Month: July 2018

China’s Global Building Spree Runs Into Trouble in Pakistan To fund a 70-nation infrastructure initiative, Beijing has been extending loans in opaque deals often contingent on using Chinese contractors. Three years into China’s program in Pakistan, that nation is heading for a debt crisis, caused in part by a surge in Chinese loans and imports.

(…) The problems are expected come to a head by early fall, when Pakistan’s new government is likely to seek a bailout from the International Monetary Fund, the nation’s first since 2013, according to Pakistani officials. Such a bailout would likely include restrictions on borrowing and spending, the officials say, which would force the country to curtail its Belt and Road program with China, known as the China-Pakistan Economic Corridor, or CPEC. (…)

In Malaysia, the second-biggest recipient of Belt and Road loans after Pakistan, a new government suspended work this month on a $20 billion Chinese railway project and is reviewing other Chinese projects. Myanmar is trying to renegotiate a $10 billion Chinese port project. Nepal has halted plans for two Chinese-built hydroelectric dams since November. (…)

A Chinese bailout could keep Beijing’s plans intact but would set a worrying precedent. Chinese banks have provided at least $200 billion of loans to Belt and Road projects since 2013, Chinese officials say. (…)

In its latest guidance to Chinese companies investing in Pakistan, published in March, China’s tax administration warned that Pakistan’s capacity to repay debts “is extremely low.” Returns on Chinese investments in Pakistan were “very low, and some may become bad debts,” it said. (…)

Trump Warns Iran of ‘Consequences’ If It Threatens the U.S. In a tweet late Sunday night, President Trump warned his Iranian counterpart to be cautious in his country’s approach to the U.S. or suffer consequences such as few in history have suffered.

In Letter to Trump, Mexico’s President-Elect Seeks ‘Common Path’ In a conciliatory letter to President Donald Trump, Mexico’s president- elect Andrés Manuel López Obrador said he is ready to start a new stage in U.S.-Mexico relations.

(…) Mr. López Obrador told Mr. Trump “it is worth making an effort to conclude the renegotiation of the North American Free Trade Agreement.” Prolonging uncertainty could slow down investment in the medium and long term, which could hinder Mr. López Obrador’s plan to spur economic growth thorough more infrastructure projects. (…)

Economy Minister Ildefonso Guajardo, who is Mexico’s chief trade negotiator, said last week that Mexican and U.S. officials agreed to speed up talks to try to strike a preliminary deal by the end of August.

Currency War Erupts, Threatening to Ripple Across Global Markets

U.S. President Donald Trump on Friday accused China and the European Union of “manipulating their currencies and interest rates lower.” The comments came after the yuan plunged to its lowest level in a year, with little sign of China’s central bank intervening to stem the slide. They also follow a decline in the euro this year and add to the calculus that European Central Bank policy makers might need to consider when they meet next week.

As the world’s largest economies open up a new front in their increasingly acrimonious game of brinkmanship, the consequences could be dire — and ripple far beyond the U.S. and Chinese currencies. Everything from equities to oil to emerging-market assets are in danger of becoming collateral damage as the current global financial order is assailed from Beijing to Washington.

“The real risk is that we have broad-based unravelling of global trade and currency cooperation, and that is not going to be pretty,” said Jens Nordvig, Wall Street’s top-ranked currency strategist for five years running before founding Exante Data LLC in 2016. Trump’s recent rhetoric “is certainly shifting this from a trade war to a currency war.” (…)

Whether the People’s Bank of China attempts to anchor the dollar-yuan exchange rate near 6.80 to avoid further escalation is key, according to Nordvig. He says ECB President Mario Draghi may elect to step into the fray at the central bank’s July 26 policy meeting, given American attempts to talk the dollar down in January were extremely unpopular in Frankfurt. (…)

“There’s no question that the weakening of the currency creates an unfair advantage for them [China],” Mnuchin said. “We’re going to very carefully review whether they have manipulated the currency.” (…)

“It has now been virtually defined as a currency war by the U.S. president, given that he explicitly suggested foreign countries are manipulating exchange rates for competitive purposes,” Jalinoos said.

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  TRUMPISM: Déjà-vu!

Xi Jinping’s handling of the US trade war sparks discontent within China

US regional bankers warn on rising trade tensions Protectionism threatens demand for loans particularly in export-dependent sectors

China says it won’t devalue currency to bolster exports China said on Monday the value of its currency is driven by market forces and that it has no intention to devalue the yuan to help exports, after Washington said it was monitoring the currency’s weakness amid the escalating bilateral trade row.

The Chinese Foreign Ministry also said that threats and intimidation on trade would never work on China, after U.S. President Donald Trump said he was ready to impose tariffs on all $500 billion of goods imported from the country. (…)

China’s central bank injects $74bn into banking system PBoC loans to commercial banks are part of easing monetary policy as economy slows

Fears of Currency War Ease After Mnuchin’s Two Days in Argentina

Bank of Japan Policy Change Speculation Roils Markets Yields surged, spurring the central bank to offer to buy an unlimited amount of bonds.

A dramatic day for Japan’s debt market saw yields surge on media reports of possible changes to the nation’s ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds.

The yield on 10-year government securities soared as much as six basis points to 0.09 percent, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day’s high. (…)

The BOJ’s offer to buy an unlimited amount of bonds on Monday was meant to meet its policy objective of keeping 10-year yields at around zero percent, an official at the financial markets department said. Its offer to buy the note at 0.11 percent wasn’t met with any sellers. (…)

The dilemma for Governor Haruhiko Kuroda is that even as calls to change policy grow louder, persistently weak inflation dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur higher prices, while also hitting Japanese exporters. (…)

2.5 Billion Pounds of Meat Piles Up in U.S. as Exports Slow Meat is piling up in U.S. cold-storage warehouses, fueled by a surge in supplies and trade disputes that are eroding demand.

NYC’s Home Inventory Is Piling Up Supply of sub-$1 million apartments jumped 27 percent in June from a year earlier, according to StreetEasy

It’s not just luxury-home listings that are piling up in New York City. Even units for less than $1 million are hurting for buyers. In Manhattan, the inventory of sub-$1 million apartments surged 27 percent in June from a year earlier to 3,087, the most for the month since 2013, according to StreetEasy. Such listings jumped 17 percent in Brooklyn and 6 percent in Queens, a borough usually sought for its relative affordability.

NY Business Leaders Survey

Growth in the region’s service sector moderated somewhat but was still fairly brisk, according to firms responding to the Federal Reserve Bank of New York’s July 2018 Business Leaders Survey. The survey’s headline business activity index retreated seven points to 14.8, after reaching its highest level in more than a decade in June. The business climate index fell eight points to 13.3—still indicative of a fairly positive view of the business climate.

The employment index slipped five points to 12.9, suggesting a modest slowing in hiring activity, and the wages index was little changed at a fairly elevated level. The prices paid index retreated from a multiyear high, edging down four points to 58.6, suggesting ongoing widespread input price increases. The prices received index edged up to 24.6.

Indexes assessing the six-month outlook generally declined modestly, suggesting that firms have become somewhat less optimistic about future conditions than they had been earlier this year.

Canada’s Economy Strengthens as CPI, Retail Sales Beat Forecasts

The consumer price index rose at an annual pace of 2.5 percent in June, the fastest year-over-year acceleration since 2012, Statistics Canada said Friday from Ottawa. (…) In a separate report, the agency said the nation’s retailers posted a 2 percent gain in sales in May, the biggest monthly advance since October, and double the median forecast from economists. (…)

Core measures of inflation — seen by officials as a better gauge of underlying trends — ticked up slightly to an average of 1.97 percent, from 1.93 percent in May.

The retail sales numbers largely reflected an increase in receipts at vehicle dealerships and gas stations, but even excluding autos the numbers came in well ahead of what economists were expecting. The strength was volume related, with sales up 2 percent once price changes were factored out.

EARNINGS WATCH

Stocks at a Standstill as Earnings Offset Tariffs

(…) In fact, of the 75 S&P 500 companies that had reported earnings, 71 topped analyst forecasts. Those beats have been rewarded with an average gain of 0.9% on the trading day following the report, in contrast to last quarter when it seemed like every beat was seen as a chance to sell. Those earnings have helped the market compensate for the continued global worries by putting the focus squarely on the fundamentals, says Christopher Harvey, head of equity strategy at Wells Fargo Securities. “It’s hard to fight the macro overhang in between earnings season,” he says. “We’re in the sweet spot for the market now.” (…)

As of Friday afternoon, 87 companies had reported and 84% (73) beat estimates by 4.9% on average and 74% beat on revenues by 1.4% on average.

Thomson Reuters/IBES’ tally shows blended Q2 earnings up 22.0% (+18.2% ex-Energy), up from 20.7% on July 1st. Revenues: +8.3% (+7.2% ex-Energy).

Trailing EPS are now $147.03 but $151.50 pro forma the tax reform for the full 12 months assuming 7% accretion. On that basis, the S&P 500 Index is selling at 18.5x trailing EPS, right on its median since 1993 (which includes 2 bubbles) but 33% above its 13.8 median since 1927, 1953 and 1983. For its part, the more stable Rule of 20 is now at 20.9, overvalued by 4.5%. The overvaluation reached 17.5% in January at 2866. Since then, the S&P 500 is down 2%, inflation rose by 0.6 percentage points but trailing earnings jumped 15%.

From today’s The Daily Shot:

The main fundamental risk here comes from the trade issues which would impact equity valuations in two ways:

1. corporate costs would jump due to tariffs and ensuing logistics challenges;
2. Inflation would jump;

The other, possibly more significant, risk would come from the damage to sentiment as happened in 1987 (TRUMPISM: Déjà-vu!). when equity valuation was crushed 30% for 4 years.

For now, investors continue to discount trade war risks and companies are very cautious not to scare people too much, understandable at this time given limited knowledge.

Interestingly, analysts revisions, post results and post conference calls from less than 20% of S&P 500 companies, have turned more positive last week:

• Insiders have been selling.

Source: @hmeisler (via The Daily Shot)

Costs Are Crashing the Party for Manufacturers

What the Fed Is Missing, Again Policy makers say a flattening yield curve isn’t a worry, but they said the same thing in 2006 and gave pretty much the same reason

(…) An inverted curve is a signal investors believe that the Fed’s current rate-raising efforts are going beyond what the economy can handle and overnight rates will eventually fall. Fed policy makers don’t seem to think that is the risk now.

Rather, they think longer-term yields are lower than they should be because of all the bonds purchased by the Fed and other central banks to prop up their economies. They believe that has driven term premia—the extra yield investors demand for the risk of lending over a long period—negative. Usually, term premia are positive.

Indeed, according to New York Federal Reserve estimates, if the average term premia that prevailed over the past 25 years were in effect today, the 10-year Treasury yield would be about 1.4 percentage points higher than the two-year yield.

In 2006, the Fed’s view of the inverted yield curve was that a global saving glut had pushed down long-term interest rates. show policy makers believed this had driven down term premia, just as they see the glut of central bank holdings driving down term premia now. As a result, they weren’t all that worried about the inverted yield curve. By the end of 2007 the economy had entered a recession and they were frantically cutting rates. (…)

Ed Yardeni: That flawless predictor of recession and a bear market is wrong this time

(…) the U.S. bond market has become more globalized, and is no longer driven exclusively by the U.S. business cycle and Fed policies. (…) So this time may be different for the bond market, which has become more globalized and influenced by the monetary policies not only of the Fed but also of the other major central banks. (…)

Thanks Pat.

TECHNICALS WATCH

Six Stocks Are King of the Hill

Narrow market…

As of July 10, just three stocks account for over 70% of the 2018 returns on the S&P 500 and NASDAQ 100. And 105% of the NASDAQ’s return, and 98% of the S&P 500’s return, were due to the top six tech stocks. (Mauldin Economics)

…or not:

Lowry’s Research is staying the course, seeing no increase in its Selling Pressure Index in spite of all the political uncertainties. “The current pattern of the Selling Pressure strongly suggests that the bull market is still in force”, evidenced by recent all-time highs in the Nasdaq Composite, Nasdaq 100, Russell 2000, S&P 400 Mid-Cap and S&P 600 Small-Cap Index.

In fact, looking at all its indicators, Lowry’s says there “are virtually no warning signs of an impending bear market. (…) In fact, this week’s new high in the Adv-Dec Line for the S&P 500 Index significantly increases the probabilities for new highs in the S&P 500 Index in the relatively near future.” According to Lowry’s, any short term corrections “should be viewed as buying opportunities.”

CMG’s Steve Blumenthal uses Ned Davis Research to monitor selling pressures:

This process looks at a smoothed total volume of declining issues versus a smoothed total volume of advancing issues using a broad market equity index. More buyers than sellers. This is a relatively slow-moving but important indicator.

Yellow highlight shows the current signal. Currently in a buy signal. Here is the model’s data 1981 to present (which includes the great bull market and the two bear markets since 2000):

But Doug Kass seems to be looking at other indicators:

• Doug Kass Liquidates All Long Holdings

After a great deal of thought and following a discussion with my investors and limited partners I have decided to liquidate all of my long holdings (which include many which I believe have a favorable intermediate term outlook). (…)

This is not a recommended course of action for most investors – indeed, it’s too extreme for 99.9% of all investors.

It is even a rare move for me.

But, it is a bet that I will be able to buy back my favorite stocks and sectors at a reasonably large discount to current stock price levels – after all a 10% market pullback means that numerous stocks will decline by twice that amount. (…)

In the extreme, a case can now be made – which I will outline over the weekend and deliver in my opening missive on Monday morning – that the downside dwarf the upside and that few stocks currently meet the risk/reward standards in a political, economic and policy backdrop that has rarely been more uncertain. (…)

Though I would caution that few should engage in such timing, I am still thinking about it as I have had a very good year and have a large “cushion” of investment performance thanks to good stock selection (long and short) and my success in trading the S&P ranges with Spyders.

The above is a statement of how concerned I am regarding the market’s outlook over the balance of the year and in the abundance of possible political, geopolitical and economic outcomes (many of them adverse).

Small-Caps Surge, but Their Haven Status Is in Jeopardy Investors have pushed U.S. small-cap stocks to record highs while seeking a haven from tariff-related tensions, but the popular trade is beginning to appear vulnerable.

(…) At least half a dozen small, domestically focused companies, including motor-home manufacturer Winnebago Industries Inc.,lighting firm Acuity Brands Inc. and agricultural machinery maker Art’s-Way Manufacturing Co., have said the recent tariffs imposed on steel and aluminum and a host of other Chinese goods threaten to disrupt their businesses. (…)

The Peterson Institute said its analysis of the most recently enacted tariffs found the vast majority apply to intermediate or capital goods, such as machinery and electrical equipment. That means U.S. firms that import those goods will pay higher prices, even if they are manufacturing their products domestically. (…)

Companies in the S&P 500, on average, get about a third of their revenue from overseas. That number is 21% for companies in the Russell 2000. (…)

Prolonged Slump in Bond Liquidity Rattles Markets  Many bonds around the globe are becoming harder to trade, prompting some investors to shift to other markets and raising concerns about a broad decline in liquidity. Recent episodes of extreme market stress in Italy and emerging markets have highlighted just how quickly trading conditions can deteriorate