Longhorn Investment Team Weekly Insight: Mother’s Day Edition (5/12/19)

Happy Mother’s Day to all of the mothers out there and welcome back to the Weekly Insight! Sorry for the hiatus; finals really got to our writing staff. We’ll be back to business as usual all summer. Let’s dive into the news so you can give your mom the gifts of market analysis and bad jokes!

Trade War Beef

Since last March, Trump declared war on unfair trade practices by unleashing waves of tariffs on key intermediate goods like aluminum and steel. Because tariffs are effectively a tax on imports, analysts estimate a direct additional cost of $66 Billion on US imports.

When retaliatory tariffs from other nations are factored in, they estimate an additional cost on US exports worth over $130 Billion (that’s not the increase in cost, but the total value of exports affected).

Markets got (metaphorically) pooped on at the end of the week when Trump raised rates from 10% to 25% for tariffs on Chinese goods. Of course, this delayed talks and will likely lead to retaliation from Xi Jinping.

How did we get here?

The administration cited unfair prices as a justification for global tariffs on metals, which are required to build military stuff like tanks and battleships. But when it comes to China, the business-beef is a lot juicier. American policymakers have accused Chinese companies of corporate espionage for years. From cyberattacks such as Operation Aurora and GhostNet to IP theft by the Chinese government, businesses and the Committee on Foreign Investment in the United States (CFIUS) have grown weary of allowing Chinese investment in the US and vice versa.

A look at CFIUS’ discretion over the past few years illustrates these fears. CFIUS used to block international transactions and investments in industries clearly relevant to national security like aerospace and defense. For instance, Chinese companies acquiring Lockheed Martin would be a no-no because then the Chinese government could access the same missile technology as the US military.

Now, the fear of malicious technology transfer extends to everything from 5G to consumer data, as CFIUS even forced the Chinese firm, Kunlun Technologies, to divest in Grindr last month. Meanwhile, Chinese phone giant, Huawei has been shutout from the US telecom industry.

In fact, the WSJ pointed out that investment flows between the two countries have unraveled more than trade. China invested $29 Billion in US firms in 2017. They only invested $5 Billion last year (although this decline was also affected by China’s 2018 slowdown). For more context, here’s a chart from the WSJ.

Declining investments matter, especially in the tech space.

You know how PS4 and Xbox have exclusive networks with their own games and separate players and it just sucks because you want to play COD with your friends? That can happen at an international scale when Chinese and American businesses fail to integrate their technologies through M&A or join ventures that everyone is scared to initiate. Not only does this mean fragmented networks, but it will undermine efficiency in emerging technologies like AI and the internet of things (it always comes back to the IOT).

How are companies reacting?

Either raising prices, moving production (although not necessarily to the US), or praying to the soybean gods.

Iran Beef

Some Context:

In 2015, Obama went in big on the JCPOA, which stands for The Iran Nuclear Deal somehow.

Last May, Trump pulled out of the deal, claiming that it enriched bad guys in the middle east (the bad guys = Iran). Since then, the US has reinstated heavy sanctions on the country.

Last month, the US announced that other countries who bought oil from Iran would also face sanctions (with some exceptions). This cut into Iran’s exports further and pushed up Brent prices.

Now, Iran faces a recession, currency devaluation, and slashed oil exports. They’re pissed about it too. Iranian President, Hassan Rouhani just partially withdrew from JCPOA by refusing to sell its excess uranium, threatened to shut off the Strait of Hormuz (it’s important!), and made robust military threats against US troops in the region. US military presence is continuing to increase near Iran.

What this means:

Lots of articles are pointing to a looming military conflict, but that’s old news.

Higher tensions in this flashpoint increase oil prices. In 2012, estimates found that if Iran actually acquired nuclear weapons, oil prices would double. Even preliminary signs of conflict or a total breakdown of JCPOA could have a similar effect.

Vegan Beef

Listed on May 2nd, Beyond Meat is the hottest meat stock that doesn’t produce meat. That’s right, synthetic vegetable proteins are the next big thing for those vegans who still want to enjoy a nice burger every now and then.

Why textured vegetable protein matters: it can give people tasty proteins without having to go through cows – nature’s worst nightmare. Methane emissions from cow farts are actually said to contribute more to climate change than car emissions.

Beyond Meat soared 225% in their first week, and since have fallen with the broader markets.

Short sellers’ rationale: Beyond Meat is very overvalued by any fundamental metric (currently over 8x sales), and larger food companies could easily enter the market for TVP.

Fun Fact:

122 million phone calls are made to moms in America on Mother’s Day. That’s sweeter than fake teriyaki!

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