U.S. Oil Falls for 8th Day in a Row as Supplies Surge
(…) The Energy Information Administration said Wednesday that inventories of crude oil in the U.S. surged by 5.8 million barrels last week to 432 million barrels, the highest total since early June. The report also said U.S. oil production exploded to a record 11.6 million barrels a day last week, from 11.2 million barrels a day a week earlier. (…)
“Saudi Arabia has indicated several times that they intend to preserve market stability, so the last increase in oil inventories has triggered it to put a supply cut on the agenda of the meeting,” said Giovanni Staunovo, commodities analyst at UBS Wealth Management.
President Trump, speaking at a press conference Wednesday, said his decision to soften the oil sanctions against Iran was directly responsible for driving down market prices for crude oil.
“I’m driving them down. If you look at oil prices, they’ve come down very substantially,” Mr. Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly. I don’t like it.”
Mr. Trump said the softened oil sanctions on Iran “will get tougher as time goes by, maybe,” but added he has to be careful because “I don’t want to drive the oil prices up to $100 or $150 a barrel.” (…)
Just in time for a merry end of year:
- Morgan Stanley’s retail sales tracker shows an improvement in October.
Source: Morgan Stanley Research (via The Daily Shot)
China Car Sales Drop for Fifth Month to Leave Carmakers Reeling
- Retail sales of sedans, multi-purpose vehicles and sport utility vehicles dropped 13.2 percent to 1.98 million units last month, the China Passenger Car Association said on Thursday. Sales in the first ten months of 2018 fell 2.5 percent to 18.4 million units. (…)
- Total vehicle sales this year will remain under 30 million units and could drop from 2017, Wu Wei, a National Development and Reform Commission official, said Wednesday. Deliveries of vehicles to dealerships amounted to 28.9 million units last year, rising 3 percent from 2016.
- To stimulate demand, China’s top economic planning body has submitted a proposal to halve the tax on purchases of vehicles with engines no bigger than 1.6 liters, people familiar with the matter said last month. No decision has been made, they said.
POLITICS
Democrats’ House Victory Complicates Trade Deals The Trump administration is facing a heated trade battle with Congress after the Democratic Party retook the House of Representatives, posing a significant challenge to President Trump’s deal with Mexico and Canada.
(…) Most Democrats, backed by unions, have voiced skepticism about liberalizing trade unless the deals allow workers in the other countries to take advantage of higher labor standards and wages. Passage “will depend on whether unions will want to push it,” a senior White House official said.
The AFL-CIO, a large federation of labor unions, said in official comments that it has “serious doubts that the improved rules will make a meaningful difference to North American working families without additional provisions.” Several environmental groups have rejected the new agreement as well. (…)
Democratic lawmakers complain the new deal doesn’t have strong enough enforcement mechanisms to ensure that Mexico implements tougher the labor rules, which include requirements for allowing fully independent unions with collective bargaining rights to help boost wages. (…)
Mr. Trump still holds leverage. He has repeatedly warned he would withdraw from the current version of Nafta if he doesn’t get a new one. Faced with a choice between Mr. Trump’s USMCA or a withdrawal from the deal, many lawmakers would hesitate to take a hard line. (…)
Republicans Weaponized the House. Now, Democrats Will Use It Against Trump
US midterm elections: Is gridlock good?
(…) Conventional wisdom has it that a gridlocked Congress is good for markets as it prevents politicians from interfering in the economy. However, US markets have received a considerable boost from the president’s tax cuts and deregulation measures.
Going forward, gridlock means less fiscal support for the economy as Democrats are unlikely to back further tax cuts. This could create a problem for US growth in 2020 when the existing package fades and is not replaced by further measures. It is possible that the president and the Democrats could strike a deal on infrastructure spending, but they may hesitate to take measures that could help get Trump re-elected as president.
Faced with a potential block on fiscal policy, the president may turn to trade policy and look to strike a deal with China and so prevent a further damaging escalation in the trade war. From an economic perspective, that would be the logical step. However, Trump will have to weigh up whether the economic costs outweigh the political benefits of playing to his base support – many of whom see tariffs as an essential part of putting America first. (…)
In the House, a number of Republican moderates lost or chose not to stand for re-election. This means the Republican House caucus will become more conservative and more Trump-like. The new House Democratic majority will be more challenging to the president on a number of issues. Consider the possibility of a House committee issuing a subpoena for him to release his tax returns. (…)
Gavekal has a more positive view:
In short, the US investment environment remains positive for growth and equity markets. While the exceptional growth of economic output and corporate profits seen this year will likely soon moderate, financial conditions remain favorable. There are risks to the status quo—chief among them being rising trade barriers, higher labor costs and rising interest rates. The trade war is little affected by this election, and remains a concern. On the margin, this election result probably reduces the risk that labor costs and bond yields rise rapidly from here on. Both are likely to keep trending upward, but if they do so gradually then this growth period and equity bull market probably have a while longer to run.
My humble view:
Politicians being what they are, their sight is now totally focused on November 2020. Dems will make sure not to help Trump in any way and Trump will make sure voters are aware of that. As the FT reports, the new Congress, which takes office in January, will be the most ideologically polarised in US history, according to a scoring system developed by Adam Bonica, a professor at Stanford University.
Gridlock means that equity investors will need to assess how corporate profits will behave during 2 years when the economy will be left to its own: no new major fiscal stimulus, no new major tax cuts while corporate costs will keep rising (e.g. wages, logistics, interest rates) while Federal debt will go through the roof following the 2017-18 fiscal largesse.
Best outcome is gridlock brings Goldilock. Good luck!
The NYT:
Exit Polls: How Voting Blocs Have Shifted From the ’80s to Now
- Women broke hard for Democrats, this year, even more so than usual.
- In the 2016 presidential election, 55 percent of white women voted for Republicans. And this year, the group backed Democrats and Republicans evenly.
- This year, voters under age 30 broke for Democrats by a 35-point margin.
- All racial groups moved left, but white voters remain solidly Republican.
- This year, Asian voters swung left more than any other voters of color.
- Lower-income voters remain a core part of the Democratic Party’s base, but this year, the second largest shift left came from voters who make $50,000 to $100,000 annually. The wealthiest voters continue to vote Republican.
I find this chart fascinating: all income groups have shifted left in spite of the strong labor market and tax cuts:
EARNINGS WATCH
We now have 419 reports in, 78% beat rate and a continually rising beat factor reaching a record +6.6%:
Q3 earnings are now expected to be up an amazing 27.7% from 21.6% expected Oct.1 and 26.6% and 24.9% in Q1 and Q2 respectively.
Trailing EPS are now $157.53 or about $160 pro forma the tax reform for the full 12 months. Future EPS have not changed in recent days.
At 2800 on the S&P 500 Index, the Rule of 20 P/E is 19.7 on pro forma trailing EPS. Maybe, Mr. Market’s main fear before the mid-terms was a loss of both Congress and the Senate. Gridlock bring Goldilocks?
TECHNICALS WATCH
Not my forte, but I note that
- the S&P 500 Index jumped back up above its 200dma;
- the 200dam is still declining but that could reverse quickly with a few more good days.
- there was never a lower low since the February 9 low.
