What’s Really in the Trans-Pacific Partnership Trade Agreement?
In the October issue of Smart Investing in Turbulent Times, I talked about the negative effect of currency manipulation on U.S. stock prices:
“China devalued its currency, the yuan, making it more expensive for Chinese citizens to purchase American products. The net effect is that multi-national companies that sell their products in China will now have lower revenues, and almost certainly lower profit margins, than they had previously expected. This future drop in revenue and profit is directly affecting stock prices today.”
Foreign currency manipulation is a big economic problem for the U.S., leading to increasing trade deficits, and making it harder for U.S. companies to sell products overseas, and at a profit. The narrowing profit margins inhibit job creation and economic expansion.
In that light, I was extremely pleased to see moderators at this week’s Republican presidential debate address the Trans-Pacific Partnership (TPP) trade agreement. I travelled to Washington D.C. nine times this year, visiting many dozens of Congressional offices, for the purpose of educating staffers and elected officials about the TPP.
Donald Trump immediately hit some important points about the trade agreement with his debate comments, “we lose a fortune on trade” and “currency manipulation is the single greatest weapon” that China uses against the U.S. in trade.
Mr. Trump was right: the TPP has no provision to address currency manipulation. There is literally no point in having a trade agreement with a country that manipulates currency. It’s a back-door way to prevent their citizens from buying the U.S. products that they agreed to buy, in order to be part of the trade agreement!
When foreign countries devalue their currencies, U.S. products become more expensive for their citizens to buy. You thought this trade agreement was going to open up beef markets in Japan? The Japanese don’t want our beef! What they want to achieve with the TPP is a flow of their products into the U.S., not vice versa! As one of the world’s top currency manipulators, Japan can simply devalue their currency in order to achieve their trade goals.
While Sen. Rand Paul corrected Mr. Trump by pointing out that China is not a participating country in the TPP, there’s a lot of important information to add to that sound bite.
Crista Huff and Sen. Rand Paul (R-KY) on the campaign trail.
Global Governance May Not Look Kindly upon Free Market Capitalism
China has been publicly encouraged to join the TPP by Hillary Clinton. Any country can apply to join the TPP the moment the document is signed. It requires a simple majority vote among the participating countries. The U.S. cannot stop China from joining the TPP; nor can we stop Iran, Russia, Turkey or any other country that wants to join. All the U.S. can do is vote “no,” and if we’re outnumbered, then we are forced to deal with the newcomer, giving them the same trading benefits as every other participating country.
Sen. Paul’s reservations about the TPP referred back to the passage of Fast Track trade promotion authority (TPA) in June. When Congress passed TPA, “We [gave] up the power to filibuster...to amend” future trade agreements for the next six years. That’s right. Do you see this 5,554-page document, in the photo? That’s the Trans-Pacific Partnership trade agreement. Congress gave up the right to add, change or delete any part of it before they ever saw it!
“Here is a photo of the TPP. Due to fast-track, it can’t be filibustered, amended or given a treaty vote."—Sen. Jeff Sessions (R-AL) 11-09-15
Raise your hand if you thought that was a good idea? Yeah, I didn’t think so. Carly Fiorina summed it up really well earlier this week, “There’s a whole bunch of stuff in there that can only be described as crony capitalism, special giveaways to certain industries...”
Honestly, the news gets worse. By signing the TPP, and other pending trade deals, the U.S. gives up sovereignty in myriad areas of American life, including our justice system, immigration, food safety, country-of-origin labelling, GMO usage and labelling, the environment and more. If Congress signs the TPP in the coming months, the U.S. will remain a large land mass, but it will no longer be an autonomous nation. Any decisions handed down by the new Trans Pacific Partnership Commission will override U.S. laws. In addition, the TPP is a “living agreement,” meaning that the Commission and global courts have the right to amend and add to the TPP as they wish, forever. Sobering.
Elections have consequences. When we allow global governance, we’re opening the door to socialism and other political systems which do not look kindly upon free market capitalism. Stock markets function optimally within free market economies.
Our world has certainly become complicated. For now, the U.S.A. is still a democratic republic, functioning within a capitalist construct. And that means there are stock market opportunities awaiting our attention.
The fourth quarter is the time of year when I review stocks that had lackluster 2015 earnings prospects. Many of those stocks simply had a slow year, and are now positioned for strong earnings growth in 2016 and 2017. The research is tedious, but the results are exciting, because I am presented with a new group of stocks which are likely to surge in the coming months.
An Undervalued Stock with Great Growth Potential
This week I added an excellent financial stock to the Smart Investing in Turbulent Times Growth Portfolio.
The company offers financial brokerage and banking products & services; and also balance sheet management, including loans, deposits, payables and asset allocation. The company had a slow-growth year in 2015, but Wall Street anticipates future EPS to grow quite aggressively.
And in 2016, the company should benefit from rising interest rates. As rates rise, investors commonly shift away from bonds toward equities, increasing transactional revenue. That’s because bond prices decline during periods of rising interest rates. Thus, bond investors shift their focus to investment categories that can preserve or grow their principal.
Rising rates will also boost net operating interest income, which currently represents about 60% of total net revenue.
2016 revenue is projected to increase by 22%, enhanced by higher daily average trading volumes, and continued growth in net new brokerage accounts. In addition, a 2015 departure from its mortgage loan business will improve the company’s balance sheet.
The stock’s 2016 price/earnings ratio (P/E) is way below the EPS growth rate, making the stock undervalued.
The stock is standing at an open door of a trifecta of catalysts: strong earnings growth, a market shift into financial stocks and prospects of the Fed finally moving on interest rates.
If you’re a subscriber to Smart Investing in Turbulent Times, you bought the stock earlier today.
Happy investing
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times
