Donald Trump set the tone for 2017, and it’s still his in-your-face Twitter diplomacy that provides instant heat for intended targets. Yesterday, it was General Motors with a threat to retaliate if the company imports Chevy Cruze cars into the United States from Mexico. General Motors quickly released a statement saying that Cruze sedans are made in Lordstown, Ohio.  It’s only a few hatchback versions made in Mexico that make their way to the U.S. market.

The fact of the matter is that the demand for small compact cars, in general, are down considerably and margins are nowhere near pickup trucks and sports utility vehicles.  In only the second year of its current version, the Cruze saw its sales tumble 20%, prompting GM to announce 1,250 job furloughs to begin on January 23. GM also plans to idle 850 workers at the Lansing, Michigan plant that makes the Camaro and other models.

I suspect that from a political point of view, President-elect Trump is hoping to get GM to reverse its decision on the Lordstown furloughs before his inauguration. That would be yet another major victory for Mr. Trump, but then comes the harder part beyond saving jobs, to actually saving industries and bringing jobs back.

U.S. Automakers and the Lure of Mexico

Trade was the big economic issue of the 2016 presidential campaign that propelled Donald Trump to the White House; thus far, he has taken on countries and companies that many feel have conspired to enrich themselves at the expense of the American worker.  While there hasn’t been collusion per se, there have been efforts to gain U.S. manufacturers, and those efforts have been made easier with certain trade deals.

The North American Free Trade Agreement (NAFTA) was implemented January 1994, which happened to be the last year America ran a trade surplus with Mexico. The United States enjoyed trade surpluses with Mexico, peaking in 1992 with $5.4 billion, $1.7 billion in 1993, and $1.3 billion in 1994.

In 2015, the U.S. ran a $60.7 billion trade deficit with Mexico.

US Trade With Mexico	Exports	Imports
2015	$236 billion	$295 billion
Since 1993	+468%	+638%

The nuances of NAFTA have advantaged Mexico, although it’s clear that the overall economic activity has surged on both sides of the border.  However, there are other advantages that Mexico has as a manufacturing hub.

Major Mexican Advantages:

• Low Wages
• Low Currency
• 40 Global Trade Deals

Then there’s the issue of the Value Added Tax (VAT), which is applied at each level of production, and it currently adds approximately 16% to the cost of goods in Mexico. With Mexican and foreign companies manufacturing in Mexico, the VAT is rebated, making it a duty-free export into the United States. 

Donald Trump’s advisors want that VAT loophole fixed.  His Republican colleagues have discussed a Border-Adjustment Tax (BAT), which would really be more of an adjustment mechanism than a tax by reducing the advantages of imports from places like Mexico while mitigating U.S. taxes on exports. It remains to be seen how that moves forward.

The bottom line is that America is going to have to become more attractive for businesses with lower taxes and fewer regulations; even then, Mexico has major advantages. New trade deals will help, along with the intangible value that goes with hiring Americans and not having the Commander-in-Chief as a public adversary.

Automakers to Play Ball

During his interview with Neil Cavuto on Fox Business, Mark Fields, CEO of Ford, said there was no negotiation with the Trump administration over its announcement to abandon a proposed $1.4 billion manufacturing facility in Mexico.  Fields said that decision was based on the lack of demand for small cars, which will still be produced in Mexico. 

Mr. Fields did hint, however, that President -elect Trump might do the industry a favor on proposed Corporate Average Fuel Economy (CAFÉ) standards that would provide great economic relief to the industry.  Currently, fleets are supposed to achieve 35.5 miles per gallon CAFÉ, but that number swells to 54.4 miles per gallon by 2025- a number not achievable even with the surge in technology and lightweight materials.

Of course, there are additional issues for the industry, which would be placed between the proverbial rock and a hard place if forced to choose to only build in America, including the fact that China alone has become a larger market. Consider Ford, it is investing $700 million in a new plant that will only create 700 jobs. It sounds as though a lot of robots and computers are going to be hired.

I do believe that Donald Trump’s efforts will improve manufacturing, and it’s going to take a combination of carrot-and-stick.

Today’s Session

That was a heck of a rollercoaster for stocks yesterday that was spooked by the hint of inflation via the surge in prices paid in the ISM manufacturing report (hence the strong move in gold and silver; we like the latter as a hedge and beneficiary of industrial demand).

By the close, all sectors save the very defensive utility sector, rallied higher.   Oil stocks held despite the reversal in oil and some Trump stocks like United Rentals and US Steel acted great.

Sector Performance	Change
S&P 500 Index	+0.85%
Consumer Discretionary (XLY)	+0.59%
Consumer Staples (XLP)	+0.37%
Energy (XLE)	+1.13%
Financials (XLF)	+1.12%
Health Care (XLV)	+1.31%
Industrials (XLI)	+0.59%
Materials (XLB)	+0.58%
Real Estate (XLRE)	+0.33%
Technology (XLK)	+0.89%
Utilities (XLU)	-0.25%

It’s all about Dow 20,000 right now and the anxiety that rushes into the market whenever that mythical number is within striking distance.

Meanwhile, the market reality is if you don’t want to buy a stock at all-time highs then you must position yourself in names that are trailing, meaning the Dow could be higher, but your names look flaccid- don’t panic or get emotional - to be successful get there before the crowd.

Comments

Mexico is not the only country that rebate VAT on all product for export. France has had the same policy for decades! Philippe on 1/5/2017 2:28:09 AM

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