The Dollar & President Trump
The two most bullish catalysts for stocks in the next twelve months are the repatriation tax holiday which will spur buybacks and the weak dollar. The chart below compares the dollar’s value at the start of President Trump’s term compared with all the presidencies since 1968. As you can see, it has fallen dramatically as President Trump is in favor of a weaker dollar to support exports. Usually presidents want a strong dollar as a form of national pride. The voters don’t see the improvements in exports, but they do see the exchange rate when they travel abroad. Regardless of whether it is good to have a strong dollar, the voters seem to like it. The president usually wants to appeal to the voters. The other catalyst for the weak dollar is the fact that global central banks are tapering. The Fed seems to be slightly pulling back from a third rate hike. If the market’s volatility increases after the Fed starts unwinding the balance sheet, the Fed will slow the number of rate hikes in 2018.
The other two charts that the IIF has posted is that the stock market has risen more than average and that Trump’s approval rating has tracked the dollar. I find them spurious which is why I won’t post them in this article. Optimism about Trump’s election helped boost the stock market, but what has kept it higher is strong earnings which isn’t related to anything Trump has done. The repatriation tax holiday could help stocks, but it isn’t priced in yet. It shouldn’t be priced in because healthcare reform still hasn’t been done yet; it needs to be done before the tax reform to pay for the tax cut. The dollar’s relationship to Trump’s approval rating, in my opinion, is randomly associating two things that are falling. The correlation will end in the next few months if the dollar falls more as it’s unlikely for Trump’s approval rating to fall at an accelerated clip since it is so low.
Apple Earnings
I think investors won’t push Apple stock around much after the Tuesday report unless it is wildly different from expectations. The stock is only about 5% off its all-time high, but it’s down 3% in the past 3 days. This recent selloff makes sense from a technical perspective because making a new high right before a quarter is released would subject the bulls to a potential correction. It’s better to wait and see what happens with the quarter and then start bidding the stock up in anticipation of what should be a full slate of new products.
An Apple stock rally in August and September would drive the Nasdaq and the S&P 500 since Apple has the biggest market cap. Apple won’t drive the Dow as much because the Dow is price weighted. Weirdly, Boeing and Goldman Sachs will have a big say in where the Dow is headed even though they only have $143 billion and $88 billion market caps respectively. Boeing’s enormous rally of 33% in the past 3 months is why the Dow is at an all-time high. The Dow shouldn’t matter because of this ridiculous construction, but it still does because many mom and pop investors use it to gauge where the market is.
The untold story of Apple’s success is shown in the chart below. It breaks down the various iPhone models over the past 10 years along with their prices. Usually consumer products fall in price. You can think of TVs, cameras, and personal computers as examples of this deflation. The most recent laptop I bought was about 50% cheaper than my first laptop 10 years ago. It also has 32 times the memory. Apple’s iPhone base model has largely stayed the same price which is in itself an amazing feat. This is because the product has replaced PCs for many home users who only need to consume internet content, post on social media, and use email. It has also replaced MP3 players, digital cameras, portable video game devices, calculators, telephones, and GPS devices.
Even with this amazing achievement, it is still tough to raise prices. The ingenious change was to come up with higher end premium devices. Apple has made camera improvements, screen enlargements, and changes to the storage to get consumers to pay up for better phones. As investors, we can’t get star stuck by the allure of Apple. The fact that it boosted storage on the second-tier level to get more people to pay more was probably more important to the bottom line than some of the design changes. Apple might push the envelope further with the latest iPhone release in the fall as it is rumored that Apple will go with another high-end device. The key management decision is to know when it is overkill because having too many options confuses customers. Apple will need the premium device to have a ‘must have’ feature. In this vain, Apple isn’t competing with Samsung for market share in the smartphone category. It is competing with itself to make the premium device better than the other new products. It simultaneously needs to make sure its lower end products still match or outperform the specs of the devices its competitors offer.
Conclusion
The weak dollar is about to be a big story for corporations as we head into the second half of the year. The repatriation tax holiday helps the same companies as the weak dollar making this a double catalyst for the multinationals. Apple is one of the firms which will be helped by both. The firm will report an unimportant quarter on Tuesday. If the stock sells off, it might be a buying opportunity as it should gain momentum based on the hype surrounding the fall product launch. The snap determination I will make on how successful the products will be will depend on what the new high-end model offers. One issue Apple is battling is that it’s products are getting too good; they’re lasting too long. That crimps demand. Apple needs to wow its customer base to make them want to upgrade from old devices.
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