Trump Tariffs are getting the most attention for deals (White House optimism) with 15 countries before the end of the 90 day window and no deals have yet come to fruition. Japan and Korea were expected to be first but changes in the political leadership in each country is delaying any deals.  This would be painful economically for both countries if Trump gets what he wants. US Secretary Scott Bessent is heading to Switzerland to initiate discussion to direct talks with China but this may be just to break the deadlock and start talks. Getting deals done will help the US trade deficit over time. The data for March showed imports rose to US$419B from US$401B as importers brought in as much goods as they could before the tariffs were initiated. US Exports remained at US$278B so no progress there. The overall deficit was US$140.5B up from US$123B in February.  Tariff collections have started and the US gained US$15.9B in April, up from US$9.6B in March. US lawmakers were annoyed that Ryanair has picked a Chinese plane to replace ordered Boeing planes that are way behind schedule in its deliveries. 

I remain concerned that a Geopolitical Challenge will take place and be the ‘Black Swan’ to take the general stock markets to our downside targets. The list of areas of concern has expanded. 

First, India and Pakistan are now fighting over terrorist attacks into India by Kashmir separatists calling themselves Kashmir Resistance and linked to militant group Laskar-e-Taiba. India did 9 attacks on terrorist locations but held off attacking Pakistani military bases. Pakistan claims it shot down five Indian planes and plans further action if this escalates, which is very likely. China, an ally of Pakistan and Russia, an ally of India, are now watching this confrontation to see if it spreads into a nuclear exchange. 

Second, China is increasing its military exercises around Taiwan and needs to redirect its citizens from the trade war, layoffs at plants, deflationary forces in housing. New outposts near the Philippines have shown the expansion plans of China’s military. To help alleviate on the economic front China yesterday lowered lending rates by 10 points and gave the banks a nice gift lowering bank reserve requirements by 50 points. China has halted all US LNG imports and has turned to Australian gas. China exports rose 12% in March as it shipped everywhere the most goods it could before tariffs started. China has increased the size of its military exercises around Taiwan and with the US distracted by trade wars, Iran negotiations, and possibly a recession; the chances of China blockading or invading Taiwan rises. US Indo-Pacific Command sees escalating preparations for a military attack against Taiwan rising at a ‘rapid boil’.  If China throws a bone to advance the trade talks it might offer concessions regarding Fentanyl and its precursor chemicals. 

Third, Iran has shown no willingness to end its nuclear program and at some point the US will move to add strongly applied sanctions to cripple their economy. Trump plans to threaten to cut off US trade with any countries that buy Iranian oil. This is aimed at Iran’s major buyer China. Iran crude exports in April were 1.6 Mb/d .

US stocks are lifting today on hopes that the China talks in Switzerland will see a breakthrough. The next trade problems or one of the ‘black swans’ above could drive  stock prices for the general stock market lower in May. 

Our expected downside targets are:

• Dow Jones Industrials Index 35,000 (now 41,045)
• S&P 500  4,800 now (now 5,634)
• NASDAQ 13,000 (now 17,779)
• S&P/TSX Energy Index <225 (now 237)
• WTI  <US$56-58/b (now US$59.49/b)

As this decline progresses in the coming weeks we should see more capitulation from leveraged investors who get nasty margin calls. Intermarket pressure should take energy stocks down as well as the overvalued tech sector (AI and semiconductor stocks the most overvalued still) and provide energy investors with the next low risk BUY window. This should trigger a Table Pounding BUY signal during the second half of May and we will send out to SER subscribers another Action Alert with new BUY ideas. 

The Trump tariffs have still not been seen by customers as inventories of current stock need to be sold and then new imported items will carry the tariffs and become relatively expensive. This is now expected to hit stores in June. Stores such as auto dealerships are seeing good traffic now as buyers complete transactions at current prices before the tariff rise. 

The war drums are beating and any miscalculation could set off some more regional wars. The US military is overstretched and its munition stocks are low from supporting Ukraine.  Europe, Japan, the UK and Australia all have the same empty munition stocks. China knows this and could take advantage of the trade war and turn it into a real war. There can be no real winners if a conflagration commences. 

Russia has stated that they have recovered all of the land that Ukraine fought and captured in Russia. They succeeded with the help of North Korean and Chinese forces and weaponry. This may now provide a window for diplomacy to get a ceasefire and end the war. Putin, having gained back his land, may now be more willing to do a deal before President Trump gets angrier and places painful sanctions on Russia. 

We have not yet seen in the current market decline a lot of disgorgement of assets. Investors, especially retail investors have been buying the dips. Historically at market bottoms they are in fear mode and selling. Panic climactic action is always seen at market bottoms and we expect this to occur in the coming weeks. Use this market mayhem to add to your favourite energy positions. If we are right that by year end Iran will lose production of >1.5 Mb/d and Venezuela > 500 Kb/d then there will be a significant shortage of crude production and prices will lift over US$80/b. Remember global inventories are low historically so even a 1 Mb/d shortfall can drive prices up materially. 

For the energy sector we have bargain levels right now. We have already gotten all three of our BUY indicators saying BUY. The third one and the most reliable historically is the S&P Energy Bullish Percent Index. When this reaches over 90% it is  time to take profits and when under 10% a BUY signal. In March 2020 it fell to a Table pounding BUY level of 3.7%. In early April it plunged to 0% and stayed at that level for three days. The only other reading this low was in 2008 at the worst levels for the market averages and stocks during the financial crisis. Use upcoming weakness to BUY your favourite energy investments and consider moving to a full weighting; whatever that is for your personal portfolio needs. Check with your investment manager/advisor to make appropriate individual company decisions. 

For long term investors, find the ideas you want to own for this energy (and most commodities) super cycle and put your BUY orders below the market on plunging days to get great bargains for significant appreciation into the end of this decade.

If you want to see our Action Alert BUYS, sign up now for access to the Schachter Energy Research reports.