Sunday morning, my laptop suddenly died on me. I will be working with a less effective backup and limited resources for about 2 weeks. 
Stocks Rise on Signs of Progress in U.S.-China Talks Global stocks rose after China said Beijing and Washington agreed to lift existing tariffs if a deal is struck, signalling that trade talks are progressing.
(…) China and the U.S. should remove tariffs at the same time and by the same amount when they sign the initial accord, a Chinese Commerce Ministry spokesman said Thursday. (…)
Bloomberg:
“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said. (…)
On Thursday, China sentenced three nationals to maximum punishments for smuggling fentanyl to the U.S., in one of its highest-profile moves yet against the illicit flow of opioids that Trump has made a bone of contention in broader trade talks between Washington and Beijing.
In another move, China’s General Administration of Customs and Ministry of Agriculture are studying the removal of curbs on U.S. poultry imports, Xinhua reported, without providing more details.
Interesting that China would be first to talk about a tariff roll-back deal. No sign that the U.S. negotiating team agrees with this, let alone Trump. Maybe China is sensing that politics are gaining weight here and is putting pressure on the U.S. to cave.
Beijing is also reportedly balking at a U.S. demand for a mechanism allowing it to unilaterally reimpose tariffs, without reciprocal Chinese action, if it concludes that Beijing has neglected its commitments. This issue more than any other is what scuppered talks in April, so we’re not out of the woods yet. (ADG)
Bloomberg:
(…) A visit to the United States is not part of the itinerary of Chinese President Xi Jinping’s forthcoming trip abroad, Beijing has revealed, casting doubt on whether the two nations could sign an interim trade deal next week. (…)
Trump and other US officials have since suggested that a meeting could be held in Iowa, Hawaii or Alaska.
Reuters:
President Trump and Chinese leader Xi Jinping may not be able to sign a partial trade deal until December. U.S. locations for their highly anticipated meeting, including Iowa and Alaska, have been ruled out, a person familiar said. Locations in Asia and Europe are now being considered, with Sweden and Switzerland among the possibilities, Reuters said.
The South China Morning Post:
At a recent closed-door event in Washington for members of the US-China Business Council – a non-profit organisation aimed at promoting trade between the countries – a senior Chinese diplomat said a presidential meeting appeared “extremely important” for Trump but that Beijing did not see it as critical, according to a source who attended the event.
The Chinese diplomat also said Beijing felt that Trump was fixated on a “phase one” deal for domestic political purposes, according to the source.
MAGA?
U.S. Productivity Fell 0.3% in Third Quarter Nonfarm labor productivity declined at a seasonally adjusted annual rate of 0.3% from the second quarter of this year. Economists surveyed expected a 0.9% increase. The decrease was the first quarterly decline since the fourth quarter of 2015.
Nonfarm labor productivity declined at a seasonally adjusted annual rate of 0.3% from the second quarter of this year. Economists surveyed by The Wall Street Journal expected a 0.9% increase. The decrease was the first quarterly decline since the fourth quarter of 2015, and came after gains in the first and second quarters of this year, when productivity rose 3.5% and a revised 2.5%, respectively.
Productivity grew 1.4% in the third quarter compared to the same period last year. That level remains below the average annual 2.7% rate of productivity growth between 2000 and 2007, prior to the last recession. Productivity grew 1.8% in the second quarter from the same period in 2018.
Nonfarm unit labor costs-a measure of compensation for U.S. workers-rose 3.6% from the previous quarter, more than the 2.3% rise economists were expecting. The increase in labor costs came as hourly compensation advanced 1.4% during the third quarter. The increase in the cost of labor follows gains during the first and second quarters of 2019. Costs rose 3.1% from the third quarter last year.
(…) The new figures are based on an analysis of official Commerce Department data compiled by Trade Partnership, an economic consulting firm. The data was released by Tariffs Hurt the Heartland, a coalition of business and agricultural groups who oppose the tariffs.
The sharp rise was driven by a new 15% levy on consumer goods that went into effect Sept. 1. Imports of these items were valued at $111 billion last year, according to an analysis by The Wall Street Journal. (…)
The tariffs are assessed directly to importers in the U.S., although Mr. Trump has at times claimed China pays them. But when he postponed a batch of tariffs until Dec. 15, he said he didn’t want to cast a pall over the holiday shopping season. (…)
In the 12 months through September, the U.S. brought in more than $70 billion in tariffs, according to data from the Treasury Department. That figure is about double the amount of tariff revenue from before the trade war.
While tariff collections have increased, so have trade-war related expenses. To help mitigate the losses to U.S. agricultural exporters, who have suffered from international tariff retaliation, the Agriculture Department has authorized $28 billion in payouts to farmers.
The figures only account for the direct burden of the tariffs, said Dan Anthony, vice president of the Trade Partnership.
“This is very much the low-end estimate of costs, because there’s also costs associated with shifting suppliers, shifting to higher-cost sources, that aren’t going to show up in the data,” said Mr. Anthony.
(…) Household spending increased heading into the fourth quarter but consumers are spending at a less robust pace than last year. U.S. imports of consumer products such as cellphones, toys and apparel plunged in September, with imports of goods from China down 4.9% from August, the Commerce Department said this week.
At the neighboring ports of Los Angeles and Long Beach, which together make up the biggest U.S. gateway for the container trade in retail consumer goods, combined loaded imports fell 1.9% in September from a year ago.
A measure of logistics-sector activity, the Logistics Managers Index, slowed last month to the lowest level in the three years of the survey, although it still showed business activity increasing. “Inventory seems to be growing more slowly than we would normally anticipate for this time of the year as firms prepare for the holiday shopping season,” the report said.
Mr. Yeager said discussions with customers point to “a softness in the freight market with inventories getting cleared out and a little bit of uncertainty with the political climate.”
He said the company expects “a bit of a peak through Thanksgiving,” although “We’ve seen so many of our clients miss their forecasts this year on where they thought volumes would be that we’re a little skeptical.”
(…) Output fell 0.6% in September, compared with economist estimates for a slide of 0.4%. Manufacturing fueled the decline, while construction and energy increased. The reading follows reports showing German factory orders rose more than expected and a gauge for private-sector activity in the euro area edging up. (…)
German industry output was down an annual 4.3% at the end of the third quarter, when the country probably sank into a technical recession. (…)
Markit:
New orders fell markedly and for the
thirteenth month in a row in October. That said, the rate
of decline slowed since September – when it reached the
quickest since early-2009 – to the weakest in four months.
This was also the case for export sales.
EARNINGS WATCH
We now have 402 company reports in. Actual earnings growth for the 402 companies having reported so far is –0.4% on revenue growth of +3.3%. The beat rate is 75%, the surprise factor +4.5% and the blended growth rate –0.7% (+1.9% ex-Energy), down from +0.3% on July 1
By comparison, after 412 reports during Q2, the beat rate was 74%, the surprise factor +5.9% and the blended growth rate +2.9%, up from +0.3% on July 1. Actual earnings growth for the 412 companies having reported was +3.8% on revenue growth of +4.4%.
We can now safely say that the Q3 earnings season will qualify as rather uninspiring with the earnings growth rate dropping between –3.6% (blended) and –4.2% (actual so far) compared with Q2. It is also interesting to note that in spite of a surprise factor of +4.5%, the blended growth rate (actual + expected for remaining companies) is lower than on July 1, something I do not recall seeing this whole cycle.
Trailing EPS are now $163.77, down from $164.23 at the same time in Q2 and 0.4% lower than the $164.43 and $164.31 at the end of August.and September respectively.
Q4 estimates keep being ratcheted down to +0.8% (+3.0% ex-Energy from +5.0% last week). This is down from +4.1% on Oct.1.
The expiration of the period sent a flood of shares onto the market, pushing the stock as low as $25.58, down 43% from its IPO price. (…) Approximately 130 million shares traded hands on Wednesday, much more than the 65-day daily average of 11 million and higher than the typical trading volume at a lockup expiration, said Jay Ritter, a corporate finance and IPO expert at the University of Florida. (…)
Financial services firm Wedbush Securities estimates that 763 million shares became eligible for trading on Wednesday. Out of those, Wedbush estimates that 500 million to 520 million shares are underwater, as Uber held several private financing rounds since 2015 at a share price that was significantly higher than Wednesday’s trading price. Daniel Ives of Wedbush said that 25%, or about 190 million, of the unlocked shares would be contenders to sell Wednesday. (…)
Investors seem to have become less enamored by unicorns with red figures. A good sign…if you’re not long. Ask Masayoshi Son whose Vision Fund owns some 220 million Uber shares (among many others).
Philip Grant at Almost Daily Grant (my emphasis):
(…) Sprint Corp., (S on the NYSE), one of SoftBank’s largest investments, has logged gains of 17% year-to-date, as the Federal Communications Commission and Justice Department have both approved B2/single-B-rated Sprint’s prospective merger with T-Mobile U.S., Inc. That leaves a lawsuit from a coalition of state attorneys general as the final, high-stakes hurdle, as failure would likely mean debt restructuring for Sprint (Almost Daily Grant’s, Feb. 1).
As research firm MoffettNathanson LLC wrote on Monday, the merger is likewise crucial for SoftBank, which owns 84.2% of Sprint, a stake worth $20.8 billion, or 25% of SoftBank’s market cap.
“(…) But neither can they simply let Sprint go bankrupt. In a chapter 11 filing, SoftBank’s equity would be wiped out. The Sprint trial is set to begin in early December.”
While SoftBank contends with large losses in some investments and existential risk in others, Masa Son’s preparations for a sequel to the Vision Fund continue unabated. As noted by Bloomberg’s Tim Culpan today, the Vision Fund’s structure, which includes a $3 billion annual obligation to pay a 7% coupon to investors in preferred shares which account for roughly $40 billion of fund assets, makes raising more money all but essential:
All this explains why SoftBank not only wants to raise a second $100 billion fund, but truly needs to: From the fund’s inception through to June 30 this year, it earned $3.2 billion in management performance fees, twice the $1.6 billion it received in distributions as an investor. That distribution is supposed to rise over time as more investments come to market or get acquired, but the decline in publicly traded shares and the cooling mood toward unicorns doesn’t augur well for the future.
With the first Vision Fund tapped out, there’s not a lot of money around to keep pushing up valuations, which in turn drive earnings of both the fund and SoftBank. And with public markets turning sour, hopes of a steady flow of distributions from cashed-out investments are also dimming.
Hmmm…
(Bloomberg)
