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Profitable Investing Tips has been a member since April 20th 2008, and has created 172 posts from scratch.

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Investing During a Protracted Trade War

China and the USA have both hardened their positions to protect their national interests in the ongoing trade war. China is increasingly talking about not being humiliated as during the European Colonial Era and the USA is increasingly talking about China as a threat to US technological and economic leadership. What you need to consider is how to go about investing during a protracted trade war.

How Will the Trade War Affect Investments?

To the extent that you are invested in China, you may need to worry about the companies that will be sanctioned or cut off from high tech American products. The New York Times writes that the USA blacklists more Chinese tech companies over security concerns.

The Trump administration added five Chinese entities to a United States blacklist on Friday, further restricting China’s access to American technology and stoking already high tensions before a planned meeting between President Trump and President Xi Jinping of China in Japan next week.

The Commerce Department announced that it would add four Chinese companies and one Chinese institute to an “entity list,” saying they posed risks to American national security or foreign policy interests. The move essentially bars them from buying American technology and components without a waiver from the United States government, which could all but cripple them because of their reliance on American chips and other technology to make advanced electronics.

The entities are one of China’s leading supercomputer makers, Sugon; three subsidiaries set up to design microchips, Higon, Chengdu Haiguang Integrated Circuit and Chengdu Haiguang Microelectronics Technology; and the Wuxi Jiangnan Institute of Computing Technology.

US policy makers have worried for years about China moving past the mass production of products to becoming dominant in ultra high tech. This is seen as a concern for US national security seems to have been the red line that China crosses when it set its sights on dominating supercomputing, artificial intelligence, and other ultra high tech areas.

For investing during a protracted trade way you will need to look at who loses markets and sales because of these restrictions. US chip makers are still at the forefront of manufacturing the highest quality of the fastest and most powerful chips. To the extent that they lose their markets, it will hurt anyone invested in these companies. To the extent that you are invested in a company like Huawei which seeks to dominate the newest and highest tech levels of telecommunications, you need to be concerned about the US and perhaps the Europeans banning their products and technology outright and continuing to do so for years. Then, a smart investor will look around to see who else is working in these echelons of high tech to see where to invest next.

The Trade War and Investment in Raw Materials for High Tech

We recently wrote about investing in non-Chinese rare earth producers. As we noted, the rare earth minerals that go into computer chips and other high tech products are not really rare. But they don’t exist in concentrated amounts that make mining economically feasible in most areas. China has invested in mining these minerals because it can do so cheaper than companies working in the West. And, they are doing it to control the market. To the extent that mining rare earth minerals outside of China because a defined national security concern, look to see government subsidies and support for these types of operations and more profits for investors.

Investing and Manufacturing Anywhere But China

There is a belief now that ABC is the best place for supply chains. “ABC” means anywhere but China. However, much of the manufacturing in Asian nations outside of China is taking place by Chinese companies setting up shop in places like Vietnam. Beware of investments in these countries if the USA starts looking closer at who owns a company, where the profits are going, and how much control the Chinese government is still exerting. To the extent that manufacturing is taking place in countries like Mexico, and the Trump administration is not applying punitive tariffs, these might be safer investments.

As you will note, we have not made any specific investment recommendations, which we rarely do. But, we hope this article has provided “food for thought” as the trade war goes forward and even lasts for another generation or two. We suggest that you read an article in the South Morning China Post about prolonged tensions with the US. A better way to view this subject is perhaps not to think in terms of trade but to look at who wants to dominate the planet for centuries to come and how much suffering they will inflict on their own people in order to achieve that goal.

How Could War with Iran Affect Your Investments?

Depending on whom you talk to we are at the brink of war with Iran in the last few weeks or have been at war with the Islamic Republic for several years. Most recently the U.S. president ordered an air strike in retaliation for Iran shooting down a U.S. spy drone. He allegedly called it off at the last minute because of not wanting to kill 150 people and said that such a response would have been out of proportion. As the world frets of a possible war with Iran, we are concerned about the flow of oil coming out of the Persian Gulf being shut off, Saudi oil fields and others in the area being damaged as well as shipping and storage facilities. The question for an investor is, how could war with Iran affect your investments?

Your Investments in the Stock Market Could Suffer

Forbes suggests that an all-out Iranian conflict could torpedo the stock market.

Aside from the perfectly reasonable fear that a raging (and possibly radioactive) regional conflict with a rabid and likely already nuclear-armed foe should inspire, the economic risks – unlike those engendered by the tanking Chinese economy – are fairly limited to oil price effects.

Not to discount the damage an intense war in the tightly-wound Middle East that could ensnare arch-enemies Iran (and satellites like Syria and Lebanon) on one side, and major non-US players like Israel and Saudi Arabia on the other.

Such a flashpoint could engender untold and unholy consequences that might poison human culture for decades, or longer.

They note the problems that conflict in the region might cause if the flow of oil is interrupted and, even worse, if the infrastructure is damaged for years to come.
On the other hand, both the USA and Russia are bigger oil and gas producers than all of the Persian Gulf. Perhaps, investing in oil companies that work outside of the Middle East could lead to substantial profits.

War, Recession, and Your Investments

The Post Millennial writes that war with Iran will sink Canada into a recession.

Canada still buys a bulk of its oil from Saudi Arabia and doesn’t have enough capacity to be self-sufficient. If Iran’s navy shuts down the Strait of Hormuz, through which of the world’s oil and gas trade occurs, it would spell disaster for not just Canada, but the entire world.

The price of oil would explode. Gas prices, already at a high due to Trudeau’s carbon tax, will skyrocket. It is highly likely that Canada, currently only growing at a meager 0.1%, will enter into a major recession.

While the oil shock may help in Canada’s oil exports, it could reduce demand and dampen the effect of the price surge.

While Canadian oil producers would do well, the Canadian economy would tank if Persian Gulf oil were cut off. And, the Millennial has a lot of other concerns about Canada being dragged into such a conflict, such as Canadians dying in combat.

Our opinion is that the US economy may be ready to cool off a bit and an armed conflict anywhere would not help. The US stock market is still overbought and does not need one more dose of uncertainty. And, while the US is juggling a trade war with China, picking fights with everyone else, and locked in a red state blue state fight to the political death, this may not be the best time to go to war. The problem is that governments have long used foreign adventures to distract from their problems (and inadequacies) at home. As such, take a close look at your investments and consider what happens if fighting breaks out in the Persian Gulf.

How Politics Will Affect Your Investments

The trade skirmish between the U.S.A. and China threatens to become a permanent trade war. Many investors have come to realize that the trade war is really not about the balance of trade but rather about global economic and technological leadership. We discussed this issue in our article about the trade war becoming permanent. The decline of U.S. power after the post-World War II era was predictable as the Japanese and European economies mended. And, it was hastened by ill-advised military involvement from Southeast Asia to the Middle East. Along the way, the “Asian Tigers” became technological and economic powerhouses throughout Asia and then there was the rise of China. The Americans and the Europeans were naïve in believing that if they gave China greater access to global markets that the country would gradually liberalize and the Communist Party would give way to a mixture of Capitalism and Socialism. That did not happen. And, as we noted in our permanent trade war article, China is aiming for global dominance on all fronts and does not intend to return to the “turning inward” of the European Colonial Era. Political concerns are now dominant both with the U.S.A. and China. So you need to wonder, how will politics affect your investments?

Best Places to Invest Money in a Prolonged Trade War

Market Watch suggests which stocks to buy if the trade war worsens and becomes permanent.

Goldman’s analysts, led by chief equity strategist David Kostin, are recommending that investors target services firms, which they describe as less exposed to trade policy (including retaliatory moves) and have better corporate fundamentals, as a group that could help to insulate investors from tariff-fueled volatility.

Goldman expects companies within services to outperform those that provide goods, including consumer products and hardware, like iPhone maker Apple Inc. AAPL, +0.88% and Johnson & Johnson JNJ, +0.64% for example. Shares of Apple have gained nearly 30% this year, while those for J&J are up 8.8%.

In addition, they suggest Microsoft, Alphabet, and Amazon as good choices.

Although the big tech companies that have led the market since the Financial Crisis would seem to have over-extended their rallies, their strength in services, as opposed to products (think of Boeing, Caterpillar, and Deere), is a reason to stay with these investments. Good returns on investments will be more likely to come from the services sector as the trade war drags on and gets worse.

In regard to national defense and reducing American dependence on Chinese products we might consider the ABC (anywhere but China) movement of production facilities to continue. We recently wrote about investing in non-Chinese rare earth producers as such businesses may end up benefiting from subsidies or other forms of government support to avoid a Chinese embargo on the elements so critical to high tech these days. This sort of niche investment may be particularly vulnerable to how politics will affect your investments.

What Happens to Your Investments if the U.S.A. Caves in and Makes a Bad Deal?

When political decisions are so critical to your investments, you need to worry about when the politicians will do things simply to get themselves re-elected. This fact has been a huge contributor to the ever-expanding U.S. budget deficit. Politicians know that when the economy is doing well and employment is strong that people are happy and that they, the politicians, are more likely to remain in office. So, they pass bills to increase spending, putting off things like repaying the national debt to the next generation. If Trump believes that he needs a “trade war victory” to get reelected, will he cave in and let the Chinese win? If that is the case, the stock market will be happy, stocks will go up, and U.S. economic and technological leadership will gradually dwindle over the years. It that is the case, you need to start looking at long term investments in China in hopes that the Chinese Communist party will throw a few scraps your way.

When you find yourself looking at the front page headlines more than at the business pages, you are wondering how politics will affect your investments. Good luck.

How politics will affect your investments is that  trade war could be devastating to the farm implement manufacturer, Deere.

Deere Combine Harvesting Soybeans

FANG Investments at Risk

Government regulators are taking a look at FANG stocks in regard to monopolistic and anti-competitive practices. This realization just took the stocks down by several percent each. In fact, all of the FANG darlings are substantially off from their highs a year ago. Are your FANG investments at risk? If so, what are the factors to consider when deciding to ride it out, sell to lock in some of your gains, or buy more shares in hopes of a comeback? CNBC looks at FANG stocks, their recent losses, and what is in store for them.

Fears of increased government scrutiny just crushed FANG stocks.

Facebook, Amazon, Netflix and Alphabet tanked Monday, shedding nearly $130 billion in market cap collectively. Those losses sent Facebook, Netflix and Alphabet into a bear market, having dropped at least 20% from recent records.

The drop came on the first trading day after The Wall Street Journal reported that the Justice Department is readying an antitrust investigation against Google over its search practices and other issues. Alphabet declined to comment.

They go on to say that having to deal with regulators takes management away from making effective decisions for company growth and, by itself, could be damaging.

Gina Sanchez, CEO of Chantico Global, says just the threat of increased regulatory oversight could stymie the FANG trade for some time.

“These companies will be very, very mired in the process of being scrutinized,” Sanchez said during the same segment. “They could actually keep these companies so involved in this process over the next two years that they won’t be able to effectively run and do the things that growth companies do.”

And, of course, the look at anti-competitive practices could end up with any of these companies getting broken up as happened to the venerable AT&T in the 1980s.

Are Your FANG Investments at Risk for Other Reasons?

Regulatory concerns are not the only reason that the FANG stocks have cooled off. The group has led the bull market to higher and higher levels since the economy emerged from the financial crisis and Great Recession. There is always a point at which the market price of a stock exceeds its intrinsic value so much that even the most optimistic investor will sell a few shares. The trade war with China affects some of these stocks but not others. And, there is no guarantee that their prices will continue to rise as they may not continue to buy back shares indefinitely.

Are All FANG Stocks in the Same Boat?

To the extent that passive investors are investing in FANG stocks through an ETF, it makes no difference which FANG stock is most strongly threatened by the risk of government regulation. However, Alphabet (Google) is a different business than Netflix and Amazon.com is different than either. Facebook is a totally different animal as well. However, all of these companies have grown large and have the capacity to limit competition in various ways. As such, they become targets for regulators. It seemed such a shame when the old AT&T was broken up but, in fact, the breakup ushered in a great new era of telecommunication in which the better companies with better ideas succeeded and the one who continued in the staid ways of AT&T failed and were absorbed by the competition.

 

Are FANG investments at risk from regulators?

FANG Stocks

 

Google is far and away the leading internet search engine. Because of the importance of internet searches in an era where no one used the yellow pages or phone book anymore, it is a major concern for society that this system be fair to all users and not meant to manipulate to hide information.

Facebook has become a major social force and also a hiding place for terrorists and crazy people. This will be regulated at some point as we discussed in our article about FANG regulatory risk.

Netflix is essentially a monopoly but always runs the risk of a newer technology passing it by. Just think of how video cassettes were such a big deal and how Blockbuster controlled the content on movies that it rented. Then everything went to disk and then it was downloaded and then Blockbuster just went away. We are not sure what technology might make Netflix obsolete but there is probably one out there. To give Netflix credit, they have become a movie production and content generator which will always give them something to sell even if they are not the major viewing platform.

Amazon.com is unique in how they have displaced so many brick and mortar businesses but they have also followed the John D. Rockefeller approach of undercutting competition until there is none and then they have the capacity to raise prices. At some point, this behavior will be broken up or regulated.

In the end, we think the FANG investments at risk include all of them. This is a doomsday scenario of these great companies going out of business but the world changes and that simply makes yesterday’s winners change or fade.

 

Of the FANG investments at risk, Alphabet is perhaps the safest as they diversify into things like autonomous vehicles.

Waymo Self-driving Car

Investing in Non-Chinese Rare Earth Producers

The trade war shows more and more signs of becoming a permanent fixture in our lives and especially in the world of investments. In our article about the possibility of the trade war becoming permanent, we discussed how both China and the U.S.A. view this issue in the broader scope of global power and homeland security. As such, both sides are ramping up their tariffs and making no-so-hidden threats about what comes next. One of the things that especially caught our attention was the Chinese threat to cut off the export of rare earth metals to the U.S.A. At this point, investing in non-Chinese rare earth producers might be a really good idea. The Street’s Real Money has an informative article about how rare-earth stocks strike gold at the prospect of a Chinese rare earth export cutoff.

Rare-earth miners toil in obscurity, operating a fancy-sounding but grungy business. They have hit pay dirt on the stock markets late this month, with it looking increasingly likely that China will restrict U.S. supply of the minerals they produce.

The Global Times, a mouthpiece for the Communist Party on foreign affairs, has run an article stating that it’s only a matter of time before China will “weaponize” its rare-earth exports in the trade war.
The shares of the listed miners operating in this space have surged. The CSI Rare Earth Industry Index (index code 930598) tracks 50 of these stocks, companies that mine, extract, process, trade or apply the minerals. The index is up 45.4% so far this year.

Real Money goes on to state this.

There are 17 rare-earth elements, metals used to make magnets for electric cars, earphones and computer hard drives. China accounts for 90% of global production and 80% of worldwide export shipments.

They go on to talk about a Chinese rare earth producer whose stock trades on the Hong Kong Exchange. We don’t think that Chinese producers will be a good investment choice in this situation because they stand to lose if 1) they cannot export to the U.S.A. and 2) if more and more companies follow the ABC (anywhere but China) course for outsourcing their manufacturing. We think that investing in non-Chinese rare earth producers may be a better idea in case Chinese exports get cut off. And, if the trade war becomes even uglier, we may see countries like the U.S.A. find ways to subsidize rare earth producers through tax incentives and more.

Investing in Rare Earth Mining Operations

There are rare earth mining operations scattered across the globe. Here are the companies in the U.S.A, Australia, and Canada that mine rare earth elements and produce rare earth metals.

Rare Earth Producers in the U.S.A.

The one active rare earth mining operation in the U.S.A. is Alkane Resources Limited. (Mining Feeds Rare Earth U.S.A.)

This company has been a penny stock for the last twenty years with the exception of 2011 and 2012 when it “surged” as high as $2.52 a share before falling back. Its mining operation was shut down for a while about a year ago but is open and producing again.

Rare Earth Producers in Australia

Australia has seventeen companies that do rare earth mining as part of their operations. (Mining Feeds Rare Earth Australia)

 

For investing in non-Chinese rare earth producers, Australian mining companies are a good choice.

Rare Earth Mining Operations Australian Companies

 

The list of Australian stocks is a better place to look for investing in non-Chinese rare earth producers because it includes mature and strong mining operations that are not totally dependent on profitable rare earth extraction and processing for their survival.

Rare Earth Producers in Canada

There are seventeen Canadian mining companies that extract and process rare earth elements as part of their operations. (Mining Feeds Rare Earth Canada)

 

 

Canadian mining companies are good choices for investing in non-Chinese rare earth producers.

Canada Rare Earth Mining Companies

 

As with the Australian companies, investing in non-Chinese rare earth producers will work better with Canadian companies that are large, have been in business for years, and have operations in numerous countries extracting numerous metals.

Rare Earth Elements Are Not Really Rare

Rare earth elements are not rare. They simply don’t occur in the kinds of concentrations seen for copper, gold, silver, and other minable metals. This makes them more expensive to mine because a lot more ore needs to be extracted and processed than with other metals.

For more insight into Australian rare earth elements and rare earth production, you can look at information about rare earths published by the Government of South Australia.

Rare earths were named by Johann Gadolin in 1974 for a group of chemically similar, metallic elements with atomic numbers 57 through to 71.

In order, these are lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), promethium (Pm), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), holmium (Ho), erbium (Er), thulium (Tm), ytterbium (Yb) and lutetium (Lu).

These elements are commonly known as the lanthanide series and are divided into light rare earths (lanthanum–gadolinium) and heavy rare earths (terbium–lutetium). Scandium (Sc, atomic number 21), yttrium (Y, atomic number 39) and thorium (Th, atomic number 90) are also generally included in the rare earth group because of their similar chemical properties.

The rare earths were originally thought to be rare in crustal abundance but this is now recognised not to be the case and they have a similar crustal abundance to elements such as nickel, copper, silver, lead and tin. However, mineable concentrations are less common than for most other ores.

And, the lack of easily minable concentrations is what has hindered mining operations outside of China. China still has a lower wage scale than countries like Australia, Canada, or the U.S.A. And, the government heavily subsidizes these operations in various ways, not all of them plainly visible from outside the country.

Investing in Non-Chinese Rare Earth Producers

Our considered belief is that threats of cutting off rare earth exports by China will at least temporarily drive up stock prices and make investing in non-Chinese rare earth producers more profitable. Over the longer term, governments in countries like the U.S.A., Australia, and Canada will be able to mine these elements because they are common and can be extracted from things like coal deposits. Higher prices will make these operations more profitable and to the extent that their production is seen as critical to national economies and national defense, governments will find ways to subsidize such operations to ensure their long term survival and success.


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