China Trade Data Points to Sagging Economy
Chinese exports fell 1.3% in June from a year earlier, after rising 1.1% the previous month, the General Administration of Customs said Friday. Imports fell 7.3% in June versus a 8.5% drop in May. (…)
China’s exports to the U.S. fell 7.8% in June from a year earlier, extending a 4.2% decline in May, customs data show. Imports from the U.S. tumbled 31% from a year earlier. The bilateral trade surplus widened to $29.92 billion—the highest in seven months—from May’s $26.9 billion.
Bucking the trend, exports to Southeast Asian countries surged nearly 13% in June, extending May’s 3.5% growth, possibly a sign of transshipping to circumvent the tariffs. (…)
New face on China’s trade team worries White House
The Trump administration is increasingly concerned about prospects for a trade deal with China, amid an unexpected reshuffling of the Chinese negotiating team and a lack of progress on core issues since the Group of 20 (G-20) summit in Japan, according to United States officials and senior Republicans briefed on the discussions.
Commerce Minister Zhong Shan, regarded by some White House officials as a hardliner, has assumed new prominence in the talks, participating in a Tuesday (July 9) teleconference alongside Chinese Vice-Premier Liu He, who has headed the Chinese trade team for more than a year. (…)
“Zhong is a hardliner’s hardliner,” said former White House chief strategist Stephen Bannon, who remains close to several Mr Trump advisers.
Mr Zhong, who joined the Communist Party at 18 years old, is the second veteran trade official to be added to the Chinese team in recent weeks. In April, Mr Yu Jianhua, one of China’s most experienced trade negotiators and its ambassador to the United Nations Office in Geneva, returned to Beijing to bolster Mr Liu’s delegation. (…)
Hopes for a deal also have been dented by China’s failure to make large new purchases of US farm products – despite US President Donald Trump’s claim at the G-20 that Chinese President Xi Jinping had agreed to place such orders “almost immediately” – and the lack of any announced schedule for the next round of direct talks. (…)
“This has to be seen as a loss of confidence in Liu He and the desire of the leadership to bring in someone more politically savvy,” said Mr Dennis Wilder, a former China analyst at the Central Intelligence Agency. “I am sure his instructions are to get tougher with the US.” (…)
Mr Trump told his trade team before the Tuesday call to secure the new Chinese orders for soybeans and wheat he believed he had been promised in Osaka, Japan.
But Mr Zhong and Mr Liu offered no specific commitments, leaving negotiations at a virtual standstill, according to a White House official who spoke on the condition of anonymity because the official was not authorised to speak publicly. (…)
“Republicans in general are frustrated that the Chinese have been so uncooperative at this stage, and it’s now clear this is going to be a slow process,” said conservative economist Stephen Moore, an informal Mr Trump adviser. “They keep backpedalling, and the hardliners in China play right into the hands of hardliners in the US.” (…)
How China’s Hidden Debt Is Getting Even Riskier
In a bid to boost the economy, China this week announced it would allow local governments to borrow more to fund infrastructure investment. As part of this push, it will let municipalities use the proceeds of special-purpose bonds(6) as equity in railroad, highway and other projects.(3) Previously, local governments weren’t able to use such debt as seed capital. (…)
China’s new policy could amount to an additional $13 billion to $19 billion of project capital from special-purpose bond issuance through the rest of this year, S&P Global Inc. analysts estimate. In theory, adding equity helps secure bank financing, too. Beijing said the usage of special-purpose bonds’ proceeds for project capital would be closely monitored. (…)
Beijing seems to be backtracking on its deleveraging efforts and going back to its old playbook. The stakes are only getting higher and the risks murkier.
Vast Chinese Loans Pose Risks to Developing World(…) Furthermore, little is actually known about the loans. China’s foreign assets are now worth $6 trillion, but outside of the government in Beijing, nobody knows much about where that money has been invested and what conditions and risks are attached. Because China doesn’t completely open its books to international organizations like the World Bank and the International Monetary Fund (IMF), there is a lack of needed transparency, says IMF head Christine Lagarde.
Now, though, with the release of a new study by a German-American team of academics under the leadership of Harvard professor Carmen Reinhart, Largarde will have a clearer picture. For months, the economists dug through both known and unknown source material, compiling the most comprehensive analysis yet of Chinese foreign loans. And the image that has resulted does nothing to assuage concerns about the financial power being exerted by Beijing.
On the contrary: The data shows that many countries in the poorer regions of the world have accepted far more credit from China than previously known. And the loans frequently come with onerous conditions that are strongly oriented toward Beijing’s strategic interests and increase the risk that many countries in the developing world could plunge into financial crisis. “The West still hasn’t understood how profoundly China’s rise has changed the international financial system,” says Christoph Trebesch, a co-author of the study from the Kiel Institute for the World Economy. (…)
To ensure that the loans are paid back, the contracts guarantee Beijing a number of rights, such as access to foodstuffs, raw materials or the profits of state-owned companies in the recipient countries. (…)
The German-American study […] argues that many payments from Beijing are masked because they go straight to state-owned companies operating in recipient countries. The balance sheets of those companies, though, are frequently not accounted for in official financial statistics. The result is that a large chunk of Chinese development loans is concealed from Western governments and international organizations. The study found that the amount of foreign debt held by China is around 50 percent higher than is documented by official statistics.
The discrepancy is particularly large in those countries that are already heavily indebted. In Ivory Coast, for example, debt levels are $4 billion higher than previously thought. The difference in Angola is $14 billion and in Venezuela it is $33 billion. Because the Beijing government tends to charge high interest rates, many emerging and developing countries suffer, according to the study, from “growing annual debt service obligations.” That means their interest rate payments continue to rise, which increases the danger that they may ultimately default.
Study authors note that the situation is reminiscent of the late 1970s, a time when large banks from the U.S., Europe and Japan provided billions in loans to Latin American and African countries rich in commodities — credits that flew under the radar of international monitoring agencies. When prices for many raw materials crashed, countries like Mexico could no longer service their debts and much of the developing world slid into a debt crisis that set them back for years.
Today, the situation is hardly any different. Once again, many developing countries have accepted huge loans. And once the hidden money flows from China are included, as the study shows, the debt loads being carried by many countries are again as high as they were in the 1980s. The authors write that the situation looks “strikingly similar.”
Already, there are initial indications of an approaching crisis. Pakistan was recently forced to apply for an emergency IMF loan because it was no longer able to service its massive Chinese debt load. In Sierra Leone, the government stopped the construction of an airport that China had intended to finance. Meanwhile, IMF Managing Director Lagarde hardly holds a speech in which she doesn’t mention the dangers facing global financial stability. (…)
U.S. Producer Prices Rose Slowly in June The modest gain in the overall producer-price index masked divergent behavior in two of its most volatile components, energy and trade services
The producer-price index, a measure of the prices businesses receive for their goods and services, rose a seasonally adjusted 0.1% in June from a month earlier, the Labor Department said Friday. (…)
Energy prices plummeted 3.1% in June from the previous month, while trade services, which measures profit margins in wholesale and retail businesses, jumped 1.3%. Prices for food, which also show large month-to-month swings, jumped 0.6% in June.
Excluding food, energy and trade services, prices were flat from May. (…) Compared with June 2018, the overall producer-price index was up 1.7% last month. Excluding food and energy, the index was up 2.3%.
If the PPI is any indication, the U.S. manufacturing sector is in near-deflation. Final demand core goods prices have been flat for 3 months while intermediate demand processed and unprocessed goods are deflating.
EARNINGS WATCH
The game people play…This is from Factset:
S&P 500 WILL LIKELY REPORT EARNINGS GROWTH IN Q2 2019
(…) Over the past five years on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.8%. During this same period, 72% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 3.7 percentage points on average (over the past 5 years) due to the number and magnitude of upside earnings surprises.
If this average increase is applied to the estimated earnings decline at the end of Q2 (June 30) of -2.7%, the actual earnings growth rate for the quarter would be 1.0% (-2.7% + 3.7% = 1.0%). (…)
On the eve of the Q2 earnings season, analysts are scrambling to revise their numbers, mostly down again.
Over the next two weeks, I will be much less interested in the beat rates than in the actual earnings and revenue growth rates. The 24 companies that have already reported their Q2 boast an 83% beat rate vs the 65% long term average and the 76% prior four quarter average and a +5.7% surprise factor (+3.3% long term average, +5.3% last 4 quarters). Their revenue beat rate was 75%, also well above the 60% long term average and the 63% prior four quarter average. The revenue surprise factor was +0.8% (+1.5% long term average, +1.0% last 4 quarters).
But why should we be impressed, let alone happy, with their aggregate earnings decline of 7.8% on revenues up 3.0% following –4.6% and +5.4% respectively in Q1? Earnings are not only decelerating, they are falling at an accelerating rate. And margins are seriously contracting.
At the end of the day, we don’t buy revisions or beat rates, we buy earnings.
In the table below, I have highlighted quarters when sector earnings decelerate (excluding Energy which has its own dynamic). Analysts are totally united predicting that Q2 will prove to be the trough in trends for almost each and every sector.
What has suddenly happened since June 30th?
If the economy has reaccelerated and business sales (volume + inflation) are now rising much faster than wages (costs), somebody should tell Chairman Powell and his FOMC colleagues. If the trade war and all the uncertainty and supply chain adjustments stemming from it have ended, somebody should tell Trump and Xi so that they move on to some other game.
Did you know that pre-tax corporate margins (red line) are now lower than they were prior to the Great Financial Crisis without the negative effects from collapsed oil prices like in 2015-16?
Maybe corporate America will again prove its resilience even against the current daunting challenges. A case in point:
Middle market private companies in the Golub Capital Altman Index experienced approximate year-over-year earnings growth of 12.5% and revenue growth of 10.3% during the first two months of the second quarter of 2019. This compares to approximate year-over-year earnings growth of 9.5% and revenue growth of 9.3% in the first quarter of 2019.
Lawrence E. Golub, CEO of Golub Capital, said, “We continue to see very strong growth in the U.S. middle market, especially among domestically focused companies. The Golub Capital Altman Index for the second quarter of 2019 posted a seventh consecutive quarter of revenue growth at or near double-digit rates, and a fifth consecutive quarter of earnings growth at or near double-digit rates. We see ample momentum in the economy to offset the potential impact of tariffs. The labor market is strong, inflation is tame, fiscal policy and monetary policy are expansionary; in short, the U.S. economy does not look to us like it currently needs additional support from the Fed.”
Dr. Edward I. Altman said, “Revenue and earnings growth remain strong in our sample of U.S. middle market companies, showing a modest acceleration from the healthy pace of the first quarter of 2019. Earnings growth outpaced revenue growth in aggregate and in most of our sector indices, suggesting that labor costs had limited impact on profit margins despite a very strong labor market. We are not surprised to see a moderate deceleration of earnings growth in our sample of Technology companies year-over-year; the second quarter of 2018 was exceptionally strong. Overall, our data highlights the fundamental strength of U.S. middle market companies focused on the domestic market.”
TECHNICALS WATCH
Lowry’s Research reminds us that “the formation of major market tops is a process, not an event. Specifically, the eroding strength that ends a bull market is a gradual process
occurring over a period of months, not days or weeks.” Lowry’s analysis shows that “Selling Pressure has set lower lows at each of the [recent] bull market highs – Jan. 2018, Sept. 2018 and April 2019. Although now above its April 2019 low, Selling Pressure is currently trending lower (…) At the same time, there is little sign of the steady erosion in Demand that typically occurs in the final stage of a bull market. (…) In summary, although the S&P 500, by some perspectives, shows only nominal gains since the Jan. 2018
bull market high, there is little evidence suggesting this apparent ‘consolidation pattern’ represents a major market top. To the contrary, the forces of Supply and Demand
continue to suggest an ongoing, healthy bull market.”
But it is still mainly a large cap market:
The S&P 500 Index has run pretty far ahead of its 200 dma:
And it is in rising risk territory from a valuation viewpoint, with flattening earnings and a Fed desperately trying to lift demand and inflation amid admittedly tight labor resources and generally rising corporate costs.
The Only Thing the Smart Money Is Smart About A number of recent studies show that professional investors—the, ahem, smart money—are prone to the same mistakes that individual investors make. The difference, our columnist writes, is that the pros get paid to make them.
(…) The problem, says Essentia’s head of research, Chris Woodcock, is what psychologists call the “endowment effect.” This is the automatic tendency to put a higher value on what you own than what you don’t—and to become reluctant to part with something merely because it is yours.
Therefore, he says, portfolio managers “put greater focus on positive rather than negative attributes” of the stocks they own. That leads them to minimize potential bad news and to hang on too long. (…)
A bit of my own history in finance…Yes, I was using VisiCalc early on.
40 Years Later, Lessons From the First ‘Killer App’ VisiCalc, the world’s first spreadsheet, took the nascent personal computing world by storm, and just as suddenly ceased to exist—in the process, writes Christopher Mims, it transformed how companies are built and how all of us make decisions
(…) VisiCalc was unveiled on June 4, 1979, and shipped that October. Dan Bricklin first dreamed it up in a classroom at Harvard Business School—the room now bears a plaque commemorating his idea—and partnered with Bob Frankston, who coded VisiCalc and collaborated in its design.
When users opened VisiCalc, they would see a character-based grid where numbers or text could be manipulated. It was handy for budgeting, financial projections, bookkeeping and making lists. Today it’s instantly recognizable as a spreadsheet, as familiar to us as a blinking cursor, but at the time it was a novel idea that had to be experienced to be understood. (…)
VisiCalc was the first piece of software that was so popular that it drove people to buy computers just to run it. (…)
Mitch Kapor, who worked for VisiCalc’s publisher as a product manager, left the company and began working on his own spreadsheet program. Instead of creating it for the Apple II, Mr. Kapor put his money on another horse: the brand-new IBM PC. Released in 1983, his software—Lotus 1-2-3—took the world by storm on a scale that even VisiCalc’s success couldn’t have foretold. (…)
Lotus 1-2-3 had variable column widths, a macro language to allow simple programming in cells, and the ability to create charts and graphics. Plus, it was fast. (…)
After Mr. Kapor stepped down as CEO of Lotus, the company focused on porting its product to IBM’s OS/2, its attempt to beat Microsoft at PC operating systems, missing the shift to Microsoft’s Windows. That shift was driven largely by users clamoring, yet again, for the best system to run the best spreadsheet—in this case Excel, which Microsoft announced for Windows in 1987. (…)
Also showing my age…
It’s No Longer a ‘Mad’ World
Really?
