THE WOLVES IN THE STABLES…

Question: Did you get what you voted for? While it is definitely too early to see the actual impact or hard data, the soft data, which consists of surveys, suggest the lemon wasn’t worth the squeeze. 

The economy was just starting to recover before Trump’s take-no-prisoners tariff approach upended the economy and the stock market.

It’s one thing to have businesses bracing for impact, which, as a business—once they can plug in costs or expenses, they can adjust. But it’s another thing to upend public confidence.

For business, it’s a simple decision whether to eat the costs or pass the costs to the end consumer. While this may sound like a real choice, don’t get your hopes up too fast on the idea of companies saving the consumer from tariff increases. 

Whenever a decision affects the bottom line, you can bet corporate America will engineer a way to have the consumer pay. 

It’s as simple as understanding the economics of a company’s net profit margin and operating cash flows. 

A company’s net profit gives you a window seat to the profitability of a company. It also tells you about the company’s ability to convert revenue to profit. The higher the net margin, the bigger the profit. 

With this being said, Wall Street analysts and institutions alike are king makers. And it all comes down to earnings. Therefore, companies are constantly under pressure to outperform sometimes unrealistic expectations. 

Now factor in tariffs and re-ask the question, will Wall Street hold your company’s performance hostage according to revenues and earnings per share? Absolutely!

Do you really think a company would be willing to eat the cost while simultaneously lowering guidance, versus passing the cost to the consumer at the risk of displeasing the all-powerful financial minority that has the financial majority to place billion-dollar votes of confidence or not?

We all know how this ends. 

This is the inflation that has been shaking Wall Street and is creating such a huge amount of uncertainty. 

Uncertainty as a word or environment is right up there with high unemployment, high inflation, and economic slowdown.

In fact, I would argue that uncertainty is the Hatfield’s to Wall Street's McCoy’s.

Although this appears to be a self-inflicted pain, it’s painful nonetheless.

Here’s what I mean. When you create uncertainty, Wall Street’s earnings start to come down, which means multiples or company PE’s start to rise, and the topic of value versus expensive begins to make its rounds. 

Analysts downgrades start, and no one wants to be the outlier; so whether Jay Powell says it’s transitory or not, no one is willing to believe his theory enough to be the Lone Ranger and stick their neck out at the risk of being wrong.

In fact, it’s more of a shoot-first-ask-questions-later scenario. 

Once the earnings come into question, the sell side momentum starts, and the correction versus bear market becomes center stage. 

Now in this case, it’s one thing to talk Wall Street business in private, but when it becomes public and Main Street (the average consumer) starts to get scared…Houston, we have a huge problem. 

The evidence in the soft data says consumer sentiment has been going down, and savings have been going up, which means if the consumer slows down, businesses slow down right along with them.

This could lead to a slowdown in economic activity in the form of layoffs or high unemployment, which brings the pink elephant of stagflation back into the conversation. 

Stagflation famously originates from the Nixon era—a period of high inflation (9%), a period of high unemployment (8.5%), and a drastic economic slowdown that lasted nine years. 

Trump’s tariffs have recently become the author of the bear market conversation.  Now here is where the conflict exists. Economists and their economic surveys (soft data) do not align with the hard data (the actual numbers).

For example, people are talking about stagflation, trying to twist the perception of the meaning, but when you look at the unemployment number, we sit at 4.2%, which is pretty healthy and right in line with the Fed's dual mandate.

When you look at inflation, the last headline CPI report came in at 2.8%—down from 3% in the prior period. 

So, this tells me that the wolf is in the stable. 

Meaning…people are reacting to the threat, which apparently has more bite than the reality since no one can put a financial data point on the actual effect of Trump’s tariffs. 

So, in this case, the sizzle is more misleading than the steak. 

And because Trump is such a polarizing figure, people may be led to think that something more nefarious and sinister is going on, when in fact, the only thing going on is the market's downward spiral and wealth destruction based solely on the feeling of uncertainty. 

This may stem from tariffs, but the uncertainty expressed by CEO’s is what is causing the market's misstep, so until we can put the tariff conversation into a state of finality, good or bad, it’s best to wear a hard hat—to avoid the falling knives. 

OPTIONS ARE JUST AN INVITATION TO THE CASINO…

If you want to hide something in plain sight, put it in a book…which might explain why people leap into the stock market before they look. 

Wall Street has turned into a full-blown legalized casino where the dreams are being deferred by the type of behavior you find on a 1-800 addiction line. 

There is no way new investors should be buying options when they have absolutely no clue about how the underlying equities' fundamentals work. 

Options are a sure way to go broke quickly, and without the knowledge of the fundamentals, you’re better off burning your cash. The allure of options lies in the something-for-nothing aspects of greed. 

A call option contract gives the buyer the right to buy, but not the obligation to purchase a specified amount of the underlying asset. 

So, what ends up happening is instead of having the right information or the correct perception, the new investor realizes that they can control one hundred shares by buying one call contract, usually at a fraction of the actual cost of the underlying equity and all it takes for one successful trade—and the investor is hooked. 

For those who need a clearer visual:

If you buy 100 shares of XYZ at $100, it’s going to cost $10,000.

If you buy 1 option contract for $10 of XYZ, $10 x 100 shares = $1000, which gives you the right to own 100 shares, but not the obligation.

If the option price goes up 10 points, you make $1,000 for a 100% profit on a $1,000 investment, without having access to $10,000.

This is for the new investor—what I call “poking the bear.” Here’s what I mean…you’re new with more desire than you have money. 

You’re scrolling in your timeline on your social media platform of choice and fall into the quicksand of a guru with a fast money option play for you to make money by using options. 

They don’t give on Wall Street what we call a balanced presentation…meaning, they only tell you how much you stand to make—they never discuss the downside or potential loss. 

You—being new, go for the bait and you purchase a $5,000 course from someone who has just one chapter ahead of you in the experience with options.

So, they really have no clue about hedging strategies, limiting downside risk, or giving any information on the tax consequences that come along with short-term trading. 

It’s all just pure adrenaline leading the charge while your money is in the back screaming like hell, “Let Me Go!”

You make your first earnings play and you get lucky in total disregard of the economic or fundamental situation surrounding the stock. This keeps you pressed up against the craps table until either one or two things happen.

One—you lose all your money, or you keep going up in contract size, until eventually you lose all your money. The new investor doesn’t take into account the microeconomics, macroeconomics, or seasonal trends. It’s always blind tunnel vision fueled by desire. 

Or two—the fact that they are playing one side of the market, they think they found their way out of the financial rabbit hole, only to have dug a deeper one than the one they thought they escaped.

It’s only a matter of time before they destroy their account by having a short-term outlook. This is pure gambling disguised as wealth building, but most will not see the truth ‘til reality sets in that they’ve lost their life savings.

ONE MANS TREASURE IS ANOTHER MANS TRASH…

Let’s say you own a business and you desire to go public through an initial public offering (IPO). First, you would hire an investment bank to help underwrite your company and sell your shares in the open market.

It is the underwriter’s job to perform their due diligence on your company's financials, your business health, and as an operation. 

Next, you have to file an S-1 with the US Securities and Exchange Commission (SEC). This includes financial statements, risk factors, and a description of the business, governance or leadership team, details about the shareholders and ownership stakes—and more importantly, what the proceeds of the IPO will be used for?

Once you have completed your S-1 registration, you file it with the SEC for review and address any questions or comments, submit any revisions if necessary, and you are ready to go. 

Now it’s time to take your prospectus or red herring, which is a legal document that details and outlines the company’s risk, management team, and financials, and go on a roadshow to promote your company to the institutional investors on Wall Street—generate interest and create demand surrounding your IPO. 

This will allow your investment bankers to set the price and the number of shares of your company to be sold in the open market. 

Once you have finalized your documents with the SEC and your deal has been declared effective, your investment banker or syndicate will set a date for your public debut. 

The investment bank will take what is called an indication of interest from Wall Street. This will gauge the demand for your IPO. If the demand for your IPO exceeds the number of shares outstanding, it will be declared oversubscribed or a hot deal. 

Now that you understand the process, let’s talk about Newsmax Inc. I was reading a Barron’s article, and they posed an interesting question…is Newsmax Inc. the next DJT? 

Based on the earnings and revenue, the answer would be a resounding, loud No! Newsmax Inc. is a cable TV And social media company that has been branded the hot new MAGA trade. They have branded themselves as an independent news outlet with a conservative perspective. 

According to FactSet, the company was priced at $10 a share after selling 7.5 million shares in its March 28th initial offering.

The company went into effect and started trading Monday, March 31st. The right-leaning media company traded like a MEME stock on its first day of trading, soaring more than 720% Monday, closing its first day of trading at $83.51.

This was the type of IPO an investor would give up their firstborn for. The following day, Tuesday, Newsmax continued to advance, tripling, running as high as $265 or up 2600% in just two days before closing at $233 a share.

Newsmax’s stock was so oversubscribed that it was halted for volatility numerous times on Monday and seven times on Tuesday. 

But no upside lasts forever, and as the saying goes, nothing goes up or down in a straight line, so in its traditional spirit as a highly anticipated stock, there were some bag holders along the way. 

On Wednesday, Newsmax fell 180 points or 77.4% to $52.53 a share. The company currently trades with a market cap of $5.5 billion and produced $171 million in revenue, and posted a $72.7 million loss in 2024.

One might be curious as to why the company took off; this all comes down to the fact that they had what Wall Streeters call a tiny float—they only offered 7.5 million shares at 10 dollars a share.

In terms of pure capital, that’s only $75 million which is a snack size investment for any reputable Wall Street firm.

Now add in the hype or rumor that they have a favorite nation status with the White House, giving them the ability to obtain high-profile interviews and breaking news first, and you have a recipe for a MEME stock performance. 

Besides the fact that they are losing money—I personally don’t invest in IPOs as the leadership and business model are unproven. I need at least two to three years of boots on the ground to measure performance. 

Now add in the slight manipulation and investment bank obligations through what is known as a green shoe clause. This is an allotment option that allows an investment bank to sell up to 15% more shares than originally planned if demand is higher than expected. 

The purpose of this clause is to prevent volatility. In the case of Newsmax, 15% more or 1,125,000 shares wouldn’t have made a dent in the volatility, as there were so many dollars chasing so few shares. 

But as an underwriter it’s their obligation to maintain an orderly market. This means an underwriter may buy shares in the open market to stabilize the company’s stock if the price falls below the offering price. 

Also, they may act as a market maker providing liquidity, willing to make markets by buying and selling shares.

So, in essence, there is a hint of market manipulation.

Now, add to the fact that the early investors, after the lock period, can dump their shares in the open market, creating windfall profits for early investors and dilution for the current investors. 

In the beginning stages, there is too much noise to see a clear picture and not enough data to measure the business. So, while it’s been a wild and fun ride for Newsmax Inc. ultimately, in a span of 48 hours, one man’s treasure became one man’s garbage. 

THE ART OF THE DEAL…

Could Trump’s tariffs be the biggest negotiating tactic the world has ever seen? People have accused Trump of ripping the band-aid off of world trade. 

As a poker player for many years, my question is, why would you slow play aces when you know you have power, the money, and position?

The question is, , We have heard retaliatory tough talk from France, according to the New York Times.

France: Prime Minister François Bayrou of France, an E.U. member, said that the tariffs were “a catastrophe for the economic world” and would also cause pain for the United States. France’s government spokeswoman, Sophie Primas, provided some detail about how the European Union could respond to the new tariffs.

“We are also going to attack services,” which make up the bulk of the American economy, she said in an interview with French radio. That could include online services provided by Google, Apple, Facebook, Amazon and Microsoft, she added.

China: The Commerce Ministry in Beijing vowed countermeasures against the sweeping new tariffs, which it described as “unilateral bullying.” The Trump administration hit Beijing with a new 34 percent duty that will be added to the levies that the president had already imposed since January.

Mr. Trump also scrapped a loophole that has allowed many e-commerce companies, such as Shein and Temu, to send low-cost goods to the United States from China without having to pay taxes.

The European Commission president, Ursula von der Leyen, said the bloc would be united in its response, saying if you take on one of us, you take on all of us. Britain said that it would not retaliate right away, but negotiations with Washington were ongoing.

Germany: Finance Minister Jörg Kukies said he remained hopeful that Europe would be able to reach a deal with Washington, but added: “We do need a strong reaction.” He told the BBC.

India: The Commerce Ministry said it was “carefully examining the implications of the various measures”

Japan: Prime Minister Shigeru Ishiba called the tariffs “extremely regrettable,” but refrained from talk of retaliation. He said that his government was trying to impress upon the Trump administration that Japan is helping the United States to re-industrialize as its largest overseas investor.

Canada placed a 25% retaliatory tariff on imported cars from the United States. 

On the flip side, Israel has gone to zero tariffs. Will there be other countries that follow suit?

We will see, but one thing is for certain—American companies are scrambling to preserve their margins, and if that means cancelling international orders and pausing factory output, then so be it. 

Even if the hourly cost to produce a car in Mexico and Canada is significantly cheaper, $6 and $40, respectively. According to CNBC, the margin pressure from tariffs makes it cost-ineffective to produce cars in both regions, even though America’s costs are 68% more than Mexico's and 38% more than Canada's. 

So one has to ask…what exactly is the end game? Because surely, they have mistaken the word reciprocal when it should have been called the Pay America the Difference Trade Deficit tariff. 

This is the type of fuzzy math that is such an exaggeration that it has to be a negotiation tactic. Where is the logic in slapping tariffs on countries that are too financially weak to import from America at a rate to equal our imports?

Apparently, the stock market disagreed with the science behind the so-called reciprocal tariffs.

Both the Dow and the S&P 500 fell 1679.39 and 274.45, respectively, confused by what seemed like the irrational tariff selection. Wall Street may not totally understand the rationale, but at least the cats out the bag and CEO’s and the street can begin the process of pricing in tariffs.

The fact remains that we are the world’s biggest consumer, so it’s a matter of time before the buck circulates. 

ARE WE NOT LIBERATED YET…

In my Russel Crow voice, “Are we not liberated?”

So, there you have it…a worldwide baseline - 10% tariffs on all goods entering the United States that goes into effect April 5th—with temporary exception from the reciprocal tariffs for specific minerals and industries including gold, copper, semi-conductors, and lumber.

Automakers continue to have a, pardon the pun, but a rough ride with 25% tariffs on all cars imported into the United States. The estimated impacted vehicles amounts to 7.38M with a potential cost of $4,000-$8,000.

The low-end consumer stands to be impacted the most as 40% of the cars sold in the country are sold for under $40,000.

• Under $30 K: 13.4% 

• $ 30 K-40 K: 27.3% 

• $ 40 K-60 K: 33.7% 

• Above $60 K: 25.4%

Tariffs will force automakers to raise the prices of cars to mitigate the cost, leaving them no choice but to pass the increased cost to the consumer.

USMCA goods remain non-tariffed, such as lumber and drywall from Canada. But many other goods will be tariffed. It is estimated that tariffs will be responsible for a $17,000-$22,000 increase in cost for a new home.

Roughly 70% of construction costs are materials, and 25% or more of those materials are imported. 

40% of appliances are imported, and half are from China. 

Whirlpool will be impacted, as well as 20% of their agitators are made in China and Mexico. 40% of ceramics are made in Italy, Spain, and Mexico; 80% of luxury vinyl flooring is imported with 50% coming from China. 

China's current tariff rate stood at 20%. Now add 34%, for a total of 54%. This has to get the retaliatory juices flowing, and this doesn’t include the 25% tariff enacted for all countries buying Russian oil. 

It seems like everyone, and any industry, is free game for pharmaceutical company drugs imported from outside the United States. This will put some cement shoes on the market for quite some time until we see the impact on companies' bottom lines.

In this case, knowing is half the battle; at least companies can factor their costs and make arrangements to either retool domestically and figure out the margins and decide how much of the excess cost is going to their customers, whether enterprise or retail. 

It will be interesting to see how companies adjust. I always believe great leaders know how to call brilliant audibles as well as make the hard choices.

The questions that come to mind are, if tariffs force the international operations of companies to shutter or reduce capacity—can the companies make up the revenue and maintain margins both international and domestically?

Obviously, they will use their international operation to service international clients, but the main concern is time. 

I sense that there will be an immediate impact on industry and their bottom lines, mainly because if the adjustments mean building factories in the United States, the typical factory will take two to four years, depending on the industry, not to mention the cost to build, impacting their bottom line. 

This will increase jobs in the beginning, but depending on the cash positions of the companies having to re-shore their operations, increased Capex spending will hit the income statement in the form of reduced net income. 

This, in my opinion has Wall Street taking down estimates as well as the uncertainty that President Trump’s America First policies won’t put the U.S. in a deep recession. 

Quick Links…

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Seek And Destroy….

A Different Kind Vietnam War…

  Thank you for reading, we appreciate your feedback—sharing is caring

 Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report