Who is going to hit the button?

361 Capital Market Commentary | August 26th, 2019

The POTUS news flow got a little crazy last week. If Twitter didn’t find a way to monetize all that activity, then it is clearly a bad business model. Who would have thought that Jackson Hole would have become such a non-event? Hopefully the fly fishing was still excellent.

There is only one story in the news right now and it is whatever the POTUS is tweeting. Friday’s hurricane of activity called for a jump in the China tariff rates, an order for U.S. companies to retreat from China, a reference to the head of the Federal Reserve as an enemy of the United States, a joke about U.S. investors losing billions in the stock market, and then direction on how to judge his stock market gains. Only LBJ twitter might have been more colorful in a 48-hour period. To say the least, managing a business or a portfolio became even more difficult over the weekend.

With risks significantly rising on Friday, confidence in the equity markets collapsed at a breadth not seen since the volatility in February of 2018. At the same time, the ‘bubble’ in Treasuries grew larger, while the yield curve further inverted and Gold became even more shiny. As we reach the end of the month and Pensions look to their balancing, there could be a decent re-weighting toward equities given that bonds are up in the mid-single digits and stocks are down a few percent month to date. But what will you do once a bounce due to re-weighting occurs? Stock valuations remain tough to buy given the increasing risks of a global economic slowdown. We thought falling interest rates would bail out falling equity earnings, but the news flow is just too negative right now. For every stock that I want to buy, there seems to be an easier stock that I want to short. A mixed book with little risk on the table, plus lots of Bonds and Gold, seems to be the best bet in the short term. Oh, and of course volatility. That seems to be the easiest bet in the world right now. Have a great last week of summer.

Where we stand this minute on the U.S./China trade dispute…


US-China Trade update: Last Friday, in retaliation to China’s latest tit-for-tai move, U.S President Trump informed markets of his decision to increase tariffs to 30% from 25% on the existing $250 billion of Chinese goods, as well as from 10% to 15% on the next $300 billion due partly at the end of this month and in December. He also ‘ordered’ U.S companies to search for alternatives with immediate effect. This morning, President Trump communicated that China contacted U.S authorities to restart negotiations, although reports from Global Times Editor-in-Chief Hu Xijin indicate that China has not engaged in any meaningful communications with the U.S beyond what would be considered talks at the “technical level.”

(Cantor Fitzgerald)

Leaving China is not a good idea…


American business leaders warned that forcing companies to leave China would hurt the competitiveness of American industry and cause heavy financial losses.

“It’s difficult to move out of China, and any time they are forced to do so by tariffs, this is a momentous act,” said Ker Gibbs, president of the American Chamber of Commerce in Shanghai. ”We are in no position to give up the China market — it’s too large, it’s too important.”

Business leaders said the result could be a flurry of fire sales at greatly reduced prices as companies from other countries snap up American business interests.


Think moving production out of China is easy?


American Fishing Association

Who wants to be the one to tell Church and Dwight that the 25% tariff is now 30%?


Church and Dwight

Year-end financial budgeting is just going to be one giant question mark…


Joshua Bolten, the president and chief executive of the Business Roundtable, an organization representing the leaders of the largest American companies, said on Sunday that many C.E.O.s were already “poised right on top of the brake.”

“The risk is that everybody’s going to slam on the brake, and that would be a disaster,” Mr. Bolten said on “Face the Nation” on CBS.

President Trump’s latest moves, Mr. Bolten said, could “disrupt trade and commerce in a way that would cause huge damage — not just to the Chinese economy, but to the global economy and the U.S. economy.”


If you believe the Fed holds all the keys, here are two important statements for you…


Plosser Statement Powell Statement

This visual of the room during Powell’s speech is perfect…


“The big policy uncertainty now, of course, is Trump. It’s obvious,” said economist Gauti Eggertsson. The Brown University professor suggested central bankers at this year’s confab were short of ideas about how to cope with a possible downturn in the current low-rate environment, and more than a little distracted by what might come next from the U.S. president — always just one tweet away.

“When Powell was giving his speech, I could see everybody on their iPhones, refreshing Twitter, waiting for the tweet from Trump,” said Eggertsson, a former New York Fed economist. “The most powerful central bankers in the world, all in the same room, would — rather than listen to Powell, they’re checking on Twitter waiting for when Trump is going to tweet.”

Powell steered clear of commenting on Trump in his speech at Jackson Hole. But former Fed Vice Chairman Stanley Fischer was not as reticent.

“The trouble one has is not in” the international monetary system, Fischer, widely seen as the doyen of the central banking community, told the symposium. “It is in the president of the United States. We are in a system in which things are getting worse day by day.”


Washington D.C. is finding itself in a box…


After debating for days whether the U.S. is going into an economic downturn, Washington policy makers and Wall Street investors on Wednesday barreled into an even more difficult problem: There are few good options to deal with one if it happens.

With short-term interest rates already low, the Federal Reserve has little room to cut borrowing costs to spur spending and investment as it usually does in a slowdown. Meantime, the federal debt is exploding, which could hamstring any efforts to boost growth with tax cuts or spending increases.

Further complicating matters, Democrats and Republicans strongly disagree about how best to rev up the economy, with Democrats favoring higher spending and the GOP wanting lower taxes. Even within their own ranks there are disagreements about what course to take.


As a result, the US yield curve is inverting further…


United States Yield Curve

Record broken!


Streaks Without Inversion: 1977 - 2019

Germany won’t be rescuing the U.S. economy…


German business confidence extended its decline, falling to the weakest level in almost seven years, as a deepening manufacturing slump put Europe’s largest economy on the brink of recession.

Germany’s export-centered economy is struggling as global trade tensions worsen. GDP contracted in the second quarter and the Bundesbank predicts it could shrink again in the third, and the U.S.-China trade war escalated again at the end of last week.


German companies are suffering badly from geopolitical uncertainty

Even my Fed district is getting a darker shade of red…


Kansas City Fed

A slowdown in commercial construction activity is no doubt hurting my Rocky Mountain Region…


AIA’s Architecture Billings Index (ABI) score of 50.1 in July showed a small increase in design services since June, which was a score of 49.1. Any score above 50 indicates an increase in billings. In July, the design contracts score dipped into negative territory for the first time in almost a year. Additionally, July billings softened in all regions except the West, and at firms of all specializations except multifamily residential.

“The data is not the same as what we saw leading up to the last economic downturn but the continued, slowing across the board will undoubtedly impact architecture firms and the broader construction industry in the coming months,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “A growing number of architecture firms are reporting that the ongoing volatility in the trade situation, the stock market, and interest rates are causing some of their clients to proceed more cautiously on current projects.”


We are even slowing down on the residential construction side…


For the first time since the depths of the housing crash in 2009, the pace of new home construction in metro Denver has dropped for three consecutive quarters.

The number of construction starts on new homes dropped 10.5 percent in the second quarter compared to the same period a year ago. That was mostly driven by a steep 17.6 percent drop in single-family home starts, according to counts maintained by Metrostudy, which tracks new home construction across the country…

New single-family home permits dropped 18.4 percent through May, compared to the same period a year ago, while the permits pulled for new apartments are down even more, 30.3 percent.


U.S. rail traffic continues to retreat at a healthy clip…


US Rail Traffic

And newer, uglier RV industry data today…


The RV Industry Association’s July survey of manufacturers found that total RV shipments ended the month with 28,044 wholesale shipments, a decrease of (-23.2%) from the 36,525 units shipped last July… Through July, RV shipments have reached 244,625 units, down (-20.6%) from the 308,113 units at this point last year.


Total Shipment Monthly vs Last Year

Looking at the asset classes, it was a tough week for risk…


Asset Classes 8-23-2019

And a defensive week for the U.S. Sectors…


Sectors 8-23-2019

Be very fearful as the stock markets biggest fan is retreating…


Companies in the S&P 500 repurchased about $166 billion of their own stock in the second quarter, S&P Dow Jones Indices projects, down from $205.8 billion in the first quarter and $190.6 billion in the same period a year ago. That marks the lowest total since the fourth quarter of 2017 and the second consecutive quarter of contraction.

What has alarmed some investors is that companies eased up on share repurchases even as volatility surged in the midst of a heightened trade dispute between Washington and Beijing. The S&P 500 slumped almost 7% in May, but the buyback data suggest companies didn’t step in to support their stock prices the way they did during the final months of 2018.

That is a sign that corporations are potentially tightening their wallets as executives grapple with new tariff threats in the long-simmering trade dispute with China; weakening corporate earnings; signs of a downturn in global growth; and uncertainty over the Federal Reserve’s interest-rate policy.


Slowing Share Buybacks Remove a Pillar of Stock Market

Hmmm, not a healthy trading pattern for the S&P 500…


SPX Trading Pattern
SPX Index

Contrarians note…


In other words, it looks like a great time to have built that short book.

Share of SP500 market cap held short

Hedge Funds looking to be in a good place if the China trade wars continue to whack Semis and Hardware stocks…


Hedge fund net sector tilts vs Russell 3000
(Goldman Sachs)

“If it keeps on rainin’, levee’s goin’ to break”…


Just too much selling pressure in the financials as banks watch their future net interest margins collapse. Will credit losses be around the corner?

XLF in Jeopardy of cracking that support blew the 200...

“When the levee breaks I’ll have no place to stay”…


Energy companies will likely be the source of the losses at the banks given how many Oil stocks are now trading with single digit prices.

SPDR SP Oil Gas Exploration and Production



Something smells very wrong with GE if it couldn’t bounce after that short report.

General Electric

Value Trap…


Has anyone yet discovered an alternative use for a 30-year old mall anchored by a Sears or Kmart store?

Mall Versus Avg REIT

Will we soon find out what happens to liquid funds that holds less liquid assets?


Investors flee leveraged loans

Hong Kong looks uninvestable…


Hong Kong Protests

Hong Kong property values are about to revert to the mean…


Median property prices climbed to 20.9 times median household income in 2018, according to Demographia, an urban planning consulting firm. That compares with 12.6 times for Vancouver and 11.7 times for Sydney—two other cities often cited as among the world’s priciest. Huge demand, coupled with constrained supply in a market dominated by a handful of developers and cashed-up buyers from the mainland, has acted as a powerful cocktail to drive up house prices.

That’s as incomes, which used to far outstrip those on the mainland, have stagnated in recent years. Wage growth for those employed in the private sector in Chinese cities and towns was 8.3% in 2017-2018, according to National Bureau of Statistics, while Hong Kong’s was 3.9% from March 2018 to March 2019, data from the city’s Census and Statistics Department show.


Ratio of median house price to median household income in selected markets

Speaking of Hong Kong, here is your CEO of the year candidate…


Cathay Pacific

For those on the political right, more towels are being thrown in…


If your company’s owner abruptly pulled out of a conference with an important joint-venture partner just because the other CEO said something mildly unflattering, would you try to defend it as some sort of cunning N-dimensional chess move? Or would you start looking for another job? If your mother canceled a family visit because your cousin wouldn’t sell her the bedroom, would you get mad at your cousin for slighting your mother’s honor? Or would you try to arrange a neurological consult?

Hopefully, you wouldn’t just smile and say, “No, really, everything’s fine,” when it’s very obviously not. The longer you humor people who have clearly gone off the rails, the more time they have to damage themselves and those around them. Moreover, the damage is usually fiercest to the people closest by — which in Trump’s case means the folks who have been standing loyally behind him for the past three years.

(Washington Post)

And the next round of political polling will not get any better…


The best re-election strategy might be an Emergency Executive Order to repeal the Nineteenth Amendment.

Female Voters Trump

A reminder to buy your holiday decorations extra early this year…


They all are made in China, so this could be your last time ever to buy Christmas lights at a decent price.


Something to look forward to in the event you can’t find a holiday reindeer for your front yard…


Star Wars - The Rise of Skywalker

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