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U.S. Import Prices Rise With Higher Fuel Costs; Export Prices Steady

Import prices increased 0.5% (3.5% y/y) during September following a 0.4% August decline, revised from -0.6%. A 0.2% rise had been expected in the Action Economics Forecast Survey. These figures are not seasonally adjusted.

Strength in import prices last month was paced by a 4.1% increase (32.1% y/y) in petroleum prices which followed a 2.3% fall. Nonpetroleum import prices held steady (0.6% y/y) following three consecutive months of decline. Industrial supplies & materials costs rose 1.5% (14.8% y/y) and reversed the August decline. Industrial materials prices excluding petroleum eased 0.5% (+4.1% y/y) after falling for two months. Capital goods prices held steady, both m/m and y/y, after a 0.1% dip. Motor vehicle & parts prices also were unchanged (0.1% y/y) for the third straight month. Nonauto consumer goods prices eased 0.1% (+0.6% y/y) following no change in August.

Export prices held steady last month (2.7% y/y) after a 0.2% slip, revised from -0.1%. A 0.1% rise in prices had been expected.

Tariffs Hit Those Trump Wants to Help: U.S. Factories The Trump administration says tariffs on Chinese imports will shift manufacturing back to U.S. factories, but some companies that have done just that say the tariffs are hurting their business.

(…) Companies that have brought manufacturing back to the U.S. say tariffs are raising their costs and making them less competitive. (…) Mr. Smith and other smaller manufacturers said they are disadvantaged under the current tariff rules. Chinese-made finished goods that use the same components often can enter the U.S. from China without paying these duties. So, a Chinese loudspeaker avoids the tariffs, but one assembled at JL Audio’s facility in Florida faces a 25% duty on key parts next year. A European loudspeaker would also avoid the tariffs, even if it used Chinese components. (…)

Finished goods from China could lose their advantage over U.S.-made goods with Chinese components if the White House follows through on its threat to place tariffs on another $267 billion of Chinese imports, a move it has so far avoided to limit the impact on U.S. consumers. (…)

Companies hit by the tariffs aren’t simply raising prices to offset the added costs. Some business owners say they are delaying plans to expand their U.S. footprint, looking at dropping product lines or shifting production offshore.

“Overall, manufacturing in the short-term in the U.S. is worse off because of the tariffs,” said Harry Moser, founder of the Reshoring Initiative, a nonprofit that helps manufacturers make decisions about relocating production. (…)

In a letter to the USTR, Walmart said tariffs on Chinese components “have the potential to undermine” the retailer’s reshoring efforts. “Tariffs on intermediate goods make little sense when the stated goal of the Administration is to increase manufacturing and jobs in the United States.” (…)

Tariffs added an extra $50,000 to the cost of the tooling dies. In September, JL began paying 10% more for forged metal parts, coated wire and other components. The company recently notified customers it was raising prices, and warned of another price increase if the tariff climbs to 25%. (…)

But the math moved against the company, which has just over 80 employees, after domestic steel prices climbed by 40% or more in response to tariffs on imported metals earlier this year.

“Since the onset of the tariffs, we have not won a single reshoring award,” said the company’s president and co-owner, Timothy Zimmerman, who worries that some business he’s won could go away. “I don’t sleep well at night.”

We know that the ISM is currently not reflecting the reality. Markit’s PMI, at 55.6 seems closer to the real world, but this chart suggests a coming decline:

Financial conditions indicate that US growth is slowing down,

albeit from a strong starting point.

Here’s another measure of financial conditions in the U.S. via The Daily Shot:

Trump Threatens Another Round of China Tariffs

Trump Is Risking an Even Greater Chicken War A trade spat over poultry between the U.S. and European nations in the 1960s left lasting damage. The fight with China could do greater harm.

(…) When one country imposes tariffs on another, the eventual resolution of the conflict does not necessarily mean a return to the status quo. Instead, the penalties levied in the heat of a trade war can have destructive ripple effects long after the dispute is settled.

The textbook example of these unintended consequences was the so-called Chicken War between the U.S. and the European Economic Community, the precursor to the European Union, almost six decades ago. Although the clash lasted little more than a year, we still live with the repercussions today. (…)

U.S. Is Edging Closer to a New Cold-War Era With China The Trump administration is moving to counter what it views as years of unbridled Chinese aggression, taking aim at military, political and economic targets in Beijing and signaling a new era in U.S.-China relations.

(…) Interviews with senior White House officials and others in government make clear that recent volleys in what appears a new Cold War aren’t the exception to President Trump’s China policy. They are exactly what the administration wants—putting the spotlight on a meeting between Mr. Trump and Chinese President Xi Jinping at a multilateral summit planned for November. (…)

The U.S. moves represent an emphatic shift from a “constructive engagement” strategy that dates to the establishment of diplomatic ties in 1979. It was based on hopes China would slowly liberalize economically and politically.

Underpinning the change is the view that China has reversed course since Mr. Xi took over in 2012 and began recentralizing political and economic controls, pledging to build his nation into a great world power.

The more aggressive U.S. approach was forecast last December in the National Security Strategy that put China on par with North Korea, Iran and jihadist terrorist groups as the biggest U.S. threats. At the time, the strategy contrasted with Mr. Trump’s personal diplomacy. (…)

After a dozen phone calls with Mr. Xi, an exchange of letters and several face-to-face meetings, the tepid response from China has irritated the president, one senior administration official described, like death from a thousand cuts. (…)

“Where this ends is a trade deal,” a senior administration official said. “Xi is starting to look at this and say, ‘Wow, Trump is doing the things he said he’s going to do,’ and realize that he has to get to work.’”

The November meeting between Messrs. Trump and Xi may help soothe tensions on trade but there appears little prospect the new U.S. stance will soften. There is a souring on China across Washington, even in groups that have long promoted stronger U.S.-China relations. (…)

• Mnuchin Says a Trump-Xi Trade Summit Is No Done Deal

Bavarian shockwaves shake Merkel’s fragile power base Election result raises doubts over whether the German chancellor can survive

(…) Sunday’s poll saw the Christian Social Union, Ms Merkel’s conservative Bavarian ally, suffer its worst result since 1950. The party, which long enjoyed absolute majorities in Bavaria and has ruled the state for the past 60 years, crashed to 37.2 per cent, down from 48 per cent five years ago. (…)

EU to offer billions of funding for electric battery plants Four groups planning to build European rival to Tesla’s ‘gigafactory’

The Bad Trade-Offs Emerging Markets Face Emerging markets worried about their falling currencies and investors rushing to the exits are raising interest rates and keeping a lid on spending, even though doing so is likely to hurt their long-term prospects.

Middle-Market Private Companies Extend Record-Setting Revenue Growth Streak

The report is based on the Golub Capital Altman Index, which measures the median revenue and earnings growth of more than 150 closely-held companies in Golub Capital’s loan portfolio. The index captures financial results for the first two months of each quarter and tracks earnings before interest, tax, depreciation and amortization.

Revenue rose 11.8% in the first two months of the third quarter from the same period of 2017, the fastest rate of year-over-year growth since the inception of the index in 2012. It’s also an uptick from 11.2% revenue growth clocked in the second quarter. (…)

Earnings rose 10.8% during the period, a slight slowdown from the 12.6% year-over-year increase recorded in the first two months of the second quarter. However, the third-quarter figure is the second-best earnings performance in the history of the index. (…)

The third-quarter results from the index suggest that the U.S. economy will again expand faster than expected, and will likely beat forecasts of 3.4% GDP growth, Mr. Golub said. (…)

Notice the margin squeeze in all sectors but tech.

EARNINGS WATCH

As of Friday, 28 S&P 500 companies had reported Q3 results. The beat rate is 86% and the beat factor +2.7%, down from +3.1% last Thursday. The blended earnings growth is +21.5% (+18.5% ex-Energy). Q4 estimates are +20.0% (+17.3% ex-E).

Trailing EPS are $155.57 ($158 pro forma 12 months of tax-reform). Full year 2018 EPS estimated at $161.79.

Aggregate estimates seem to be holding even though analysts are getting more cautious, even on larger companies now.

Refinitiv reporst that 13 mid-cap companies have reported Q3. Their beat rate is 69% and the beat factor +0.6% in spite of a +2.4% beat factor on revenues. Their blended earnings growth for Q3 is 19.9%.

Fourteen S&P 600 companies have reported Q3 with a low 50% beat rate and a –2.1% beat factor. Their blended earnings growth for Q3 is 25.5% 18.2% ex-E).

The RSM polls 700 middle market executives the first month of every quarter. The latest index has flattened since its Q1’18 peak:

SENTIMENT WATCH

From The Blog of HORAN Capital Advisors:

(…) over the course of the last several days, I have published posts on sentiment that is becoming increasingly bearish, here and here. These sentiment measures are contrarian ones and are most actionable at extremes. Maybe the bearishness level is indicating a market that is near a turning point, one that wants to turn higher. And just for good measure, below is CNN Business’ Fear and Greed Index. This index can not go much lower or get anymore fearful.

Source: CNN Business; Read full article (via The Daily Shot)

As the below chart shows only 11% of S&P 500 stocks are trading above their 50 day moving average. The last time this occurred was in February earlier this year. That turns out to be a low point in the market so far in 2018. In regards to the 200 day moving average, 41% of stocks are trading above that level, again similar to the early 2018 market low.

Lowry’s Research remains positive seeing “little evidence of rising Supply over this period, as Selling Pressure set a new low for the bull market on July 31st and matched that low at the S&P 500’s high on Sept. 20th.”

Lowry’s own chart, however, shows a clear rise in supply (“typical during a market pullback”!), along with a continued “measured decline” in demand since the Sept. 20 high.

“Currently, only the NYSE all-issues Adv-Dec Line shows a non-confirmation of the Sept. 20th high in the S&P 500, with that non-confirmation likely due to weakness in the many interest-sensitive non-OCO issues traded on the NYSE. In contrast, the OCO (Operating Companies Only) Adv-Dec Line confirmed the Sept. 20th high, suggesting the lag in the NYSE all issues Adv-Dec Line more accurately reflected conditions in the bond rather than equity market.

In summary, (…) “[while] preliminary signs of weakness among small caps suggest an aging primary uptrend, there is as yet very little evidence to support contentions the recent market highs represent a major market top.”

Using $158.00 trailing EPS and 2.2% inflation, the Rule of 20 Fair Value is 2812 [(20 – 2.2) * 158)] which is the yellow line below. The S&P 500 Index (blue) is currently 1.8% below “fair value”, first such occurrence since April 2016, reflecting more subdued enthusiasm like observed since October 2008. Note that the fair value line is rising strongly thanks to strong earnings growth and stable inflation. Keeping inflation at 2.2%, full year 2018 EPS would take “fair value” to 2884 next February, 4.4% above current level.

Downside to a 19.0 Rule of 20 P/E is 2650 (-3.9%) and 2550 (-7.5%) to its January 2016 low of 18.3, using full year EPS of $162.

Bridgewater: Fed could turn ‘hot’ economy to ‘mediocre’ World’s largest hedge fund expects market turbulence as economy begins to cool

(…) “This week could fade into history and we won’t remember it, but we are clearly shifting from an era of monetary easing to monetary tightening,” he said. “If that [a growth inflection point] is what is happening, then this won’t be a one-week event.” (…)

Corporate insiders are taking the stock market’s big selloff in stride

(…) Currently, according to data provided by Professor Seyhun, this net-buying percentage stands at 27.5%, slightly higher than the 10-year average of 23.8%. Even though he classifies this current percentage to be in the “neutral” category, Seyhun noticed that it is still slightly higher than the long-term average and therefore means that insiders are “giving the market the benefit of the doubt.”

Note carefully, however, that the greatest explanatory power of the insider data exists at the one-year horizon, according to Seyhun. So even if the insiders are right to give the current stock market the benefit of the doubt, it’s still possible that the current correction could go further, both in terms of time and magnitude, before recovering a year from now to a higher level than today.