BOOM?
Not in and around Philly:
UPS, Teamsters Reach Handshake Deal on New Contract Union says 5-year deal promises higher wages, creates new weekend driver job
(…) The Teamsters national negotiating committee said Thursday the new contract provides hourly wage increases totaling $4.15 over five years and raises the starting wage for part-time workers to $13 an hour as of Aug. 1, with increases in subsequent years.
The settlement also creates a new category of “hybrid drivers” that would normally work on weekends, allowing the company to expand its Saturday delivery and potentially add Sunday services. The starting hourly pay for these full-time workers is $20.50 and tops out at about $35, the union said.
Under the current contract, most package-truck drivers work Monday-to-Friday shifts and earn higher wages on weekends.
The union says they are entitled to double-time wages in some areas for working on a Sunday, amounting to nearly $74 an hour. (…)
State Sales-Tax Officials Rev Their Engines After high court ruling, some states could move within weeks to require sales-tax collection by out-of-state retailers
(…) States could collect an additional $8 billion to $13 billion annually in sales taxes, which is a 2% to 4% increase, according to a study by the Government Accountability Office. (…)
A Generation of Americans Is Entering Old Age the Least Prepared in Decades Low incomes, paltry savings, high debt burdens, failed insurance—the U.S. is upending decades of progress in securing life’s final chapter. According to a WSJ tally, more than 40% of households led by people aged 55 through 70 lack sufficient resources to maintain their living standards.
This cohort should be on the cusp of their golden years. Instead, their median incomes including Social Security and retirement-fund receipts haven’t risen in years, after having increased steadily from the 1950s.
They have high average debt, are often paying off children’s educations and are dipping into savings to care for aging parents. Their paltry 401(k) retirement funds will bring in a median income of under $8,000 a year for a household of two. (…)
INFLATION WATCH
The Philly Fed’s Manufacturing Business Outlook Survey showed a sharp acceleration in the diffusion index for Prices Received. The last time we got to this level was in 2007:
David Rosenberg has another chart showing expected prices received in uncharted territory. Perceived pricing power is pretty strong in Philly. New orders better get back up soon.
Oil Prices Rise Despite OPEC Agreement to Raise Output OPEC ministers agreed to boost output by about 600,000 barrels a day, moving more modestly than many producers had hoped to curb higher oil prices.
(…) That was far less than the one million barrels many predicted. (…)
OPEC said Friday its members had tentatively agreed with their non-OPEC partners to end their overcompliance with production curbs they set in 2016 to add barrels to the market.
On paper, such a move would add about one million barrels a day to global markets, officials said. But the boost is to be shared among all members, some of whom can’t raise output at all right now. That translates into about 600,000 barrels of new oil a day, said people familiar with the deal’s technical aspects. (…)
Since the November 2016 agreement, global inventories have drawn down to the five-year average and hit the lowest level in three years this year, according to the International Energy Agency. OPEC’s efforts have been aided by strong global growth and demand for fuel, as well as unexpected supply disruptions. (…)
Weak readings on inflation, retail sales cast doubt on Bank of Canada’s next move
The consumer price index recorded an annual pace of 2.2 per cent in May, unchanged from April and well below economist expectations for a 2.6 per cent gain, Statistics Canada said Friday. In a separate report, the Ottawa-based agency said retailers recorded a 1.2 per cent sales drop in April, also unexpected. (…)
On the month, consumer prices rose just 0.1 per cent in May, down from a 0.3 per cent gain in April and well below expectations for a 0.4 per cent gain, Statistics Canada reported.
Core measures of inflation – seen by officials as a better gauge of underlying inflation trends – posted their lowest readings since January. (…) The average of the Bank of Canada’s three key core inflation measures fell to 1.9 per cent in May from 1.97 per cent in April The “common” and “median” core rates were unchanged at 1.9 per cent, while the “trim” rate fell to 1.9 per cent from 2.1 per cent Inflation for services was unchanged in May at 2.3 per cent. Goods inflation picked up to 2.2 per cent, from 2.1 per cent Seasonally adjusted inflation was 0.1 per cent in May, unchanged from a month earlier Car prices fell 1.5 per cent in May and telephone services were down 4.3 per cent, acting as the biggest downward contributors during the month. (…)
The weak April retail sales numbers reflected a sharp decrease in car sales. Even excluding autos, the numbers came in below what economists were expecting. Sales excluding car dealers were down 0.1 per cent, versus economist expectations for a 0.5 per cent gain. Retail sales were also down 1.4 per cent once price changes were factored out.
TRADE
As time passes and more “negotiating tactics” only lead to more negotiating retaliations and nothing positive happens, the Art of the Deal might need to display the Art of War. Not funny!
Trump Plans to Curb Chinese Investments in U.S. Tech Firms President Trump plans to ratchet commercial tensions with China even higher by barring many Chinese firms from investing in U.S. technology and by blocking more technology exports to Beijing.
Trump Threatens 20% Tariff on European Cars
Europe Vows to Keep Fighting Trump on Trade
Russia Joins in on Retaliation Threats for U.S. Tariffs
Economy Minister Maxim Oreshkin said autos from the U.S. could be targeted, just days after saying that the government also is likely to hit American road-building equipment with higher levies. Both moves are in response to new U.S. tariffs on steel and aluminum, important Russian exports. (…)
Imports of cars and other passenger vehicles totaled $837 million last year.
Many of the vehicles imported from the U.S. to Russia aren’t made by American companies, according to data from Autostat provided to the RNS news service. In addition to General Motors Co., producers selling U.S.-made vehicles in Russia include Bayerische Motoren Werke AG, Daimler AG, Volkswagen AG, Fiat Chrysler Automobiles, Toyota Motor Corp. and Honda Motor Co., according to Autostat.
It’s Time for Investors to Face the Tariffs
(…) Higher costs could pinch profits at S&P 500 companies that rely on imported goods. Auto companies topped BAML’s list on that score, followed by companies that sell home furniture, appliances and apparel. Shares of auto-part supplier BorgWarner fell 5% this week, while shares of Ralph Lauren shed 3%.
Industrial companies like Boeing, down 5% this week, and Emerson Electric, off 4.3%, could get hit both by higher prices for things like steel and their high exposure to China. (…)
But it can be more complicated:
-
Cummins Will Pay Tariff to Import Engines From Its Own Plants in China ‘Making changes in your supply chain is not a three-week process’
(…) In the aftermath of the 2008 recession, Cummins, like many of its industrial peers, turned to overseas markets in search of sales growth. Cummins found ready buyers in China, Brazil and elsewhere as vehicle makers snapped up its diesel engines rather than revamping their own engine technology to comply with stricter emissions standards in their home markets. Capitalizing on its experience complying with tightening regulations for engine exhaust in the U.S. and Europe, Cummins was able to quickly adapt its engines and components to developing countries’ standards.
Sales nearly doubled between 2009 and 2017 driven by strong international sales growth.
With Cummins parts and service providers available around the world, the company’s engines helped Chinese construction-equipment manufacturers LuiGong Machinery Co. and Sany Group Co. and truck makers Beiqi Foton Motor Co. and Dongfeng Motor Co. extend their sales to other countries.
As its business grew overseas, Cummins retooled plants like the one it operates in Seymour, Ind., to make more engines for export. Cummins has invested more than $300 million in the plant since 2011, including a new assembly line and a research and engineering center for large, high-horsepower engines that power ships and train locomotives, and generate electricity. Cummins’s workforce in Seymour has grown to 900 from 250 seven years ago. Three-quarters of the engines built at the plant are exported.
The proliferation of tariffs and increasingly frosty relationships between the U.S. and its biggest trading partners undermines export-focused operations like the Seymour plant, Mr. Satterthwaite said.
“Tariffs and trade wars are very disruptive,” said Mr. Satterthwaite. “The European and Japanese manufacturers are going to have an advantage.”
Caught in Trump’s Trade Fight: GE Factories in Wisconsin, South Carolina Plants make MRI scanners using parts imported from company’s own facilities in China
GE has argued to federal policy makers that it is counterproductive to impose tariffs on components the company imports from its own plants in China, including some assembled using parts that were originally made in the U.S.
“Putting tariffs on the parts they produce will not hurt Chinese businesses or sway Chinese decision makers,” GE executive Karan Bhatia said in a May hearing held by a committee of the Office of U.S. Trade Representative. “Rather, they hurt U.S. companies that own these facilities, as well as the U.S. workers and suppliers who rely on these parts from China to make world-class products in the United States.” (…)
“We are being as sensitive as we can to these types of problems, given the overall problem that we’re trying solve,” the official said. Still, he acknowledged, some U.S. companies could see costs rise.
GE, which makes everything from LED bulbs to jumbo jet engines, has said it expected to be affected by levies imposed on about three-quarters of an initial list of products facing U.S. tariffs. But it considers some three dozen products to be critical, in part because obtaining them elsewhere will prove difficult or require months to arrange.
That shorter list includes parts for aircraft-engine turbines, submersible electric pumps, locomotives and steam boilers. It also includes key parts for X-ray machines and other equipment made by GE Healthcare—including MRIs. (…)
GE could find it tough to pass the cost of the tariff on to the buyers of its MRI scanners. Three-quarters of GE Healthcare’s medical equipment is sold within the U.S., much of it to hospitals and other buyers facing tight spending constraints. The rest is exported to markets, including in China, where competitors aren’t troubled by the U.S. tariffs. Alternatively, GE, like other industrial companies, could absorb the tariffs, reducing profit margins in the process. (…)
The unknowns are starting to get known:
Tariffs’ Toll on Trade
(…) Cornerstone Macro, headed by Nancy Lazar, makes the point that second-order effects could be more significant than the precise dollar amounts from the tariffs. The 25% tariff on $50 billion of goods from China would total $12.5 billion, equivalent to a 0.1% tax hike on the U.S. economy. A 10% tariff on an additional $200 billion worth of goods would effectively double that, to 0.2%. “While still manageable, this would offset almost half of the estimated boost from tax cuts in 2018,” the firm wrote to clients.
“More importantly, this represent only first-order effects of the tariffs,” the note continues. “Second-order effects, more difficult to quantify, would include a hit to business confidence, headwinds from a stronger dollar, and supply-chain disruptions, including a loss of competitiveness of U.S. exporters who rely on imported components.”
This effect is also pinpointed by Barclays’ head of macro research, Arjay Rajadhyaksha, in the bank’s latest outlook. “It doesn’t take a lot of such uncertainty for companies to decide to postpone spending until there is more clarity on policy. Taking this logic one step further, it would not be an enormous stretch for investors to downgrade global growth expectations, due to fears about a trade war.” (…)
However the trade and capital-flows disputes ultimately are resolved, they create uncertainty for Corporate America. It’s no coincidence that small-capitalization stocks, which tend to have a more domestic orientation, have been outperformers, with the Russell 2000 hitting a record on Wednesday. (…)
As Tariffs Take Hold, It’s Corporate Crunch Time More businesses are beginning to feel the effects of an escalating tit-for-tat fight over trade.
(…) Exxon Mobil (XOM) is still calculating the impact of steel and aluminum tariffs, for example, but CEO Darren Woods says they do “risk lowering our returns and making our investments less competitive.” He’s focused on the broader economic damage that a trade war could precipitate. “My biggest concern is you get into a trade war that impacts the economy and the growth of economies around the world, and that would have a big impact on our business, more so than looking at” one particular tariff, he tells Barron’s. (…)
A quarter-mile strand of barbed wire is about to cost 10% more because of U.S. metal tariffs, says Gary Cammack, whose family owns Cammack Ranch Supply in South Dakota. “If we’re going to stay in business, we have to pass those increased costs on to our customers.” A six-pack of beer will cost an extra 10 to 12 cents because of aluminum tariffs, and the metal tariffs could cause the price of an average car to rise $144, says John Mothersole, a research director at IHS Markit.
But the impact of subsequent tariffs on the auto industry will likely be much more acute than a $144 surcharge on a $33,000 purchase. The U.S. has been successful in coaxing foreign auto makers to build their vehicles in American factories. Those factories, a boon to U.S. jobs, become liabilities in a trade war, so much so that investors worry that European auto makers could leave.
Dec Mullarkey, managing director of investment strategies at Sun Life Investment Management, says that German auto makers now have incentives to “scale back their U.S. footprint, cut jobs and investment, and relocate to serve their Chinese market.” (…)
“This new protectionist phase is likely to bring unintended consequences.”
US business fears choppy waters due to trade tariffs While the economy is robust, there are fears of an extended drag on corporate earnings
The FT reveals that a survey by the Business Roundtable conducted in May showed that 95% of top chief executives judged foreign trade retaliation to be a moderate or serious risk, with 90% warning about the risk of higher input costs.
That was in May. Things have gotten worse since.
The FT adds that Carlos Gutierrez, the former Kellogg’s CEO and commerce secretary in the administration of George W Bush who now chairs the National Foreign Trade Council said his conversations with companies led him to believe that the trade tensions would start having a significant impact in the fourth quarter. According to the FT, he said that
- The parties that will be most impacted are US companies.
- They are going to report bad earnings.
- It is going to hurt the stock market.
- Even worse we are going to put people out of work and it is going to spark inflation in our country.
Finally, Jay Powell said at a conference in Portugal on Wednesday that he was hearing about decisions to postpone investment or hiring.
Harley says EU duties could prompt price hikes
(…) Harley says it is getting hit by tariffs twice: Once by the EU import duty and once by a rise in raw material prices resulting from U.S. steel tariffs. (…) He also said that the anticipation of tariffs boosted demand as customers sought to snap up motorcycles before prices rise. (…)
Gavyn Davies writes in the FT that the initial effects tariffs would be to directly increase the US CPI by over 1%, probably mitigated by a rise in the dollar as the US trade deficit shrinks. But “other countries would almost certainly ramp up their retaliation, damaging output and employment in the US economy. This, and likely confidence effects in asset markets, would obviously pose large downside risks for US GDP growth well before the end of President Trump’s first term.”
Trade Is an Afterthought in a Stock Market Still Glued to Earnings
(…) Profit forecasts have been calling the tune in equities all year. According to Bank of America, a strategy that buys and sells shares based on earnings sentiment has beaten every other equity factor in 2018. Companies with the best estimate revisions have outpaced those with the worst by 13 percentage points.
Estimates keep rising. At present, analysts expect S&P 500 companies to earn $158.70 a share in 2018, $175.90 in 2019 and $193.70 in 2020. Each is up appreciably from the end of the first quarter. Using next year’s projection, the index’s price-earnings ratio — above 21 based on profits in the last 12 months — falls to around 16, smack at its historical average. (…)
While no real impact from a trade war is expected for the second quarter, investors will look to the earnings calls to gauge the potential fallout, according to Joe “JJ” Kinahan, the chief market strategist at TD Ameritrade.
“We’d all be surprised if you didn’t hear a Caterpillar and a Deere and a Boeing sort of address it,” he said by phone. “The area of particular interest is going to be technology and more specifically semiconductors. Will they address it? Do they see it as being a hindrance going forward?” (…)
Here’s a clue:
What Would Happen if China Started Selling Off Its Treasury Portfolio?
HOW’S YOUR BREADTH?
Lowry’s Research says that “historically, advance warning of an approaching bear market has been provided by a divergence between the Adv-Dec Line and the major price indexes, on average 4-6 months prior to the final market high. This pattern has preceded virtually every major market top over our 93 year history.”
According to Lowry’s, this market has great breadth. “Even large caps are showing widespread strength with the OCO [operating companies only] and S&P large cap Adv-Dec Lines at new bull market highs as of Jun. 12th 2018, suggesting weakness in this segment is limited to a select number of stocks.” BTW, Lowry’s OCO Adv-Dec Line reached another marginal new high this week, on June 20th.
Steve Blumenthal is more reserved:
The NDR/CMG process measures market breadth by analyzing the overall technical strength across 22 individually measured sub-industry sectors. The process measures the trend of each of the sub-industry sectors, evaluating the rate of change in price momentum over short-term and long-term time frames and directional trend of each sub-industry sector (a list of the 22 sectors is below – more on that in a second). (…)
The most important line to follow is the blue model equity line in the middle section of the chart. It is the combined total score across the 22 sub-industry sectors. Think of it as “market breadth” or the combined weight of evidence measurement of what is going on in the stocks that make up the S&P 500 Index. (…)
The current Index Model Composite Score is 65.64% (yellow highlight with the red circle). That’s in the moderately bullish zone, but the composite score is trending lower. It signals some degree of caution.
I don’t know if we should put much weight on the strong breadth readings given the rising impact of index funds and ETFs which simply invest the cash across the board. The cash influx itself ensures widespread advances and limited declines.
The risk here is that all this money moved and moving into ETFs and invested across the board without any valuation arbitrage will eventually find that the exit door is pretty narrow. Reaching the exit will leave many investors out of breadth and more…Ask the Italian bond investors about narrow exits!
One potentially significant source of demand for both equities and Treasuries through the summer months is the huge sums that corporations with underfunded pension funds will be sending their fund managers before mid-September.
Companies with underfunded pensions have a rare opportunity to score a tax break in the coming months.
Pension contributions made through mid-September can be deducted from income on tax returns being filed for 2017—when the U.S. corporate tax rate was still 35%. That means a company that contributes $100 million to its pension plan now can save $35 million in taxes, while a company contributing the same amount after the deadline would save just $21 million, based on the new 21% corporate tax rate. (…)
This one-time incentive is helping corporations close a pension funding gap that topped $680 billion for S&P 1500 companies after the financial crisis, according to consulting firm Mercer. (WSJ)
The enormous tax savings, sun-setting September 15, make it a no-brainer for any underfunded corporation that can borrow to close the gap. These dollars will be immediately put to work by fund managers with roughly equal amounts invested in equity and fixed-income markets. Absent trade wars, the next few months could see a demand climax.
Lastly, Steve Blumenthal also displays this NDR Trading Sentiment chart as a short term warning:
But from a Buy-Low-Sell-High secular view point, I prefer this U. of Michigan chart via David Rosenberg:
Even more relevant when TINA is fading away. Return on capital or return of capital?
More storms are brewing for emerging markets Investors caught in a bind as EM sell-off plays out in unexpected ways
(…) The same is true on local credit markets, according to Yerlan Syzdykov, head of EM at Amundi, where “it is a lot more difficult to liquidate positions compared to three or four months ago”, he said.
Such liquidity shortages are adding to the pressure on EM currencies, which can be used quickly and easily to hedge other portfolio risks against a broader deterioration by selling them short.
They are also, simply, the easiest assets to offload. “Liquidity in bonds is not great, so if you’re doing anything, it has to be in currencies,” said Jack McIntyre, fixed income portfolio manager at Brandywine Global Investment Management. (…)
CHINESE BAILOUTS
(…) The fund, which serves as a backstop for the country’s insurance companies, pumped nearly $10 billion into Anbang in April amid government concerns the conglomerate would collapse. The bailout signaled the transfer of control, but until Friday details of its stake weren’t known. The fund will hold control of Anbang temporarily until a private shareholder can be found, said a person with knowledge of the process. (…)
In a statement Sunday, the People’s Bank of China announced that it is reducing the amount of reserves banks are required to keep with the central bank by half a percentage point starting July 5. That is the day before a U.S. deadline to slap punitive tariffs on tens of billions of dollars in Chinese goods.
Under the reserve cut, some 500 billion yuan ($76.86 billion) will be released for 17 large banks, including the Big Five state-owned banks, the central bank said. It said the banks are to use the freed-up funds by converting bad loans into equity in companies that default on their debts.
Another 200 billion yuan is being unleashed for the country’s city-level commercial banks and other smaller lenders, and those funds are to be used to expand lending to small businesses, the central bank said in the statement. (…)
In an interview, [central-bank Governor] Mr. Yi pledged to use monetary policy “comprehensively” to fend off any “external shocks.” (…)
The shift, however, is tricky, potentially aggravating still-voluminous levels of corporate and government debt and reflating asset bubbles that Beijing has fought hard to control in the past two years. In some previous reserve reductions, banks have had to meet central-bank criteria for lending to small businesses to lower their reserves. For the latest move, the central bank didn’t impose such a condition. (…)
-
Stock Award to Xiaomi CEO Is One of Largest Ever Xiaomi, the Chinese smartphone maker whose value may hit $70 billion, gave its founder and chief executive a token of its appreciation: $1.5 billion in stock, no strings attached, in one of the largest corporate paydays in history.
Trump’s Attacks on Germany: The Enemy in the White House Trump’s latest lies are an open attack on the German government and the European Union. This U.S. president was never a partner. He is an aggressive opponent and should be treated as such.
“You are not my friend, my friend.” (Salladhor Saan, Game of Thrones)
“I have no trouble with my enemies. I can take care of my enemies in a fight. But my friends, my goddamned friends, they’re the ones who keep me walking the floor at nights!” (President Warren G. Harding)