Down Week

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted Wednesday 11/21.

Economy:

The consumer price index (CPI) climbed 0.3% in October to mark the biggest advance since January while the increase over the past 12 months rose to 2.5% from 2.3%.  Initial jobless claims edged up by 2,000 to 216,000 in the seven days ended Nov. 10, but is still near a 50 year low.  Retail sales surged .8% in October, but the most of the money was spent on gas and new autos and the increase came after the first back-to-back declines since 2015.

The economy looks good.

Geo-Political:

China continues to slow down as a result of the US trade tariffs.

October 31, 2018 – Growth in China’s factory output slowed for the second consecutive month in October, according to official data, a sign that the economy is continuing to lose momentum amid the backdrop of an escalating trade war with the United States.

The National Bureau of Statistics’ (NBS) manufacturing Purchasing Managers’ Index (PMI) fell to 50.2 in October – the weakest reading in two years and a significant drop from the 50.8 score posted in September.

The reading surprised the market on the downside, which had an average forecast of 50.6, and compares poorly with the average across the first nine months of the year (51.2). The index is benchmarked at 50, with anything higher indicating sector expansion.

NBS representative Zhao Qinghe said that the October decline was partly attributable to a “complex and variable external environment” causing “fluctuations” in demand and supply.

The loss of momentum was broad-based, with all five components of the index (new orders, output, employment, delivery times and raw materials inventories) falling. New orders saw a particularly steep drop to 46.9 from 48.0 in September, fitting with the wider trend of weaker domestic demand.

https://chinaeconomicreview.com/china-manufacturing-growth-falls-short-of-estimates/

There is no doubt that the US is punishing China.  The problem is that the US is suffering also, and since production in China drives so much economic activity in the Pacific Rim, the entire region suffers when China suffers.  After the sugar high surge in economic activity in Q2 and Q3 in the US following the tax cuts, we are seeing a slowdown in the US.  Europe is slowing.  The narrative has shifted in one year from a global synchronized growth to a global slowdown.  If this is the effect of the US trade wars, they will be a failure.

I continue to believe that if “forced technology transfer” from US companies to China is a problem, then the CEO’s of those companies are responsible.  All they have to do is “just say NO” when China says they have to give their tech secrets to Chinese companies in order to do business in China.  If the secret is that vital of a competitive advantage, you CANNOT give it away, no matter the size of the market you might enter.  That is not a government problem, that is a CEO problem.  That is also a problem with the corporate form of business organization.  CEO’s understand their average tenure is five years, so if they give away key secrets that will damage the company over 10 years, but they gain a huge market and grow revenue and profits over five years, they may be willing to give it away and take the short term (five year) gain, as they don’t expect to be around in 10 years when the Chinese are taking their business away by using their trade secrets.  A founding owner gets all the company profits now and in the future, but a CEO does not.  That creates a conflict of interest for the CEO, of short term profits vs long term positioning, that a true owner does not have.  The true owner must balance short term profits with long term profits, while a CEO only worries about short term profits (I define short term profits to be when the CEO’s last stock grant has vested!).

Regarding THEFT of trade secrets, it is still the responsibility of the CEO to only do business with companies that you trust, and that you have recourse to in US courts.  Don’t offshore any activity that is so key to your success that you can’t afford to have it stolen.

I see this as much more of a corporate problem, one of corporate irresponsibility, than a government problem that needs to be addressed by tariffs.  If enough companies refused to give their technology to China, Chinese economic activity would slow so much that eventually they would be forced to stop trying to steal our technology.  Another possibility is that the CEO’s do give SOME technology to China, but not the most important competitive advantages.  If we play the game wisely, we might take advantage of cheap Chinese labor and preserve our key competitive advantage.  I just don’t know how much we have given away or had stolen.  Therefore it is also unclear that the tariff war is an appropriate response.  The details of this situation have not be shared with the US public, so we are basically in the dark regarding whether this trade was is even necessary.

If anyone has factual data describing real incidents, I would love to receive it and post it in the blog!

This is important because the stock market fluctuations seem driven by Fed activity on interest rates, and by the tariff wars.

Technical Analysis:

The stock market was down for the week, its first down week in Nov.

Technically, it appears the correction grinds on.  RSI at the top of the chart ended the week at 48, near neutral.  MACD at the bottom of the chart has flattened out and is in neutral.  Price action is negative for the week.  Of more concern, the small “potential” double top at 2820 (two acqua lines) appears to have turned into an actual small double top since its prior upward move has been completed, and will now be resistance on the upside.  On the downside support would be at 2640 and if that is violated, next would be at 2580 at the old low from last winter.  We’re still in correction mode for stocks, unless you see an individual stock that has been mis-priced by the overall market pullback.

2018 11 17

Click THIS LINK to open the chart in a separate window.

What did I do last week?  Not much.  I bought some T-bills for 30 days in a couple of accounts, and after the next Fed rate hike on 12/19, I plan to roll that into a one year T-note or CD.  I will not buy a bond fund in a rising rate environment, so I buy the individual bond or CD with a specific maturity date that I select.

As a bonus today, let’s look at the performance of the PIMCO Total Return bond fund, one of the larger and better performing bond funds over time, and I will show you what I mean.  The ticker symbol is PTTRX.  The fund has an average maturity of 4.7 years, and its current 30 day yield is 2.76%.  But, look at this from the PIMCO website:

2018 11 17 PIMCO total return fund

In the last year, the fund has lost 1.5% of your principal.  So, if you made 2.75% interest and lost 1.5% of your principal, your total return for the year was 1.25%.  You could have bought a 1 year CD a year ago, gotten a lower interest rate but a higher total return, and had no risk to your principal if you were committed to holding for a year.  The CD would have been a better deal than the PIMCO bond fund in my opinion.  That continues to be my opinion in this rising rate environment.  What might the loss of principal be in the bond funds this year?  Nobody knows, and I don’t like that uncertainty.  Much better to buy an individual bond with an exact maturity date that is relatively near in time (I like one year right now, and as interest rates rise, move out to 2, 3, or 5 years).

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing

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