“The solution to any problem—work, love, money, whatever—is to go fishing, and the worse the problem, the longer the trip should be.” – John Gierach
Here’s what I am thinking and hearing: *1.) From the front lines of the trade/cold/currency wars: China has gone for the big guns, firing a warning shot with its currency. On Monday, China let the yuan fall below 7 to the dollar, breaching a level long seen by currency market watchers as the “line in the sand.” This is the first time in more than a decade that the yuan has traded below 7 to the dollar. The People’s Bank of China said the currency’s decline was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.” The Chinese have now suspended any new purchases of U.S. agricultural products and are considering new tariffs on those products if purchases resume. President Trump, according to the Wall Street Journal, reportedly overruled all of his trade and economic advisors when he decided to go forward with new 10% tariffs on Chinese goods, starting September 1st. My personal feeling is that Trump may have really miscalculated that move. China’s currency is a very large weapon that can potentially negate the impacts of his tariffs. Making Chinese goods cheaper for the rest of the world that imports them, is a move that offsets the damage from tariffs to some degree. *2.) Credit Suisse said there are two alternatives that would drive a settlement in the U.S. vs China trade war. One is a 10% pullback in the S&P 500 that gets Trump’s attention and two, for Trump to have a clearer vision of which Democratic challenger he will face in 2020. *3.) Jim Cramer: “You have to ask yourself, who would you rather be: The U.S., with incredibly low inflation, tremendous job growth and plentiful natural resources, with internal consumption as the driving force for the economy? Or the Chinese, without plentiful resources, a currency with an inflationary bias, and a workforce that is challenged by the great job exodus? I think I would rather be the U.S. Moreover, given the state of our economy, we do not need to do a deal. While that would be destructive for many of the industrials and technology companies that have businesses in China, I believe we can get a commercial deal if we want to, but if we can’t because the Chinese won’t bend, we are strong enough right now to take the pain. If we don’t take it now, I don’t know when we can.” *4.) More recent Fed speak. San Francisco Fed President Mary Daly says that she’s monitoring the impact of U.S.-China trade tensions as she considers the central bank’s next move on interest rates. She says: “In thinking about what to do going forward, where I’m really focusing my attention is these headwinds. Sometimes the blowing slows down and sometimes it picks up, and now we’re in a picked-up position.” St. Louis Fed President said that uncertainty over trade policy is here to stay and he has one more interest-rate cut “penciled in” for 2019 but wasn’t sure it is needed. He believes the best course currently is to see how the economy responds to the quarter point cut of last week. *5.) According to Deutsche Bank, nearly $15 trillion of government bonds worldwide now trade at negative yields. MarketWatch reports, “Historically, people give the government their money, instead of spending it, with the promise of being paid back over time, with interest. Now [in a negative yield environment], governments are essentially getting paid to borrow money, as people become increasingly desperate for a safe haven for their wealth.” As of August 7th, the 10-year German bund was yielding an amazing -0.59%, the Swiss 10-year: -1.0%, the Spanish 10-year: +0.15%, the French 10-year: -0.34% and the U.K. 10-year: +0.43%. The 10-year U.S. Treasury bond: +1.68%. *6.) Tom Graff, chief fixed income strategist for Brown Advisory: “The [bond] market is once again out ahead of the Federal Reserve. After a series of escalations in the trade war with China, expectations for rate cuts have increased significantly. Fed funds futures are pricing a 1.45% target rate at the end of 2019, which implies almost 75 bps worth of cuts. More immediately, the market is pricing an 80% chance of at least 50 bps cuts over the next two Fed meetings, with a 24% chance of 75 bps. This is well ahead of the Fed’s actual plans.” *7.) The rapid plunge in global bond yields on Monday, which followed a dip in the Chinese yuan below 7 to the dollar, flipped the switch on the computerized trading algorithms that caused the dramatic one-day sell-off in the equity markets. In the days that followed this week, China responded by placing a new peg on the yuan at just above 7 to the dollar. Global interest rates began rising again and that triggered the algorithms to buy, now here we are with the averages basically roundtripped for the week. Just crazy. Insanely crazy. *8.) During Monday’s sudden downdraft, Goldman Sachs said that its corporate buyback desk was exceptionally busy buying back shares for a number of companies. Bloomberg also reported that Corporate America bought back shares at a “furious” pace as the S&P 500 plunged 3% that day. *9.) Currency manipulation and trade wars are not good for stocks but, with the Fed and other central banks back in the easing mode, this tailwind is very good for stocks. Does easier monetary policy trump (no pun intended) trade wars? The answer is probably yes…because lower interest rates are good for the consumer and consumer spending accounts for two-thirds of GDP. *10.) According to Major League Baseball (MLB), the New York Yankees will play the Chicago White Sox at the iconic “Field of Dreams” location on August 13th of 2020. A temporary 8,000-seat stadium will be built on the site of the 1989 film in Dyersville, Iowa. A pathway will be constructed through a cornfield that will take fans to the stadium.
The Commerce Department said that the U.S. trade deficit widened by 0.3% in June to $55.2 billion. Exports declined by 2.1% to $206.3 billion, the lowest level since December. Imports dropped by 1.7% to $261.5 billion. The trade gap with China was little changed but the deficit with Mexico jumped dramatically higher.
The Commerce Department also said that June wholesale inventories were basically unchanged from May. Wholesale sales fell for the second straight month, down 0.3% dragging the year over year change in wholesale sales to its weakest level since Trump’s 2016 election victory.
The Institute for Supply Management (ISM) reported that its non-manufacturing (services) index fell to 53.7 in July from 55.1 in June. New orders fell to 54.1, the lowest reading since August 2016. Of the 18 industries surveyed, 13 saw growth in July vs. 16 in June. There were 5 industries that saw contraction in the month vs only one in June.
The Federal Reserve announced that consumer credit expanded in June at a 4.3% annual rate, down from 5.3% in May. Total credit increased by $14.6 billion to a total of $4.1 trillion. Revolving credit (credit cards) fell by 0.1% and nonrevolving credit (student and auto loans) rose by 5.8%.
The Baker Hughes weekly drilling rig survey fell by 4 rigs last week to a total of 942, which follows the week’s prior decline of 8 rigs. Oil rigs fell by 6 to 770 and natural gas rigs rose by 2 to 171.
The Germany Economy Ministry said that German industrial production fell by 0.5% in July which follows a decline of 1.5% month over month in June. The year over year decline in IP of 5.2% is the 10th month in the last 11 and is the biggest since November of 2009.
According to CareerBuilder, in a recently released Harris poll, about one-third (32%) of U.S. employees say they plan to get a new job this year. Also, more than one-quarter (29%), say they regularly search for new jobs while currently employed and 78% say they are open to trying something new if the opportunity arises.
According to the Washington Post database, Colorado pharmacies received 1,022,073,725 prescription pain pills between 2006 and 2012. Of those, 46% were manufactured by SpecGx LLC, a subsidiary of the global pharmaceutical company Mallinckrodt. In El Paso county, pharmacies received 125,820,253 prescription pain meds during that time period, enough for 30 pills per person per year. About 44% of those pills came from Actavis Pharma Inc. a generic manufacturer which later merged with Allergan. As for pharmacies, Walgreens received more pills than any other pharmacy in the county during the period.
GW Pharma reported that sales of its marijuana-derived epilepsy drug Epidiolex, more than doubled in the second quarter of this year. “Since the drug’s launch, the company said more than 12,000 patients have received prescriptions for the medicine and it has been dispensed to 2,500 doctors,” according to MarketWatch.
Arizona Brands, the company behind Arizona Iced Tea, is getting into the cannabis market. MarketWatch reports, “[The company] has reached a licensing deal with Dixie Brands, a Denver-based cannabis company that makes and sells weed vaporizers, candies, drinks, tinctures, and topical creams in five U.S. states”. Dixie will make the products and sell through Arizona Brands.
According to the Wall Street Journal, Barneys New York is preparing to file for bankruptcy next week and will close most of its stores but is actively seeking buyers for seven of its core U.S. locations.
Walgreens says that it intends to close 200 stores across the U.S., which is about 3% of its footprint.
Uber said that it lost more than $5 billion in the 2nd quarter. The company said that $3.9 billion of the loss was related to the stock-based compensation expenses related to the IPO. Revenue improved by 14.0% to $3.17 billion.
Boeing said that it is planning further changes to the 737 MAX flight control system to address a new flaw found in June testing. CEO Dennis Muilenburg said that the company has conducted over 500 test flights (two of which he personally flew on) for the airplane in an effort to gain back the public’s trust in the 737 MAX.
Airbus said that it will begin building the new A220 in Alabama soon. The A220 is the new brand for the C Series passenger jet acquired from Canada’s Bombardier and the first U.S.-built A220 will be delivered in late 2020.
Microsoft has acquired PromotelQ, a retail advertising start-up for an undisclosed sum. The purchase is designed to help Microsoft compete with Amazon in the digital ad space.
New Media has finalized the purchase of Gannett at $12.06 per share. Under the terms of the deal, Gannett shareholders will receive $6.25 in cash and 0.5427 shares of New Media for each share of Gannett held.
Cisco Systems has said that it intends to acquire Voicea, an AI assistant creator for an undisclosed sum. “Voicea’s Eva assistant blends AI and automated speech recognition to listen, take notes, and capture important moments of work meetings,” according to Seeking Alpha.
Salesforce.com said that it has agreed to acquire privately held field service company ClickSoftware in a deal valued at $1.35 billion in stock and cash. The deal will help CRM compete with Microsoft which acquired field service company FieldOne in 2015.
According to Nation’s Restaurant News, Chick-fil-A is the third-largest fast food chain by total sales. The company grew revenues by 16.7% in 2018 to reach nearly $10.5 billion. Only McDonald’s and Starbucks brought in more money in U.S. sales last year, both with far more locations.
Zoetis reports 2nd quarter earnings of $0.90 per share on revenue of $1.55 billion, an increase of 9.2% year over year.
Walt Disney reports fiscal 3rd quarter earnings of $1.35 per share on revenue of $20.2 billion, an increase of 32.9% year over year.
Gannett reports 2nd quarter earnings of $0.21 per share on revenue of $660.3 million, a decrease of 9.6% year over year.
GrubHub reports 2nd quarter earnings of $0.27 per share on revenue of $325.06 million, an increase of 35.6% year over year.
Restaurant Brands reports 2nd quarter earnings of $0.71 per share on revenue of $1.4 billion, an increase of 4.5% year over year.
B&G Foods reports 2nd quarter earnings of $0.38 per share on revenue of $371.2 million, a decrease of 4.4% year over year.
Etsy reports 2nd quarter earnings of $0.14 per share on revenue of $181.1 million, an increase of 36.8% year over year.
Take-Two Interactive Software reports fiscal 1st quarter earnings of $0.41 per share on revenue of $422.2 million, an increase of 46.4% year over year.
CVS Health reports 2nd quarter earnings of $1.89 per share on revenue of $63.43 billion, an increase of 35.2% year over year.
Roku reports 2nd quarter earnings of -$0.08 per share on revenue of $250.1 million, an increase of 59.5% year over year.
Lyft reports 2nd quarter earnings of -$0.68 per share on revenue of $867.3 million, an increase of 71.8% year over year.
CenturyLink reports 2nd quarter earnings of $0.34 per share on revenue of $5.58 billion, a decrease of 5.4% year over year.
Next week: Earnings from: Cisco Systems, Macy’s, Walmart, Dillard’s and NVIDIA. Economic reports: U.S Consumer Price Index for July, U.S. Retail Sales for July and U.S. Housing Starts for July.
WTI crude oil: $52.58 per barrel. 10-year U.S. Treasury note: 1.78%. Gold: $1,508 per ounce.
Sources: CNBC, Real Money Pro, Seeking Alpha, MarketWatch, Zero Hedge, First Trust Economic, 361 Capital, The Calafia Beach Pundit, The Wall Street Journal, Bloomberg, Estimize.com, Morningstar, The Colorado Springs Independent and the Business Insider.
At the time of publication Cascade Investment Group and or its clients were long shares of: BHGE, WBA, GWPH, UBER, BA, MSFT, AMZN, GCI, CSCO, CRM, MCD, SBUX, ZTS, DIS, GRUB, QSR, BGS, ETSY, TTWO, CVS, ROKU, LYFT, CTL
Disclosure: This publication shall not constitute an offer to sell or the solicitation of any offer to buy or sell any securities of the companies mentioned. This publication is solely a compilation of recent news releases from the sources cited above.
Ken Beach, President and Managing Partner of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.
R.I.P. to the Gilroy, El Paso and Dayton shooting victims.