THE DAILY EDGE: 19 AUGUST 2019

Trump Cites Hong Kong Concerns in Talks With China President speaks hours after administration officials confirm new round of trade negotiations

(…) Over the weekend, administration officials said they would give Huawei Technologies Co. more time to work with U.S. customers and said the White House was laying the groundwork for a new round of trade talks with Chinese officials in Washington, D.C.

Those moves, combined with last Tuesday’s delay in tariffs on $156 billion of Chinese goods, suggest an effort by the White House to dial back trade hostilities following a week of market swings. A 10% tariff on another $111 billion of imported goods will go into effect Sept. 1 as planned. (…)

“I’m making a decision tomorrow,” he said. “Ultimately we don’t want to do business with Huawei, for national security reasons.” (…)

Mr. Trump also said Sunday he was evaluating the effects of tariffs on tech company AppleInc., whose chief executive, Tim Cook, he had dinner with on Friday. The president said Mr. Cook told him that tariffs on imports from China give a competitive advantage to Apple rival Samsung Electronics Co. “And I thought he made a very compelling argument so I’m thinking about it,” Mr. Trump said.

The vast bulk of Apple’s products are made in China, while Samsung manufactures most of its goods elsewhere. (…)

Earlier in the day, Mr. Kudlow said American and Chinese trade negotiators will be holding one or more teleconference calls in the next week or two to set ground rules and discuss topics for new high-level trade talks. (…)

CEO Chuck Robbins

…what we’ve seen is in the state-owned enterprises anymore, we’re just being we’re being uninvited to bid. We’re not being allowed to even participate anymore. So those are the enterprises that’s where the large impact was this past quarter, so it was just a much faster decline of what we candidly expected. – (The Transcript)

Backing for Free Trade Up, Support for Trump Down in New Poll

(…) Almost two-thirds — 64% — see free trade as good for the U.S., an all-time high for the survey series. Support was up 7 percentage points from the previous time the question was asked, in 2017, and up from a bare majority of 51% in December 2015. Only 27% now believe free trade is bad, citing a negative impact on key industries. (…)

Costly Tariff Spat Masks Deeper Trade Problems The fight between the U.S. and China is the public face of the global slide toward protectionism

(…) “What we have is a change of direction for the U.S.” in terms of free trade, said Rob Martin, an economist at UBS. (…) UBS calculates the blossoming trade conflict has kept the U.S. economy around 0.75% smaller than it would have been had tariffs stayed where they were. (…) UBS says the world economy is around 0.4% smaller than it otherwise would have been. The damage will rise to 0.7% if Mr. Trump pulls the trigger on all threatened tariffs. (…)

Mr. Evenett, who oversees the Global Trade Alert project that tracks developments in trade policy, estimates that in 2019 around 73% of global trade will be affected by some trade-distorting measure. That compares with 35% a decade ago.

Efforts to revive economies weakened by the financial crisis have driven the shift, he said, and while the U.S. isn’t innocent of such practices itself, it is often on their receiving end. Nearly 59% of U.S. imports this year are subject to some trade-distorting measure. But in China, it is 75%. (…)

RECESSION WATCH

One County’s RV Industry Points to Recession Around the Bend Multiyear drops in recreational-vehicle shipments to dealers—many from the Elkhart, Ind., region—have preceded the last three recessions. Shipments have fallen about 20% so far this year, after a 4.1% drop last year, according to data from the RV Industry Association

(…) “The RV industry is better at calling recessions than economists are,” said Michael Hicks, an economist at Ball State University, in Muncie, Ind. Mr. Hicks says softening consumer demand for RVs coupled with rising vehicle prices due to tariffs suggests the economy is either in a recession or soon headed for one. (…)

Unemployment in Elkhart County, which has a population of 200,000, was 3% in June, below the national rate of 3.6%, according to federal data. But it is up from a low of 2.1% in April 2018. Weekly hours worked fell by half a percent in June. (…)

RV manufacturing giant Thor Industries Inc., based in Elkhart, said it was cutting back production of RVs and shifting its staff to a four-day workweek. LCI Industries , another Elkhart manufacturer, consolidated some of its facilities to address the slowdown.

Baird analyst Craig Kennison said he estimates based on proprietary data that retail sales of RVs this year are down mid-to-high single digits and expects a similar decline next year. (…)

Still, shipments remain historically strong. Executives say they expect inventory levels to balance out by the end of the year. The RV Industry Association is forecasting a 2.5% increase in shipments to dealers for 2020.

Bill Murnane, chief executive of LazyDays Holdings Inc., a national dealership based in Tampa, Fla., doesn’t think 2020 will bring the relief some manufacturers anticipate. He said consumer demand began to weaken last fall and he didn’t see it recovering soon. (…)

Divya Brown, the president of Houston.-based TAXA Outdoors, a small RV manufacturer, said her company bought most of its parts from Elkhart. Her suppliers are raising their prices to account for the hit they are taking from imported goods such as aluminum and steel. Ms. Brown said the company saw a 22% jump in the cost of steel and a 9% jump in the cost of aluminum.

“When our suppliers are having price increases, we’re seeing price increases,” she said. (…)

Bundesbank Warns German Economy Could Enter Recession

Also, from Charles Schwab:

The manufacturing downturn weighing on Germany is being felt around the world—with more than 75% of global manufacturing PMIs below 50. Thus, Germany is not a leading indicator but rather a reflection of what is happening broadly around the globe.

EARNINGS WATCH

From IBES/Refinitiv:

Through Aug. 16, 463 companies in the S&P 500 Index have reported earnings for Q2 2019. Of these companies, 73.0% reported earnings above analyst expectations and 18.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 5.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.

Of these companies, 56.9% reported revenues above analyst expectations and 43.1% reported earnings below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 63% of companies beat the estimates and 37% missed estimates.

In aggregate, companies are reporting revenues that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.

Q2 earnings are seen up 2.9% (3.6% ex-Energy) with 3 strong and 3 weak sectors:

Revenues are expected up 4.7% (5.1% ex-E), thanks to a 57% beat rate and a +1.1% surprise factor led by Financials (+3.3%), Energy (+2.6%) and Health Care (+1.6%).

Pre-announcements for Q3 are roughly in line with what they were at the same time during Q2 but substantially worse than Q3’18:

Revisions were weaker last week, particularly for smaller caps:

Q3 estimates are –1.6% (-0.1% ex-E) from +0.8% on July 1. Q4: +5.0% from +7.2%. It is worth nothing that Refinitiv estimates that buybacks will boost EPS by 2.6% in Q3 and 2.7% in Q4 from 2.4% and 1.9% in Q1 and Q2 respectively.

Trailing EPS are now $164.29, up from $163.88 at the end of May and +7.5% YoY. This week, we get 19 of the remaining 37 companies to report. Eleven of these are consumer-centric and 9 IT, among the weakest sectors this season. Refinitiv calculates that 67% of 152 retail/restaurant companies it tracks beat estimates in Q2 but that their blended growth rate is 2.0% on a 4.9% revenue growth rate.

Refinitiv says that retailers generally are “discussing China tariffs and warning us not to expect much from them in the upcoming quarters.”

STOXX 600 EARNINGS

Refinitiv reports that of the 227 STOXX 600 companies having reported so far, 52% beat estimates with a surprise factor of +1.1% leading to a blended growth rate of –1.6% on a +3.0% revenue gain. On July 1, earnings were expected to increase 2.3%. Full year 2019 earnings are now seen up 1.8% vs +4.3% on July 1.

TECHNICAL WATCH

From my lens, Lowry’s Research’s last weekly analysis is trying hard to remain positive amid all this volatility: “With the rally on Aug. 16, the market appears to have made a good start on providing evidence of the strong Demand needed for a sustained rally as Up Volume was about 88% of total NY Up/Down Volume.” More such strong days are needed to reverse the rise in Selling Pressure seen throughout the month of August.

Moving averages for major equity markets are still rising but the recent weaker behavior of the equal-weight S&P 500 Index is worrisome:

Note also that trends in smaller caps (S&P 600 and Russell 2000) remain very weak.

Lower-Rated Bonds Benefit as Big Companies Slash Debt Debt reduction at AT&T, Anheuser-Busch InBev and other companies is contributing to a surprising development: The lowest group of investment- grade bonds is outpacing other tiers.

(…) Over the past decade, triple-Bs have grown from roughly 40% of the investment-grade market to about half of it as companies bulk up on debt in an era of low interest rates. (…)

Corporate officers got the message last year when the Fed tightened. They are using the “easing window” ( and the rising equity market) to deleverage amid all the recession calls around.

The Most Fascinating Standoff in Corporate America: The Accountant Who Exposed Madoff vs. GE

Business Roundtable Steps Back From Milton Friedman Theory CEO group urges firms to remember obligation to society, widening focus beyond shareholder value

The Business Roundtable said Monday that it is changing its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, employees, customers and society writ large. (…)

In 1970, Mr. Friedman spelled out their views in his article “The Social Responsibility of Business is to Increase its Profits.”

“The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.” Mr. Friedman wrote. “In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.”

Life expectancy in America has declined for two years in a row That’s not really meant to happen in developed countries

An American baby born in 2016 can expect to live on average 78.6 years, down from 78.9 in 2014. The last time life expectancy was lower than in the preceding year was in 1993. The last time it fell for two consecutive years was in 1962-63.

Other statistics suggest that this alarming trend is caused by the epidemic of addiction to opioids, which is becoming deadlier. Drug overdoses claimed more than 63,000 lives in 2016. Two-thirds of these deaths were caused by opioids, including potent synthetic drugs such as fentanyl and tramadol, which are easier to overdo by accident and are becoming more popular among illegal drug users. (…)

The steepest rise in mortality was among 25- to 34-year-olds. In that age group deaths per 100,000 people from any cause increased by 11% from 2015 to 2016. Mortality from drug overdoses in the same age group shot up by 50% from 2014 to 2016. (…)

A continued decline in life expectancy would leave America trailing even farther behind other rich countries. Lives in America are already two years shorter than the average in the OECD group of 35 rich and soon-to-be-rich countries: life expectancy is closer to Costa Rica’s and Turkey’s than to that of Britain, France and Germany. If the administration cannot reverse this then—at least when it comes to longevity in the Western world—its policy might be described as America Last.