I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). 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 primary bear market, 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.
Economy:
New-home sales ran at a 626,000 seasonally adjusted annual rate in May, down 7.8% compared to April and 3.7% lower than a year ago. The median price of a new home sold in May was $308,000, 2.7% lower than a year ago. Durable goods orders slid 1.3% last month, the third decline in four months. Initial jobless claims climbed by 10,000 to 227,000 in the seven days ended June 22. The pace of growth in the U.S. GDP in the first three months of 2019 was left at 3.1%. Consumer spending increased 0.4% last month. The U of Michigan said the final reading of its consumer sentiment index in June was 98.2, down from the 100 reading in May.
New home sales down, durable goods orders down, consumer sentiment down. We used to go through a week and all the economic statistics were up. The economy is slowing, but still growing. This could be a time to not be thinking about what stock to buy, but rather how much to have in stocks and how much in CD’s. A recession may not hit for a year or more, but how close do you think you can time that event?
Geo-Political:
Trump and Xi met in Osaka today and agreed the US will allow companies to sell to Huawei and no new tariffs will be placed on Chinese imports, while trade talks resume with this quote from the Chinese, “on the basis of equality and mutual respect”. Trump has learned that negotiating with China is harder than negotiating with the Atlantic City city council.
Trump has taken on the second largest economy in the world, without any allies on our side. Trump has insulted all of our NATO allies by saying they do not spend what they are supposed to on defense. They don’t, but he could say it in private. Trump has alienated our allies by withdrawing from the Paris Climate Accord, which imperils all the nations. Trump withdrew from the Iran Nuclear Agreement although Iran was in complete compliance with the deal, and against the council of the other nations who signed the agreement with the US. There is significant animosity toward the US from our traditional allies in Europe. Against that backdrop, does anyone think we will get cooperation on a trade embargo with China? That’s doubtful. What about a grand coalition if we start a war with Iran? I doubt it; I think the US would have to go it alone and that would be very expensive.
I think Trump has miscalculated, he’s gotten us into some big disputes, but he has not figured out how to get us out of them. He thinks he can apply pressure and get what he wants, but nations have more resources than the Atlantic City city council and they have the ability to resist pressure even though the pressure is painful. That is the nature of war.
Tariffs are a poor tool in a trade dispute. They cause the price of goods to go up in the US which makes our consumers pay more for goods than they should have to, eating into some of the benefit of the tax cut. For companies that import goods for inclusion in products they make and sell internationally, it increases the cost of that product and makes us less competitive on the international market. It hurts China to the extent that they export less to the US, but it hurts us also.
President Reagan went to China and opened trade in the early 80’s because US corporations wanted the ability to sell goods to the 1.3 billion Chinese consumers. CEO’s have taken advantage of the huge labor cost disparity between the US and China to offshore jobs and break the power of US unions, particularly the United Auto Workers (UAW) in Detroit, and they have succeeded with an assist from Mexico and the NAFTA trade agreement. The actions of the CEO’s are just capitalists being capitalists. They seek to maximize revenue and minimize cost. The objectives of CEO used to be aligned with our national interest, building their companies was in fact building up America. To be fair, they didn’t have an alternative. A hundred years ago, the difficulty of communicating between the US and Asia was significant, and shipping across the ocean was somewhat unreliable (see Titanic). Technology has fixed those problems, communication is instant with satellite telephony and email, and shipping is almost totally reliable with better ships and weather forecasting. Today, the interest of the capitalist CEO is no longer aligned with the national interest. It is cheaper to manufacture in China or Mexico because of wage rates (it’s not about the tax rates), so now what is good for their company is NOT good for the nation. CEO’s don’t care (although they say they do, but they lie) about the nation, that is someone else’s problem to take care of the nation, their job is to maximize the profit of their company during their tenure as CEO, to optimize the value of their stock options and grants and make the most money for themselves. It was not a national policy that sent manufacturing to China, it was the CEO’s doing what good capitalists are supposed to do, maximize profit. And, it’s contagious. Once your competitor moves his factory to China and can produce at significantly lower cost, you have to move your operation or be put out of business. We had a saying at a big steel user I worked at in the 80’s, “automate, emigrate, or evaporate”. The definition of emigrate is “leave one’s own country in order to settle permanently in another”. That company today has no major fabrication in the US, it is all done offshore.
But I state again, capitalism is a great system when the capitalists interests are aligned with the national interest, but it is not so great when the capitalists interests are no longer aligned with the national interest. That is where we are for the manufacturing economy that relies on trade type labor. The tech part of the economy where peak knowledge and innovation are required still is best done in the US, and that part of the economy is thriving. Some of the tension in the US between those doing well and those not doing well emanates from this dichotomy.
There is no doubt that China engaged in unfair trade practices with the US and other nations. The question is how do you effectively get them to stop? Can the US do it alone with tariffs, or if we had built a broad international coalition of trading partners and presented a united front, could we have accomplished more with less damage to our own and the international economies. I believe the later course would have been better and I think there would have been international support for it as other nations are angry at China for stealing their technology. At the end of the day, can the US build such a coalition after pulling out of the Paris climate deal, pulling out of the Iran nuclear deal while Iran was in compliance, and openly criticizing our NATO allies for not spending enough on defense? That would be hard to do at this point. A single wolf can’t bring down a moose, but a wolf pack can; there is strength in numbers and the US appears weakened by our own actions alienating our allies.
The IMF has estimated that global trade friction will reduce global GDP by .5% this year, so the trade war is impacting everyone. When growth slows in China, it slows in Japan, S. Korea, Vietnam, Thailand, Australia, and other nations. Eventually that will back into the US economy. Current estimates for US Q2 GDP are around 2%, which would be the lowest since the Trump tax cut.
Technical Analysis:
The stock market was flat for the week. Optimism over favorable comments from the Fed is offset by concerns over the trade war with China. This morning’s statements from Osaka represent a temporary truce, that is all. Consensus was that a truce was the best we could expect and that is what we got.
Technically, I added a new aqua blue line over the mid June market record high at 2950. Yes, we made a new high, BUT we have so far failed to follow through on it, and it MIGHT complete a dreaded triple top formation, which remains to be seen. But at this point it makes me very cautious. In general the chart makes me a little cautious. RSI at the top of the chart is OK at 61, rising a little and in the neutral range. Momentum measured by MACD at the bottom of the chart is short term neutral as it is going sideways, but the histograms are shrinking making it a little suspect. Short term price action is OK, but after the great June rally based on dovish Fed comments a little pullback is expected.
The big picture though is the global slowdown and how much of that backs into the US economy. The global slowdown has been precipitated by the US trade war with China. Central banks around the world are becoming more accommodative to counter the negative effects of the trade war, and in fact our own Fed is expected now to cut the funds rate by a quarter of a point (some guess a half a point) at the July meeting. Will it work? Can a minor cut in interest rates overcome the negative damage of the trade war? We’ll see, but sitting at record highs in the market with slowing growth around the world and a trade war between the two largest economies in the world, there is significant risk in this market.
Click THIS LINK to open the chart in a separate window.
What did I do this week? I bought a 2 year CD yielding 2% with a small sum of money. I started a small position in IRM. I sold a covered call on CELG before the govt. announced they wanted CELG to divest one of its biggest selling drugs prior to its merger with Bristol Meyers and CELG stock fell. It’s too late to buy CELG now, but if you own it, I have sold several 30-day call options at the 97.50 or 100.00 strike and collected every premium, plus I still have the stock. It’s free money to me, oh look, there is $100 bill on the ground, will you bend over and pick it up? Yes. With money markets yielding 1.7% and the Fed looking like it will cut by .25%, they will be yielding 1.4% if that happens, so moving some money to lock in a slightly higher yield seems like a good plan for some money.
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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 to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.
Rich Comeau, Rich Investing
Rich Investing 