Throwing in the Towel

361 Capital Market Commentary | May 28, 2019

While many are starting the summer by throwing a beach towel into their summer bag, stock investors are throwing in a different type of towel with regards to their outlook for a China/U.S. trade resolution. With each day, the two sides move farther apart leading corporate executives and economists to plan on a worst-case scenario, while still hoping for better. The White House remains in no rush to sign a deal and the Chinese government is telling its citizens to plan for a “long march”. The next step will get painful as the Chinese population hunts the globe to replace protein for its shrinking meat sources. And in the U.S., consumers will find that juniors’ Nikes now have $200 price tags and Walmart is no longer the bargain that it once was.

As we wait and watch for the new trade impacts, we will continue to digest the already slowing global economic figures. Those were some ugly Purchasing Manager figures last week, and the Durable Goods orders were nothing to write home about either. It should be no surprise that the odds for a Fed Funds rate cut increases with each passing day, while additional time frames of the yield curve continue to invert. The global bond markets are telling you that it doesn’t get easier from here folks. Even the junk bond markets have shown signs of weakness in the last three weeks, so keep a close eye on credit.

So enough discussion about current economic and market weakness. Go outside and enjoy the start of summer. Just leave your wallet at home and you won’t even know that there is a trade dispute. Last time I checked, the sun and ocean were still free.


The stock markets give up on a Chinese/U.S. trade deal and get defensive…

 

@LizAnnSonders: Sell in May philosophy has “worked” so far, w/ defensive sectors holding their own in relative terms

Nearlt all 11 SP500 sectors are down in May

The market went after tech stocks hard last week as the trade wars line up semis and hardware for a full impact…

 

Asset Returns 5-24-19
(5/24/2019)

And while the semis were hit hard, energy names joined as the market worries over slowing global growth increased…

 

Sector Returns 5-24-19
(5/24/2019)

Washington seems to be playing hard to get with China…

 

“We’re not ready to make a deal. We’re taking in tens of billions of dollars in tariffs, and that number could go up very, very substantially, very easily,” Trump told a news conference, flanked by Japanese Prime Minister Shinzo Abe.

(SouthChinaMorningPost)

Meanwhile, China is telling its people to prepare for the long haul…

 

President Xi Jinping of China has called for the Chinese people to begin a modern “long march,” invoking a time of hardship from the country’s history as it braces for a protracted trade war with the United States.

Mr. Xi’s call, made on Monday, referred to the Long March, a grueling 4,000-mile, one-year journey undertaken by Communist Party forces in 1934 as they fled the Nationalist army under Chiang Kai-shek. From there, they regrouped and eventually took control of China in 1949, making the Long March one of the party’s foundational legends.

The comments appear intended to stir the spirit of the Chinese people as the Trump administration continues to press China on trade. But they also seem to acknowledge that the Chinese public could face difficult times ahead. The tariffs come as Beijing tries to lift the economy out of a slowdown, and as a variety of unrelated factors raise the prices of basic food items like pork and fruit for the average Chinese shopper.

(NYTimes)

Many have given up trying to predict this outcome…

 

“If things continue the way they are why would Xi want to meet with Trump,” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics. “Every day the wedge between the U.S. and the Chinese side seems to get bigger and there’s no sign of any bridges being built.”

(Bloomberg)

 

Meanwhile, the companies responsible for global trade are moving to DEFCON-1 status…

 

The shoe tariffs might be manageable if kids feet did not grow or if the shoes were only worn indoors.

“The proposed tariff of 25 percent on footwear would be catastrophic for our consumers, our companies, and the American economy as a whole,” the companies wrote…

The Footwear Distributors and Retailers of America, a trade group, subsequently estimated the retail price of a $150 running shoe would increase to $206.25 if the final tariff increase is 25 percent. The cost of a $130 basketball shoe would increase to $179.

It further estimated the tariffs would add $7 billion in additional costs to U.S. footwear.

“There should be no misunderstanding that U.S. consumers pay for tariffs on products that are imported,” the companies wrote.

(PortlandBizJournal)

This is a perfect storm for the Ag equipment suppliers…

 

During the first three months of 2019, U.S. agricultural exports to China were 40% below the same period last year, according to Agriculture Department data. And that comes on top of a steep decline in 2018, when the U.S. sold $9.2 billion worth of farm goods to China, versus $19.5 billion in 2017, the department estimates.

Deere said May 17 that it will cut production in the second half of its fiscal year by 20% compared with the same time last year. The Moline, Ill.-based company expects to record up to $75 million in higher costs this year for steel and metal components driven up by U.S. tariffs.

CNH, the U.K.-based manufacturer of Case IH and New Holland equipment, expects to pay tariff-related costs of between $50 million and $100 million this year. CNH manufactures farm equipment in the U.S. and is the second-largest seller of machinery in the domestic market behind Deere.

(WSJ)

Huawei getting caught in the trade wars will directly impact rural cellphone service costs and possibly eliminate it altogether…

 

Plans to upgrade the wireless service near Mr. Nelson’s farm halted abruptly this month when President Trump issued an executive order that banned the purchase of equipment from companies posing a national security threat. That includes gear from Huawei, the Chinese telecommunications giant, a major supplier of equipment to rural wireless companies.

The chief executive of the wireless provider in Mr. Nelson’s area said that without access to inexpensive Huawei products, his company could not afford to build a planned tower that would serve Mr. Nelson’s farm…

“Restricting Huawei from doing business in the U.S. will not make the U.S. more secure or stronger,” Huawei said in a statement. “Instead, this will only serve to limit the U.S. to inferior yet more expensive alternatives.”

Much of Mr. Trump’s focus has been on the next generation of wireless technology, known as 5G. But Huawei already provides equipment to about a quarter of the country’s smallest wireless carriers. The Rural Wireless Association, a trade group that represents 55 small carriers, estimates that it would cost its members $800 million to $1 billion to replace equipment from Huawei and ZTE, China’s other maker of networking gear.

(NYTimes)

The tip of the trade javelin looks to be forward semiconductor sales which are evaporating at 2009 rates…

 

Semiconductor Sales, 3mma, YoY
(@AndreasSteno)

And not only semichips, but all core durable goods are losing their year-over-year growth…

 

US Durable Goods Excluding Transportation YoY

(DailyShot)

The Markit PMI data confirms the U.S. economic slowing…

 

IHS Markit US PMI

Even containerboard demand is in its sharpest decline since the global financial crisis…

 

Containerboard as Cyclical Indicator

Here is a chart that will make the lending community reach for their bottle of Pepto-Bismol…

 

Loans categorised as “criticised” — a broad regulatory category that captures loans that are or are threatening to become impaired — rose 8 percent in the first quarter at the 20 regional banks Mr Foran covers, the first quarterly increase he has seen in three years. The increase in criticised loans at the big banks was 5 percent.

Speaking at an industry conference on Tuesday, the chief financial officer of M&T Bank, which has a $23bn commercial portfolio, said that while its delinquency rates remained at multiyear lows, the bank is seeing “management shortfalls” at some companies: “Taking on too much leverage to do a deal that they weren’t capable of pulling off, not managing expenses properly, in some cases not having the right controls in place and getting themselves in trouble.”

(FinancialTimes)

Bad loans bounce back, non performing commercial loans

It was inevitable that animal spirits and easy lending would create overreaching by lenders…

 

Default rates spike when corporate debt to gdp exceeds 45%
(Cantor Fitzgerald)


With the increased worries, the stretch for safety leads to a new recent low in the 10-year Treasury yield…

 

US 10yr Government Bond Yield
(DailyShot)

I missed this data point…

 

One month does not make a trend, but it is somewhat difficult to explain given the past strength in economic data and the very low levels of current mortgage rates. A visit to many automobile plant or agricultural towns will likely confirm the recent decline.

Month over month change in US home values
(WSJ)

Want to win that next election? Better think Green…

 

Those running for office in the future should look at the Euro elections over the weekend and take note of how the under 30 people in Germany voted. They want help for the environment. And the under 30 crowds in other developed nations are not very different.

In Germany the Greens were the strongest party among young voters

As college graduation time rolls around again, it is also time for parents of future grads to begin planning…

 

Future four year college costs
(JPMorgan)

Williams-Sonoma needs to invent a ‘Keurig’ for hamburgers or it is all over…

 

@mitchnolen: For the first time in history, restaurants outsold grocery stores in America, according to the latest government data. It’s a transformation decades in the making, influenced by everything from cars and fast food to women working outside the home and home delivery.

Restaurants vs Grocery Stores - Monthly US Sales

Finally, an idiot sells tacos…

 

4 Out of 5 Doctors Recommend Tacos - One is a Idiot
(T.Rollins)

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