What does Michael Cohen's guilty plea have to do with the price-to-earnings ratio of Johnson & Johnson (JNJ) ?
This is the central issue all professional investors are struggling with this morning -- and they don't really have answers, but they know that people won't necessarily pay less for JNJ after this, so why sell?
After all, it doesn't impact JNJ's pipeline. It doesn't impact the quarter, or the year. If anything, a weakened president means a weakened dollar which is terrific for JNJ. And that means you might actually want to pay more, currency adjusted, for the stock of this great company. President Trump has not been a friend of big pharma by any means, he hates their annual price increases. That said, he's been ineffectual in reining in anything involving the drug companies -- including the pushing of opiates.
More important, the guilty plea of Michael Cohen and the guilty verdict for Paul Manafort, while stinging to the president, particularly because they came down simultaneously, will be less stinging by the day because of the way the news cycle works.
Of course, investors who think Trump is great for the stock market have to worry that Cohen will go to Special Counsel Robert Mueller and tell him what he knows about Russia and the President -- that's the needed nexus for reduced jail time.
But the president could pardon Cohen today and that would be the end of that. Can you really put that past Trump?
How about the idea that the president is tripped up by Cohen's "excessive" campaign contribution, as part of the plea agreement?
Same deal. Easily pardoned. I suspect that the Deputy U.S. attorney in New York who prosecuted the case, Robert Khuzami, would like this campaign finance matter to be referred to Washington for some sort of prosecution of the president, IF the documents are clear and Cohen wants to testify. But Justice is controlled by Attorney General Jeff Sessions -- and you could see that he won't want to make the case. Could he create a special prosecutor for this, an unrelated matter to the Russian investigation by Mueller?
Why are all these things so sure and yet so unlikely. Why is it so hard to process for the entire market, not just JNJ.
Because the Republicans control the House and the Senate. As long as that is the case, you simply do not want to bet that any of these cases matter. As long as the Republicans stand by the president, and the mid-term elections go the Republican Party way, you can just see pardon after pardon with no real consequence.
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I am sure there will be people who want to sell in August and go away... until after the elections -- not that alliterative, but definitely true.
Their sales could weigh on the market. That's actually what I think is happening today.
The counter to that sell, though, is a belief that the Chinese will wait until the mid-terms, too, betting for a change in Congress.
If that's the case, you can expect heightened rhetoric, not lessened rhetoric. Aren't we all waiting for the president to say "if it says 'made in China' don't buy it?" I know I am.
But back to the matter at hand. The parts of the market that have been hurt before by worsening tensions -- some industrials and some techs -- will be hurt again. Nothing new.
The rest of the market will benefit from the rotation out of those stocks.
If you ask me, the most important aspect of yesterday or today's trading will be.. irony. This is now the longest running bull market in history. The bears will have a field day if there is a double top: The S&P took out its high intra-day but not at the close. You can see an interpretation that says, "how fitting that the market peaked on the day that Cohen pled guilty and Manafort was found guilty. That's a real top."
But what if the market rallies from here? There goes that thesis.
So let me give you the bottom line: There's enough here that cuts either way that making a decision based on politics will most likely be wrong, because even this form of politics does not have anything to do with the price-to-earnings ratio of Johnson & Johnson.
One last thought: I used to say that these kinds of events had nothing to do with the P/E of Bristol-Myers Squibb (BMY) . These days, so many other things do -- like an ascendant Merck (MRK) -- that I'd rather just move on to a better company.