THE DAILY EDGE: 16 MAY 2019

U.S. Retail Sales Ease Due to Broad-Based Weakness

Total retail sales slipped 0.2% (+3.1% y/y) during April following a 1.7% March increase, revised from 1.6%. Excluding motor vehicles and parts, retail sales improved 0.1% (3.3% y/y) after rising 1.3%. A 0.7% gain had been expected.

Last month, a 1.1% decline (+2.2% y/y) in sales of motor vehicle & parts led the overall sales weakness, after a 3.2% March rise. This compared to a 6.1% decline in unit sales of motor vehicles during April.

A measure of the underlying pace of retail spending is nonauto sales growth excluding gasoline and building materials. These sales were unchanged during April (3.4% y/y) after a 1.1% increase.

Weakness in retail sales was pervasive. Sales of building materials & garden equipment stores were off 1.9% (+1.2% y/y) following a 0.8% increase. Electronics & appliance store sales declined 1.3% (-4.3% y/y) and reversed the prior month’s rise. Clothing & accessory store sales eased 0.2% (+0.2% y/y) after a 2.1% jump. Sales via the internet also slipped 0.2% (+9.0% y/y) following three straight months of strong increase. (…) Restaurant & drinking establishment sales  increased 0.2% (5.7% y/y) after a 1.0% rise.

Extremely volatile consumer:

Sales ex-automotive, building materials and garden equipment (which feed directly into GDP) are hanging in YoY thanks to a strong first quarter. But last 5 months, which include December 2018, control sales are up a low 1.2% annualized. Last 9 months: +1.4%. This in spite of strong employment growth, rising wages and slower inflation. The American consumer has gone in hibernation and seems happy like that.

Perhaps this will incite consumers to buy now:

• Walmart says higher tariffs on China goods will increase prices for shoppers

Because the economy needs an active consumer:

Weak Manufacturing Drives U.S. Industrial Production Lower

This is pretty weak. Manufacturing IP has decidedly turned down in January. It’s more than the weather.

U.S. IP is down in 3 of the last 4 months, at a 5.0% annualized rate.

U.S. IP is rarely that weak YoY and lower oil prices are not the cause this time:

The weakness is widespread. All sectors are negative.

Capacity utilization is dropping: bad for capex, bad for industrial margins.

Is this a change in trend?

U.S. Targets Huawei as It Seeks to Revive China Trade Talks President Trump signed an executive order that would let the U.S. ban telecommunications gear from “foreign adversaries,” underscoring tensions with China even as the U.S. said it would likely resume trade talks soon in Beijing.

(…) The executive order came hours after Treasury Secretary Steven Mnuchin said the two sides would “most likely” meet again in Beijing in an effort to salvage the trade deal after each country raised tariffs on goods from the other. (…)

Negotiators for both nations are discussing specific dates for the trip, most likely during the last week of May, said people familiar with the planning. (…)

Mr. Mnuchin also signaled progress on removing steel and aluminum tariffs against Mexico. (…)

Those developments came as the White House postponed for about six months the final decision on whether to impose broad tariffs on automobile and auto-part imports, two administration officials said Wednesday.

Mr. Trump was facing a deadline this week on whether to apply the tariffs following a report from the Commerce Department about the national-security risks of automotive imports. (…)

• Trump’s Huawei Threat Is the Nuclear Option to Halt China’s Rise

The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world.

The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world. (…)

The threat is likely to elevate fears in Beijing that President Donald Trump’s broader goal is to contain China, leading to a protracted cold war between the world’s biggest economies. In addition to a trade fight that has rattled global markets for months, the U.S. has pressured both allies and foes to avoid using Huawei for 5G networks that will form the backbone of the modern economy. (…)

The Commerce Department said Wednesday it will soon put Huawei on an “Entity List” — meaning any U.S. company will need a special license to sell products to the world’s largest networking gear maker. Since American companies dominate semiconductors, that could smother Huawei’s production of everything from 5G base stations to mobile phones. It may not even be able to use Google’s Android, the most popular operating system globally for smartphones. A similar move last year against ZTE Corp. — China’s second-biggest telecom equipment company — nearly forced the company out of business.

“This could potentially lead to Huawei’s destruction,” said Scott Kennedy, a China expert at the Center for Strategic and International Studies. “You can’t underestimate the significance. It’s their most important company and threatening it in this way will generate a massive public response as well as from the Chinese government. The bilateral trade talks were on thin ice and this could derail them entirely.” (…)

The lack of alternatives is one reason that it’s far from certain the U.S. will make good on its threat to cut off Huawei. Observers for months had been dismissing the possibility, in part because it would hurt some of America’s largest tech corporations. The Trump administration has also been pressuring allies to bar Huawei equipment from their communications networks for security reasons. But the U.S. effort had largely failed, as even the U.K. declined to join the American call for a boycott. (…)

ZTE provides a roadmap for what may happen next. Huawei’s much smaller rival in 2017 ran afoul of the Commerce Department for violating the same Iranian sanctions, and then lying about it. The subsequent ban on American exports pushed the company to the brink of extinction, before Trump intervened as part of trade negotiations with Beijing.

A blanket ban would hurt not just U.S. companies, but also alienateAmerican allies around the world. Many have resisted Washington’s attempts to steer them away from Huawei, for reasons ranging from economics to just the simple fact that the Shenzhen-based company’s 5G technology is for now considered superior. (…)

That’s why some observers, including the Eurasia Group, argue that the White House is unlikely to bring the full force of a blacklist to bear. Instead, it argued, the Trump administration is likely to issue export licenses to all of its American companies while retaining the option in future to pull them if needed. (…)

The problem here is that Huawei has the critical world patents for 5G, particularly on polar coding, as the WSJ explained last February:

Huawei, and its crosstown rival ZTE Corp. ZTCOY 3.29% , have put forth vastly more proposals—and are among the biggest owners of key patents—underpinning the coming wave of 5G technology. That is in contrast to Western firms, which played a comparatively smaller role in the blueprint and design of 5G than in previous generations of wireless technology.

Huawei’s clout in the design of 5G stems from its massive research and development budget, and from its aggressive contributions to the round-the-world meetings where engineers cobbled together the underlying architecture of 5G.

As a result, the Chinese tech juggernaut as of early February owned 1,529 “standard-essential” 5G patents, the most of any company. Together with patents owned by ZTE, the state-owned China Academy of Telecommunications Technology, and Guangdong Oppo Mobile Telecommunications Corp., companies from China own 36% of all 5G standard-essential patents, more than double their share of comparable 4G patents, according to data-analytics firm IPlytics.

The Chinese 5G patents cover technology associated with everything from 5G handset componentry to base stations and driverless-car technology. And telecom companies around the world—including those operating in places where Huawei gear might be off-limits—will have to pay royalties to Huawei to license that technology when it comes time to put 5G networks on the ground, experts say.

U.S. firms, by contrast, including Qualcomm Inc. QCOM 0.15% and Intel Corp. INTC 1.00% , hold just 14% of critical 5G patents, according to IPlytics. Huawei’s clout in 5G sets it apart from previous generations of wireless networks, which saw significantly fewer contributions from Chinese mobile companies compared with U.S. and European firms. (…)

Huawei’s prowess in next-generation technology stems partly from the fact that it now regularly outspends its rivals in research and development, a fact that has alarmed some policy makers in Washington. In 2017, the company spent $13 billion on R&D, more than any other Chinese tech company, and more than its chief rivals, Ericsson ERIC 0.88% and NokiaCorp. , combined. (…)

Some of Huawei’s proposals are now fundamental building blocks of 5G. They include one highly prized technique called “polar coding,” a method for correcting errors in data transmission. Huawei poured resources into developing it, and polar coding became a rallying cry for Huawei and its Chinese peers at standards meetings. (…)

China slams U.S. blacklisting of Huawei as trade tensions rise  China on Thursday slammed a decision by the U.S. government to put telecom equipment giant Huawei on a blacklist and said it will take steps to protect its companies, in a further test of ties as the economic heavyweights clash over trade.

(…) Huawei, which denies its products pose a security threat, said it was “ready and willing to engage with the U.S. government and come up with effective measures to ensure product security.”

It said restricting Huawei from doing business in the United States would “limit the U.S. to inferior yet more expensive alternatives, leaving the U.S. lagging behind in 5G deployment and eventually harming the interests of U.S. companies and consumers.” (…)

The sanctions on Huawei were also likely to have ramifications beyond the company itself, rattling the global tech supply chain, analysts said. (…)

China dumps US Treasuries at fastest pace in two years March government bond sales by China came to $20.5bn ahead of fractious trade talks

What Will Trump’s Latest Tariffs Mean for Inflation? The latest tariff increases on Chinese imports will likely deliver a modest and temporary boost to U.S. inflation, in part reflecting the relatively small portion of American spending that goes to goods rather than services.

President Trump’s decision last week to raise tariffs on roughly $200 billion of goods, to 25% from 10%, represents the single biggest escalation of his yearlong confrontation with China. The new duties could amount to as much as $30 billion of annual revenues for the government—and additional costs for U.S. consumers. Mr. Trump’s threat to impose 25% duties on an additional $300 billion of imports from China, if carried out, would have a larger impact at up to $75 billion a year in revenue to the U.S. government.

Though recent studies have shown U.S. consumers have borne the brunt of such costs in the past, economists point out that they amount to a drop in the bucket of the U.S.’s $21 trillion economy. Since 1970, American households have spent more on services—such as housing, health care and education—than goods, many of which have become cheaper over the decades thanks to trade and technological innovation. (…)

Booming Buybacks Aren’t Likely to Slow Down Repurchases of blockbuster stock amounts during two recent pullbacks signal firms didn’t see market declines as worrying

The more than 80% of firms in the S&P 500 that have reported results for the first quarter repurchased $180 billion worth of their own stock during that time, according to S&P Dow Jones Indices, on pace to be the second-highest amount on record based on data going back to 1998. While data isn’t yet available for the second quarter, companies ramped up buying during the two previous market pullbacks.

Every quarter in 2018 marked a new high, as companies were bolstered with money they saved because of corporate tax cuts. The most buybacks in one quarter, a staggering $223 billion, came in the last three months of last year when broader markets spiraled. Buybacks also hit a record in the first quarter of 2018 when markets sold off. (…)

Last year, the top 20 companies repurchasing stock in the S&P 500—many of which were tech firms—accounted for 42% of all buybacks, compared with a 32% share in 2017, data from S&P Dow Jones Indices showed.

Buybacks are helping companies boost their earnings per share significantly. In the first quarter, 25% of S&P 500 companies added a tailwind of at least 4% to their earnings per share because of buybacks, according to S&P Dow Jones Indices. That is up from 14% of companies that boosted their earnings per share by at least 4% a year ago. (…)

I updated this yardeni.com chart for Q1’19 data.

This next chart shows the YoY change in the S&P 500 divisor (buybacks minus new issues). The Index per share profits are currently boosted by 2.4% (Q1’19) after +1.9% in Q4’18. It should be about +2.0% in Q2, +2.4% in Q3 and Q4 based on current trends. Mid and small caps are benefitting somewhat more.

Since 2009, IT companies have made 26% of total S&P 500 buybacks. Last 4 quarters: 35% per Ed Yardeni’s numbers.

Trump Pardons Ex-Media Baron Conrad Black, a Former Business Partner President Trump pardoned former media baron and one-time business partner Conrad Black, who was convicted of fraud and obstruction of justice charges, as well as a former Republican leader in the California Legislature.

(…) In granting a pardon Wednesday to Lord Conrad Black, Mr. Trump cited “broad support from many high-profile individuals who have vigorously vouched for his exceptional character,” the White House said in a statement. (…)

Mr. Black has been a conservative commentator and political biographer, and last year wrote a book about Mr. Trump entitled “Donald J. Trump: A President Like No Other.” In it, he describes Mr. Trump as “a good deal more ethical and honest than many other businessmen and corporate directors I have known.” (…)

Allow me a personal hmmm..here.