Interpreting the International Trade Report

The International Trade Report for the month of March showed an enthusing trade deficit expansion of $6.4 billion, as it widened to $51.8 billion. Economists surveyed by Bloomberg had forecast expansion to a lesser $49.5 billion at the consensus. We think the news was an important driver for stocks Thursday, killing a six day slide, but just barely. Through this report, we attempted to determine whether the trade data was truly the ace it seemed to be. In our study and after accounting for several important catalysts, we found it to be less enthusing than the market’s initial reaction might imply. This may be why stocks retraced ground Thursday into the close.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Relative tickers include the Industrial Select Sector SPDR ETF (NYSE: XLI), Caterpillar (NYSE: CAT), Boeing (NYSE: BA), General Motors (NYSE: GM), Ford (NYSE: F), SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrial Average (NYSE: DIA), Starbucks (Nasdaq: SBUX), McDonald's (NYSE: MCD) and Yum Brands (NYSE: YUM).

International Trade Report

The good news implied in the expansion of the trade deficit may be counterintuitive, but I believe it continues to apply today. It is two-fold. When America’s economy was most healthy over the last decade, the trade deficit was wide and expanding. Of course, America’s leaders have engaged China over the last few decades for two reasons. The first was for American companies to find cost savings in manufacturing overseas. This widened profit margins for American companies while offering our consumers lower prices for goods. The impact to our labor markets and the tendency for China to bend the rules of fair trade has cost us though.

The second hope was for American companies to find opportunity to participate in the development of the bursting populations of the Far East. Clearly, the hope is that trade will work to our benefit over the long run as well as it has up until now, depending on China’s willingness to play fairly. If it all goes according to plan, Chinese demand would support the growth of American companies and eventually drive a trade surplus with the nation. While I have my doubts about that, today, the widening trade gap still reflects a healthy situation in my view. Over the long run, I anticipate China will simply steal American intellectual property and know-how and advance its own home grown versions of our companies and products, so that the projected benefits will prove overstated. I’ll talk more about the trouble I see with China in a future article.

Another positive sign of the trade data (on the surface) was that the report showed that both imports and exports increased on a monthly basis. It’s good news, reflecting a growing global economy in March, but there’s a fly in the ointment we discuss further along here. On a year-over-year basis, the deficit expanded by $5.8 billion, with exports up 7.3% or $12.8 billion, and imports higher by 8.4% or $18.5 billion.

Exports increased 2.9% in March, or by $5.3 billion. This seems like fabulous news given 20% of American exports are sold into Europe, or have been historically. Unfortunately, closer inspection shows the goods deficit with Europe expanded to $9.8 billion in March, from $5.9 billion in February. This is probably due to a decline in exports sold into the struggling region, but might also be partly driven by increased imports into America. Of course, dynamic currency markets are playing a role as well.

Given the importance of China, the increase of the trade deficit to $21.7 billion in March, from $19.4 billion in February, seems enthusing. It’s probably being driven by more demand for Chinese made goods here at home. It may also be driven by lower exports into China, but given the latest expansions of General Motors (NYSE: GM) and Ford (NYSE: F) in China, that seems less likely. Also, despite the recently slowing of economic growth in the important developing nation, recent data from Starbucks (Nasdaq: SBUX), McDonald’s (NYSE: MCD), Yum Brands (NYSE: YUM) and others continues to show increasing demand for American goods and services. And China has taken steps to spur growth, including opening up to more foreign investment, which not coincidentally, has sparked a rally in many of China’s small and microcap names.

The market also found it enthusing that American imports increased by 5.2%, or $11.7 billion. With the microscope on the globally tied American economy and on consumer spending under today’s unique unemployment situation, we found reassurance in the growth of imports. Growth was attributed to capital goods, consumer goods, industrial supplies and materials, and automotive vehicles, parts and engines. We have to agree that those would be the best places to find increased activity.

That aforementioned fly in the ointment could be found in this report and through the study of a second report. The trade deficit with OPEC expanded by $2.7 billion to reach $9.1 billion. This was obviously being driven by price increase in petroleum and imported distillates. In fact, higher fuel prices skewed the growth of both factors in international trade. Import and export prices were reported the same day as the international trade data, as always, but for April. If we want to compare apples to apples, we have to dig up the March data. Unfortunately, it shows that March saw steep increases in both import and export prices. Therefore, fuel prices contributed to both sides of the trade scale, but especially to import growth, which we hoped to attribute American economic demand to. I suspect that this realization helped to quell some of the day’s enthusiasm Thursday, and the realization that the jobless claims data was not as exciting as the headlines portrayed.

The shares of the most likely benefactors of the data were mixed to modestly higher, before fading into the close Thursday. Much of the export growth was attributed to industrial goods and supplies, but the Industrial Select Sector SPDR ETF (NYSE: XLI) ended only fractionally higher. Shares of major industrials like Caterpillar (NYSE: CAT), Boeing (NYSE: BA) (see my report) and General Motors (NYSE: GM) all closed in the red, as they also contended with soft Chinese trade data published the same day.

As time passes, the suspect positives from this report will lose their impact, and the market will continue to look forward to new data points for insight into what is developing in trade. My outlook is modestly negative, with a view for the cliff’s edge that we should reach soon enough, given the disruption driven by Europe and potentially Iran this year.

This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Nobility Homes (Nasdaq: NOBH), Palm Harbor Homes (Nasdaq: PHHM), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), CRH (NYSE: CRH), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).

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