Short week. Second estimate at Q1 GDP.
Stocks opened lower seven out of the last 10 trading days. That means stocks sold off overnight in Asia and Europe but then picked up in the U.S. trading day. That shows high-risk avoidance. No one wants to be long overnight and find there’s no volume. Who can blame them? Stocks were down for the week amid trade tensions, weak manufacturing orders and lower oil prices (down 13% this year).
The deflation forces are showing up in a strong dollar and another rally in 10-Year Treasuries. The yield hit an inter-day low of 2.39% (it was as high as 3.2% in October). A 10-Year note trading at $96 back then is now at $104 and that excludes coupon payments. If the slow down continues, trade talks deteriorate and inflation keeps slipping, we would not be surprised to see the 10-Year trade with a 1 handle.
1. Trade talks improving?
Ha, no. The Administration placed severe restrictions on Huawei, which is China’s trophy tech company with a huge lead in 5G technologies. They make Android phones, among other things, and so won't be able to use Google’s software. The restrictions essentially reduce a Huawei phone to the status of a brick. It’s not a public company but some of its suppliers are and they're down 15% to 50% this year.
The Chinese authorities did not take kindly to this, of course, and promised to play the long game which could mean anything from tit-for-tat tariffs, to selling down Treasuries, to withholding exports of rare earth minerals, which are vital to electric vehicle components, guidance systems etc. China accounts for seven out of every 10 tonnes of rare earth elements.
What is one to do while this all goes on? The obvious would be to stay away from U.S. stocks with China exposure. So that’s Hollywood, Apple, Starbucks, Qualcomm, Boeing, Wal-Mart and Intel. But that doesn't capture companies who depend on Chinese suppliers, like Nike, 3M and many others. Then you would stay away from European car and luxury goods on the basis that Chinese consumers will have less spending money. We’ve done most of that already. Next we’d look at Emerging Markets which are obvious casualties in the U.S. /China wars. But they've sold off already and don't yet look like bargains. So we wait. And keep the Treasuries as insurance.
Meanwhile, the latest Durable Goods orders were disappointing. If one of the claimed benefits of the tax changes was that capex would soar, then there are some disappointed supply siders around.
Here are the latest durable goods orders with the black line showing orders excluding defense. They're down 11% since last year.
2. Does the Transportation index tell us anything?
Yes. Not many people use this index any more. Heck, there’s not even an ETF for it and there are some dopey ETFs around as we’ve discussed before. It’s made up of distinctly unglamorous businesses. Kirby (barges), JD Hunt (trucks), Expeditors International (ships), CSX (rail). All companies that move either people or stuff around. They're cyclical because costs are fixed and volumes and prices fluctuate so profits are volatile.
Expeditors is a good example. It’s up 38% in the last two years but has had many corrections of 15% or more. And that's in a good economy. In recession time, it gets ugly. The stock has massively underperformed the S&P 500 in the last 12 years.
So, if there is a slowdown in the economy it’s going to show up in transportation stocks' earnings.
What’s happening with Transportation? It’s underperformed the S&P 500 by 10%. We recently looked at tonnage coming in and out of the Los Angeles ports. Outbound containers are down every month this year. Airfreight through Memphis (through which all the iPhones are shipped) is also down. Memphis is the base for FedEx. It’s share price has fallen 40% since January 2018 and by 36% in the last year. Here’s the running annual stock price change since it went public in 1980 (h/t John Kemp).
What does all this mean? Well, early signs of a slow down are everywhere. Freight, activity, volumes are all weaker. These are not recession triggers yet. But more evidence that the U.S. economy is slowing.
3. How’s Brexit going?
You had to ask? Terrible. Look, there are so many permutations here that we’re not going to say we have much insight other than the U.K. seems to:
believe going it alone is better than cooperation
dreams back to a glorious imperial past and
think trade will work better using tools ditched 30 years ago.
If that sounds familiar to another great country, then that's on you.
Brexit has now claimed its second Prime Minister and the next one appears to be Boris Johnson. Although if we had a vote it would be for Rory Stewart but that’s a long shot. Johnson is a shameless self-promoter, with changing positions and values and opportunistic to the core. He should do well on the world stage. Yes, this guy.
So, these are the Brexit choices
Leave with no deal
Leave with negotiated deal
Have another referendum.
We only care about the markets at this stage. Stocks are down 11% since last October but for U.S. investors, they’re down 17%. We’ve been out of the U.K. for two years now and can't see any reason to change our minds.
Bottom Line: The Fed is probably the most predictable player in the markets right now. The minutes were all about “patience” and they're not going to make any big changes to the SOMA balances (i.e. the QE assets). Meanwhile, expect political headlines to rule the day.
* Because it all seems Magic Bussy now.
All the Game of Thrones memes so we don't have to talk about it anymore
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--Christian Thwaites, Brouwer & Janachowski, LLC
Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice. We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security. The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended. Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data. Past performance is no indication of future results.
All charts from Factset unless otherwise noted.