Why China Won't Back Down
'M&A' is already heating up... What the latest blockbuster deals really mean for investors... The latest on 'trade war' fears... Why China won't back down... Tune in Thursday night for Steve Sjuggerud's next 'big' idea... A busy day in the mailbag...
Has a new wave of 'M&A' already begun?
Last week, we noted that a federal judge had finally cleared the way for telecom giant AT&T (T) to complete its massive $85 billion merger with media giant Time Warner (TWX). We also surmised that the favorable ruling could set off an additional wave of mergers and acquisitions ("M&A") activity, particularly within the media industry.
That may already be underway...
Less than 24 hours after the deal was finalized, fellow telecom giant Comcast (CMCSA) offered $65 billion in cash to take over media firm Twenty-First Century Fox (FOXA). The proposal trumps a competing offer from Disney (DIS) by more than $12 billion, and would be the largest all-cash deal in history if completed.
Again, we're skeptical these blockbuster deals will be good for these firms' shareholders...
As we noted when AT&T first announced this deal back in October 2016, history shows that these types of mega-mergers have rarely lived up to expectations. In fact, Time Warner's last big deal with AOL in early 2000 is still considered one of the largest corporate blunders of all time.
One thing we are sure of is that these deals would leave both combined companies with mind-boggling levels of debt. As the Wall Street Journal reported this morning...
A wave of expected major-media mergers would transform AT&T and Comcast into the two most indebted companies in the world, a standing that carries uncharted risks for investors in the firms' bonds.
If both deals are finalized – AT&T has bought Time Warner and Comcast hopes to purchase 21st Century Fox – the companies will carry a combined $350 billion of bonds and loans, according to data from Dealogic and Moody's Investors Service.
The purchases are meant to provide additional income to help the acquirers to weather turmoil sweeping their industries. But if the mergers falter, the record debt loads will give AT&T and Comcast little margin for error, fund managers and credit ratings analysts say.
In other words, these companies will jump to the top of a long list of highly leveraged companies completely dependent on continued access to cheap credit for survival... just as credit is beginning to tighten for the first time since the last financial crisis.
We've said it before, and we'll say it again... What could possibly go wrong?
In the meantime, trade tensions are on the rise yet again...
Late last week, the Trump administration officially approved another round of tariffs on Chinese imports. The latest measures would place 25% tariffs on $50 billion of Chinese goods, with the first portion taking effect on July 6.
To no one's surprise, China quickly countered with an announcement of its own. From a separate Journal report Friday evening...
Shortly after the Trump administration unveiled plans Friday to impose tariffs of 25% on $50 billion in Chinese products, China's State Council announced it would levy penalties of the same rate on the U.S. goods of the same value...
Beijing is imposing the tariffs in two steps as Washington is doing – picking the same amounts and same dates the U.S. is choosing. On July 6, China will levy duties on $34 billion of U.S. products, covering 545 categories, ranging from soybeans, pork, chicken and seafood to sport-utility vehicles and electric vehicles. The farm goods were chosen to hit U.S. states that supported Mr. Trump, according to people with knowledge of Beijing's plan.
In response to this announcement, President Trump said that any retaliation would be met with another $100 billion in tariffs on Chinese goods.
In short, trade talks officially continue, but the risks of escalation are rising...
And should "push come to shove," China may be far less likely to concede than many in the administration appear to believe. As Bloomberg reported over the weekend...
Analysts increasingly expect the confrontation to be a war of attrition. While China has shown a willingness to make a deal on shrinking its trade surplus with the U.S., it has made clear it won't bow to demands to abandon its industrial policy aimed at dominating the technology of the future.
"The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain," said Andrew Polk, co-founder of research firm Trivium China in Beijing. China "thinks it can outlast the U.S. They don't have to worry about an election in November, let alone two years from now."
Now, before you send us an angry e-mail, let us be clear...
As we've explained many times, President Trump is right about one thing: China's own trade policies have been anything but "fair."
While it's ridiculous to believe China is solely to blame for the U.S. trade imbalance, the country has had tariffs on many U.S. imports for years.
In addition, U.S. companies have had far less access to Chinese markets than Chinese companies have had here. And those that have gained access to China have often been required to share proprietary technology and intellectual property in exchange.
However, we don't believe threatening aggressive new trade barriers in the U.S. – and risking an all-out trade war – will improve this situation.
China is unlikely to back down, no matter the consequences... and while no one "wins" a trade war, our colleague Steve Sjuggerud's research suggests the U.S. economy actually has far more to lose.
Speaking of Steve's research...
Last Thursday, we broke the news...
Steve says he has found his next "big" idea. And just like his contrarian calls to buy U.S. stocks in 2009... real estate in 2011... and Chinese stocks beginning in 2016, he believes folks bold enough to follow him again this time will see hundreds-of-percent returns over the next several years.
Of course, we're referring to commodities. And if you've been with us for long, the reasons for Steve's excitement should be clear: Commodities currently "check off" all three of his favorite investment criteria.
First, they're cheap... While stocks, bonds, and most other assets have soared over the past several years, commodities have suffered a brutal multiyear bear market. Many have plunged by 80% or more.
In fact, as Steve explained in this morning's edition of our free DailyWealth e-letter, commodities aren't just cheap today... they're absurdly cheap.
Commodities are also downright hated... Most investors – even those who were wildly bullish earlier this decade – want absolutely nothing to do with them today.
And last but not least, Steve notes that the broad commodities sector is now in a clear uptrend for the first time in years.
In short, Steve believes the next great commodities boom is quietly underway... and returns of 500% or more over the next several years are not only possibly, they're likely. In fact, he expects many individual commodities could soar 10 times or more before it's all over.
Again, Steve is hosting a special live event this Thursday night, June 21, at 8 p.m. Eastern time to explain it all. This event is absolutely free to attend... And Steve will even give you one of his favorite ways to profit from this trend – a real "live" recommendation you can buy in your brokerage account today – simply for attending. Click here to reserve your spot now.
New 52-week highs (as of 6/15/18): Fairfax Financial (FRFHF), Sysco (SYY), and Verisign (VRSN).
In today's mailbag, more "boots on the ground" perspective on China... more on the problems with Social Security... and feedback on Porter's Father's Day special. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Hello, I know this is a little late but I wanted to tell some of my experience in China. I grew up in China and Singapore in the 1990s and 2000s (born in Hong Kong, lived in Shantou, Taibei, Lanzhou, Xi'an, Singapore, and Chengdu).
"Last summer I went back to China for the first time since 2010, and even in just a few years it is a night and day difference! I grew up in bigger cities where the pollution was just terrible, where you could hardly make out where the sun was even in the middle of the day! Now there are so many more skyscrapers, clean and modern subway systems, big fancy shopping malls, and there has been a lot of improvement with pollution.
"When I was a kid most Chinese didn't have a car, and we always took buses and little Volkswagen taxis everywhere. Most Chinese still don't have cars, but there are more and more on the road, and it is not unusual to see Mercedes, Tesla, and Audi cars almost everywhere you go. There is a huge boom going on now in China that's for sure!" – Paid-up subscriber John W.
"I wonder how much more money [paid-up subscriber] Jim would have if he were able to independently save 15.2% of his gross earnings? Why do I ask? Because that's the combined required donation to social security and Medicare. Yes, for every $100 you could be paid, $15 goes to a slush fund that the federal government continues to misuse without any fiscal responsibility nor repercussions. The people running these entitlement programs can't even be voted out.
"I personally currently employ about 25 people. I supply them with a generous matching program for their 401k plans and encourage each of them yearly to save as much as they feel comfortable to save. Meanwhile, I'm forced to withhold more than $15 of every $100 they earn, knowing they will likely see very little in return.
"And make no exception, there is no refund from the Social Security Administration. They force employers to withhold money, but you as an individual tax filer don't get a refund if you happen to pay too much that year. There's not even an income tax credit for lower earners. This is particularly difficult to watch those lower earners when they are struggling to get ahead. Social security and Medicare entitlement programs are a lot of things, but I would never consider them as helping the elderly. Helping someone while hurting someone else doesn't work in my book, especially when forced to do it at the threat of being locked up and having future earnings garnished.
"Yes, taxes are a necessary part of a system of government, but the only way to ensure tax revenues is through force. So, the next time you think about taxing someone, imagine whether it's worth it to hold a gun to their head for that money.
"People would be much better off actually independently saving and investing their earnings themselves. By forcing wage earners to pay 15% of their earnings in order to support others, the government is doing nothing more than continuing to perpetuate fiscal slavery.
"I have yet to meet any proponent of increasing taxes who voluntarily and happily pays their own taxes without trying to minimize what they are paying to the fullest extent possible." – Paid-up subscriber B.R.
"Thank you, Porter, for your Father's Day special of two for one OneBlade Core shaving kits. I kept one, and gave one to my son as my dad passed several years ago. I must admit, I didn't know what to expect as a long time multi blade disposable shaver. This morning I just had the best shave of my life! I can't wait to hear my son's results! Thanks again." – Paid-up subscriber John H.
Regards,
Justin Brill
Baltimore, Maryland
June 18, 2018