“When goods do not cross frontiers, armies will.” – Frédéric Bastiat (19th century French economist)
Here’s what I’m thinking and hearing: *1.) Wow, the 10-year U.S. Treasury note down to a 2.17% yield. WTI crude oil at $55.10 per barrel. Are we going to talk ourselves into a recession, where one is nowhere on the horizon? Citigroup CEO Michael Corbat: “On our fourth quarter earnings call in early January, an analyst asked me what were the biggest risks that I saw and I said one of my biggest fears is that we are potentially talking ourselves into the next recession. And when you think about this economy so much of it is confidence. Consumer confidence and, in particular, business confidence.” Jim Cramer: “The result? We are slowly, but surely, letting the bonds talk us into a recession. That means we are going to need the Fed to take back the last rate hike and start selling bonds. I think, though, given the recent nature of the rate boost, more data has to come out to justify the cut than just the 10-year’s activity itself and the theories of what it means.” *2.) Tom Graff of Brown Advisory Group: “Falling rates mean different things depending on which part of the curve is moving. If 0-2 year bond yields are falling, this suggests that Fed cuts are imminent…If 3-10 year rates are falling, it generally means the economy is weakening. If 20-30 year bonds are falling, it means that long-term inflation and/or growth expectations are in decline…The part of the Treasury market that has moved the most [since April 17] is that 5-10 year segment, while short-term bonds haven’t moved nearly as much. This tells us that the market is pricing somewhat higher odds of a near-term Fed cut.” *3.) I think this latest inversion of the yield curve has similar characteristics to the last inversion of a couple of months ago. On the short end the Fed has done a 180 with regard to its policy stance, while the 10-year is being influenced by foreign central bank demand where German and Japanese 10-year yields remain solidly negative. The thing that is different this time around is the reality of collapsed trade talks and much higher tariffs. The fear of a global economic slowdown is more pronounced now. *4.) According to MarketWatch, “Thomas Lee, head of Fundstrat Global Advisors, says not all inversions are created equal and compared the current inversion with the situation seen in 1998. He said that when the yield curve inverts because demand for the 10-year Treasury is driving rates lower…, it tends to reflect growing worries about risk rather than presaging a slowdown in the business cycle…Bottom Line: We think investors are ‘overreacting’ to this inversion. In 1998, it was a huge tactical buy signal, as it marked ‘peak risk off’ – that inversion was seen ~1.5% before equity markets bottomed and then embarked on a 48% rise over the next 10 months. Hmmm. As much as chop makes sense for markets right now, this inversion is being viewed too negatively.” *5.) Sharp-eyed technical analyst Helene Meisler says that negative sentiment is growing elevated. The total put/call ratio from Wednesday ended at 141%, which is quite high. The peak reading of this metric was on Dec. 20 of last year when it hit 182%. This is the highest put/call ratio since that time. The put/call ratio for ETFs is extreme as well with the reading of 262%. That’s the highest level since last Dec. 21 when the reading was an astounding 326%. *6.) From the front lines of the trade/cold war: JP Morgan CEO Jami Dimon: “Trade has gone from being a skirmish to being far more important than that…If this goes south in a bad way, and you have other surprises, that could be part of the thing that changes confidence, changes people willing to invest.” According to Chinese state news agency Xinhua; “At the negotiating table, the U.S. government has made many arrogant requests, including restricting the development of state-owned enterprises…Obviously, this is beyond the field and scope of trade negotiations, (and) touches upon China’s fundamental economic system…This demonstrates, that behind the trade war the U.S. has launched against China, there is an attempt to violate China’s economic sovereignty, (and) compel China to damage its own core interests.” From the New York Times, “President Xi Jinping has called for the Chinese people to begin a modern “long march”… referring 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…The Long March [is] one of the party’s foundational legends.” President Trump said last week that easing harsh measure against Huawei could be included in a trade deal. That could become even more important as China has threatened to shut off the supply of rare-earth metals to U.S. companies. These rare-earth metals are a “critical import” necessary for the manufacturing of mobile phones, LED lighting, night-vision glasses, gyroscopes in jets, among others. Co-founder of the China Beige Book, Leland Miller, says to expect nothing from the Chinese negotiators before June 4, the 30th anniversary of the Tiananmen Square Massacre. He said that the Chinese government is absolutely fixated with having that day pass with as little domestic unrest as possible. Miller says: “The Chinese are more worried of Tiananmen than Trump.” The popular idea that the Chinese can withstand a long march is wrong. Miller goes on to say: “The Chinese want a deal and need a deal. Their economy is not going to implode if they don’t get one, but it will be under severe stress starting soon [after tariffs rise to 25%].” Hong Kong said that its exports dropped by 2.6% year over year. That’s now six months in a row of declining exports. Exports to the U.S. were lower by 17%, to China by 1.3% and to Germany by 4.4%. Imports were no better falling by 5.5%. According to data compiled by Wells Fargo, demand for diesel fuel in China fell by 14% in March and 19% in April, hitting levels not seen in a decade. Analyst Roger Read said: “We believe the accelerating decline is most likely tied to economic factors and the effects of the tariff ‘war’…If one wants to worry, that is where to focus most closely in our view.”
The Dallas Fed Manufacturing Survey for May fell to a -5.3 vs an April reading of +2.0. Production was +6.3 vs +12.4 prior. Capacity utilization was +7.7 vs +15.6 prior. New Orders were +2.4 vs +9.8 prior.
The Atlanta Fed’s GDPNow forecast is 1.26 GDP growth in the 2nd quarter and the New York Fed is 1.4%. What might help Q2 GDP is the unexpected jump in wholesale inventories of 0.7% versus a forecasted 0.1%.
The Conference Board’s Consumer Confidence index for May climbed to 134.1 in May and follows a 5 point rise in April for its best reading since last October. The Present Situation Index was 175.2 versus 169.0 prior. The Expectations Index was 106.6 versus 102.7 prior. Those who said jobs were Plentiful rose to the best level since January of 2001 and those who said that jobs were Hard to Get, fell to the lowest reading since September of 2000.
The Commerce Department said that the PCE (Personal Consumptions Expenditures) index rose by 0.13% in April to 1.5%. Over 2.0%, alarm bells begin to ring at the Fed, so inflation remains well contained. Personal incomes rose by 0.5% in the month versus +0.1% in March. Savings increased rose to $990.3 billion in April from $963.7 billion in March.
The S&P CoreLogic Case-Shiller 20-city Composite Home Price Index said that home prices rose at the slowest rate in 7 years in March, up a seasonally adjusted 0.1% from February and up 2.7% a year ago. The hottest markets remain in Las Vegas, Phoenix and Tampa. The 10-city Composite actually fell by 0.2% in March with weakness showing in Los Angeles, Seattle, Chicago, San Diego and San Francisco.
The National Association of Realtors said that pending home sales for April fell by a seasonally adjusted rate of 1.5% and were 2% lower than a year ago at this time. April’s decline marks the 16th-straight month of annual declines.
According to Peter Boockvar, economic confidence in the Eurozone improved in May. The index went to 105.1 from 103.9 in April and was the first month over month increase since June of 2018. Confidence in all the key countries of Germany, France, Spain and Italy improved.
CNBC says that California Gov. Gavin Newsom is trying to push through $2.4 billion in new taxes and fees despite the state running a $21.5 billion surplus – a surplus larger than the total budget of at least 20 other states. Included in the new request for more of the public’s money is a “water tax” to fund a safe drinking water program for disadvantaged communities and “a health tax or ‘individual mandate’ penalty starting in 2020 for Californians not having health insurance to fund expanded subsidies for Covered California, the state’s insurance exchange.”
MSN reports, “Kyle Korver has played 16 NBA seasons and will go down as one of the best shooters to ever play the game. As the 51st overall pick in the 2003, he defied the odds to put together that long NBA career. Oh, and, Korver was basically traded for a copy machine on draft day. Korver spoke at Creighton University’s commencement on Saturday, and he told the story of that draft-day trade. The Nets immediately traded his rights to the Sixers for $125,000 cash to cover their Summer League entry fee. The left over money was used to buy a copy machine…[Korver reassured the graduate by saying:] ‘But it’s OK because a couple of years ago, that copy machine broke and I’m still playing.’”
The National Weather Service says that over the last 30 days more than 500 tornadoes were spawned in the United States. That is not normal. This past Tuesday was the 12th day in a row when at least 8 tornadoes have erupted, a new all-time record. Flooding is setting records as well. Prior to May, the NWS says that we have witnessed the wettest 12 months in all of U.S. history and the Mississippi River from Vicksburg, Miss. up to the Quad Cities of Iowa and Illinois have seen the longest stretch of the river above flood stage ever recorded, even surpassing 1927. “All of this wet weather has been absolutely disastrous for Midwest farmers, and so far in 2019 agricultural production is way, way below expectations”, reports Zero Hedge and that means ultimately higher prices at the grocery store.
In what’s shaping up for a tough year for shopping malls, here’s list of retail store closures for 2019: Dressbarn – 650 stores (going out of business). Party City – 45 stores. Pier 1 Imports – 45 stores. Fred’s – 263 stores. CVS – 46 stores. Gap Inc. – 50 stores. L Brands (Victoria’s Secret) – 53 stores. Abercrombie & Fitch – 40 stores. Payless ShoeSource – 2,500 (bankruptcy). Gymboree – 800 stores (bankruptcy). Family Dollar – 390 stores. Chico’s – 60 to 80 stores. J.C. Penney – 18 stores. Bed Bath & Beyond – 40 stores.
Officials from American Airlines, United Airlines and Southwest Airlines told Reuters that once federal regulators approve the 737 Max jets for flight, each aircraft will require between 100 and 150 hours of preparation for flying. The preparation includes fluid changes, engine checks and software uploads.
Both United and American Airlines have announced flight cancellations for the 737 Max that will extend through August 3. This comes as the FAA has given no timetable for recertifying the Max but says the airlines don’t need to keep cancelling Max flights. Sounds like typical government speak to me.
Global Payments and Total Systems Services have announced an all-stock merger of equals with an equity value of about $21.5 billion. Under the terms of the deal Total System Services stockholders will receive 0.8101 Global Payments share for each share of TSS held.
Fiat Chrysler has submitted a proposal for a merger with French carmaker Renault as both look to curb costs and pool resources for developing the next generation of automobiles.
I guess you really can buy almost anything on Amazon. According to research firm IBISWorld, prefabricated “tiny homes” are sold out on Amazon for prices ranging from $7,250 to $20,000. After free shipping from Amazon, the manufacturer of one model claims the house can be built in 8 hours.
Rather than settle with the state of Oklahoma, Johnson & Johnson is going to trial on the claim they misrepresented the addictive power of OxyContin that led to 46,000 deaths in the state over a 10-year period.
According to JP Morgan and UBS analysts, Teva Pharmaceutical could have as much as a $4 billion exposure with the remaining plaintiffs who have filed suit against certain painkiller makers for their role in the opioid epidemic that has gone exponential in America.
Amazon has announced the Echo Show 5. It is a smaller version of the Echo Show with a 5.5-inch screen and costs only $89.99 versus $229.99 for the Echo Show. Sales numbers for its Echo products haven’t been revealed by Amazon but Consumer Intelligence Research Partners has said that Amazon has 70% of the U.S. smart speaker market, while Google’s Home and Apple’s HomePod have 24% and 6% respectively.
Ride-sharing company Uber said that they will remove riders from their app if they repeatedly misbehave based on feedback from drivers on rider behavior.
Cloud security company CrowdStrike plans to go public with 18 million shares priced between $19 and $23 per share. The company was founded in 2011 and will trade under the symbol “CRWD.”
Workday reports 1st quarter earnings of $0.43 per share on revenue of $825.06 million, an increase of 33.4% year over year.
Dollar Tree reports 1st quarter earnings of $1.14 per share on revenue of $5.81 billion, an increase of 4.7% year over year.
Dollar General reports 1st quarter earnings of $1.48 per share on revenue of $6.62 billion, an increase of 8.3% year over year.
Uber reports 1st quarter earnings of -$2.26 per share on revenue of $3.1 billion, an increase of 20.2% year over year.
Ulta Beauty reports 1st quarter earnings of $3.08 per share on revenue of $1.74 billion, an increase of 13.1% year over year.
Costco reports 1st quarter earnings of $1.89 per share on revenue of $34.74 billion, an increase of 7.4% year over year.
Next week: Earnings from: Box, Salesforece.com, Cracker Barrel, Lululemon, StitchFix, Ollie’s Bargain Outlet, Zoom Media, DocuSign and Vail Resorts. Economic reports: ADP Private Payrolls for May, U.S Non-farm Payrolls for May, U.S. Manufacturing New Orders for May, U.S. Purchasing Manager’s Index for May and ISM Non-Manufacturing (Services) Index for May.
WTI crude oil: $55.04 per barrel. 10-year U.S. Treasury note: 2.17%. Gold: $1,306 per ounce.
P.S. – Trump would be best to look back at WW II history about what happens when you fight a war on too many fronts!
Sources: CNBC, Real Money Pro, 361 Capital, First Trust Economics, Yardeni Research, Morningstar, Estimize.com, Bloomberg, The Wall Street Journal, The Calafia Beach Pundit, Zero Hedge, Seeking Alpha, MarketWatch, The New York Times, MSN and Business Insider.
At the time of publication Cascade Investment Group and /or its clients owned shares of PIR, CVS, LB, LUV, BA, AMZN, JNJ, AAPL, GOOGL, UBER, WDAY, DLTR, ULTA, COST, CRM, CBRL, OLLI, ZM, DOCU.
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.
Consumer Confidence Trends:
U.S. Treasury Yield Curve:
Probability Of A Fed Rate Cut:
Yield Curve Inversions Since 2000 (shaded areas = recession).
China apparent diesel demand 2006 to present: