U.S.-China Trade Deal Is Getting Closer, Lighthizer Says Negotiations to settle the trade battle between the U.S. and China are intensifying, U.S. Trade Representative Robert Lighthizer told a Senate panel.
“Our hope is we are in the final weeks of an agreement,” Mr. Lighthizer told the Senate Finance Committee. (…)
Mr. Lighthizer didn’t provide many new details on the pact Tuesday and cautioned a potential deal could fall apart. He said the U.S. wants China to provide better enforcement of intellectual property; end forced technology transfer, where companies must provide strategic know-how to a Chinese entity to enter the market; reduce subsidies for state-owned firms; and open markets in China to U.S. agriculture and services. (…)
Tariffs against Mexico and Canada weren’t resolved in the negotiations to rewrite the North American Free Trade Agreement, but Mr. Lighthizer expressed optimism about a solution.
Mr. Lighthizer said that resolving those tariffs is an issue he is “fully engaged on” and that he believes there’s a “sweet spot that allows us to satisfy Canada and Mexico and maintains the basic integrity” of the president’s goal to prevent imports from damaging the domestic industry in those metals. He said a solution could involve quotas that allow Canada and Mexico to maintain their historic levels of steel and aluminum trade, but not become a venue for subverting the tariffs.
He was less optimistic about progress toward entering talks on a free-trade agreement with the European Union. Mr. Lighthizer, who met last week with his EU counterpart, trade commissioner Cecilia Malmström, said the EU and U.S. are “at a complete stalemate” over whether to include agriculture in the talks. (…)
U.S. Cuts Oil Production Forecast for the First Time in 6 Months
While crude output is still expected to reach record levels, the Energy Information Administration trimmed its 2019 forecast to 12.3 million barrels a day — 110,000 barrels-a-day lower than it had forecast previously. In 2020, production is expected to reach 13.03 million barrels a day — 170,000 barrels a day lower than last month’s estimate. (…)
The U.S. rig count tumbled to a 10-month low last week, suggesting the rate of production growth could slow, the EIA said in its monthly Short-Term Energy Outlook. Most of the growth expected through 2020 will come from the Permian basin of West Texas and New Mexico, rather than smaller shale plays, the report said. (…)
Earlier on Tuesday, shale pioneer Mark Papa warned that the industry he helped create is facing fundamental obstacles that will slow America’s oil boom. While technological advances will help improve the rates at which drillers recover oil, that growth will be offset by challenges with well spacing and the “degradation” of shale rock quality, said Papa, the chief executive officer of Centennial Resource Development Inc.
MARGINS CALL
In a note last Monday, Morgan Stanley advised its clients not to trust this strong rally “on bad 4Q results” because “stocks aren’t out of the woods just yet” since the “gains have come amid not only disappointing corporate results, but also falling earnings expectations.”
MS is calling for an earnings recession as “business/profits cycle has run its course and was actually truncated by the fiscal stimulus (tax cuts) enacted in late 2017.”
I don’t think I would characterize the 16.7% earnings growth in Q4’18 as “bad” or “disappointing” given that both revenues and profits beat expectations. The biggest disappointment was from Financials which beat by only 0.3% on poor trading revenues but still delivered 15.6% earnings growth for the quarter.
Consensus estimates are calling for declining margins in every sector of the S&P 500 Index in 2019 with total earnings rising 3.9% on revenues advancing 5-6% on average
BlackRock’s simulations are suggesting that S&P 500 profit margins will decline by about 0.6% which would be less than the 0.9% that analysts are currently factoring in their 2019 estimates.
Source: BlackRock (via The Daily Shot)
So far, there have been no hard facts supporting the expected margins compression other than declining commodity prices. Q4’18 revenues grew 5.1% (4.4% ex-Energy), a sharp slowdown from the 8.8% average growth rate in the first 9 months of the year (7.9% ex-E). But the negative revenue surprises were mainly in Energy and Materials.
Total Business Sales growth fell below wage gains in Q4 and overall inflation has weakened.
But productivity has picked up, tapering unit labor costs from the +2.0% level to the +1.0% range, well below inflation and expected revenue growth.
According to Capital IQ, 59% of S&P 500 companies are anticipating rising EBIT margins in 2019.
But smaller companies seem more at risk. As The Daily Shot reports, small businesses are increasingly concerned about labor costs. In fact, the percentage of companies that see the cost of labor as the “single most important problem” hit a record high.
This next chart plots pretax and after tax economy-wide profit margins up to Q3’18. Note that pretax margins averaged 13.7% during the first 3 quarters of 2018, up from 13.0% in 2017 to show that 2018 growth was more than tax cuts.
Another month before the Q1 earnings season begins.
Meanwhile, the S&P 500 keeps bumping against its 2800 resistance area with the Rule of 20 P/E at 19.3 and the Rule of 20 Fair Value at 2915.