 million, not 1,100, and the president attacked him.
And never mind that the country?s eight other major air conditioning manufacturers are now disadvantaged. Are they in for a handout too?
The president has signed Carrier?s death warrant, making it a ward of the state for a photo op.
This is anything but capitalism.
I?m sure parent company United Technology (UTX), whose stock has soared since the election, is figuring out how to unload Carrier as I write this.
If this is Trump?s new rust belt economic strategy, expect an initial rise in GDP growth as the stimulus hits, and then a collapse when the bill comes due.
That, by the way, is my new economic scenario for the rest of the decade. Higher, artificially induced growth for three more years, and then a recession, with no net gain in GDP. Welcome to boom and bust.
I do fine in this environment, but I?m not so sure about you. Remember, I only have to run faster than you, not the grizzly bear that is chasing both of us.
All of this now raises the question of how to trade and invest under President Trump. He is turning the White House into a reality TV show, and filling cabinet posts with other reality stars, like Linda McMahon.
When Twitter traffic is the primary criteria for policy decisions, what is a sober, long-term portfolio to do?
Since it really is all about creating a false reality, I predict a series of ?pretend? victories on the business front.
Carrier will open a new plant to great fanfare, and then bury the losses in some affiliate. Apple might even open a token factory to build a small number of? ?super premium? iPhones just to make Trump go away.
And now I just heard that China will retaliate against any trade sanctions by clamping down on casino company Wynn Resorts (WYNN) by limiting ATM withdrawals in Macao, instantly vaporizing 11.05% of this company?s market capitalization.
Steve Wynn was a big Trump supporter, but perhaps less so today.
Is this how it?s going to be? Is EVERYTHING now political?
I confess, I can?t write fast enough to keep up with this stuff.
Over the long term, it?s really tough to beat the Law of Supply and Demand.
The last major country that attempted to sidestep it with a closed economy was the Soviet Union, and we know how that worked out; however, it took 70 years to unwind.
The policy that Trump is attempting here is more National Socialism than Republican.
Trump?s bogus economic policies will eventually be exposed for the sham they are. It?s just a matter of time before they blow up. ?
Buying low and selling high based on solid fundamentals will once again become a successful investment strategy.
Until then, that toilet paper company is looking pretty good. And keep selling short Treasury bonds (TLT) and buying the US dollar (UUP).
Not in My Budget
The Future?
