It doesn't wreck the landscape, but it sure makes it harder.
I am talking about the endless drumbeat of tariff news and how you just never know anymore how they are going to impact companies.
As we get into the heart of earnings season we are now getting an almost obligatory question about tariff impact and what it means. It's like shadow boxing.
I understand it. When an analyst is trying to model what's going on at eBay (EBAY) , for example, you can't hold it against that analyst when he asks about tariff impacts on a company that does a lot of cross border trading.
The eBay call wasn't a great one. They are spending for growth and so far it hasn't played out exactly as they were hoping. It sure wasn't anything to do with tariffs. But the question had to be asked.
Contrast, that with Alcoa (AA) , where the company is taking a $12 to $14 million monthly hit from Canadian aluminum imports from the tariffs. That's real money and an unintended consequence of the president's aluminum tariffs. We haven't opened a new smelter in 40 years in this country and all that has happened so far is that some inefficient supply has been brought back on. In that sense, the tariffs are actually hurting all aluminum producers like Alcoa's bottom line because more capacity is coming on. It was the takeout of that capacity that has actually boosted the prices of more efficient competitors, including Alcoa.
No matter, what's really going on, when you start getting these kinds of questions, is that portfolio managers who are listening are wondering, what the heck? Why do I have to worry about this kind of Washington intervention in my portfolio. Get me some companies where tariffs don't possibly play a direct role in the bottom line.
There's an issue here, though. The issue is that as the list expands of goods we place tariffs on, so will the complexity of trying to figure out earnings estimates, which is the lifeblood of Wall Street research. The models are simpler with no tariff issues but who knows where the tariff issues may lie, especially after the President tweeted this morning: "I told you so. The European Union just slapped a five billion dollar fine on one of our great companies, Alphabet's Google (GOOGL) . They truly have taken advantage of the U.S. but not for long."
Who knows where that leads?
For example, we have seen endless buying in the stock of retailer Five Below (FIVE) which is up 61% this year. You might be tempted to own a totally domestic chain that sells fun items for less than $5 even up here, especially when the company reported arguably the strongest quarter of any retailer. It's growth prospects are tremendous, kind of like the ones that faced the dollar stores when they were still in total expansion mode..
The last conference call, first week of June, was full of congratulations by analysts. Now I have to wonder how many analysts would ask about tariffs and Chinese goods and toys? Where is the stuff made? Can they switch manufacturers to Cambodia? Vietnam?
Well, then maybe you should just own a domestic retailer of goods that aren't sourced from China?
But which ones would that be?
Or how about a domestic transport, like the rails? Oops. Union Pacific (UNP) cites tariffs for some ag weakness and says on its earnings call "free trade impacts are the thing we are really keeping an eye on."
I am not saying that stock picking will be upended by tariffs. I am saying that it's become top of mind and as long as it is, we will not be as willing to pay up for companies that say they have any exposure.
And we certainly won't pay up for those who have their numbers cut by it, as is the case with Alcoa.
We know that the Russell index has been so strong because it is considered to be filled with safe havens, domestic companies with no tariff exposure.
A couple of weeks into the quarter, though, and it's pretty clear that you can't be too sure anymore. Complexity, when you are stock picking, is not a positive thing. It leads to your thinking, "hmm, I have to be more cautious."
Let's just put tariffs, for now, in the yellow flag camp. The more tariffs we get, though, the more Alcoa like red flags we should guard against and worry about, and, yes, lighten up on stocks if we have to.