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.
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The ISM manufacturing index sank to 48.1% in November from 48.3% in October, the fourth straight sub-50 reading. Readings below 50% indicate business conditions are getting worse. The ISM non-manufacturing index fell to 53.9% in November from 54.7%, slowing but still showing growth (the service economy is now much larger than the manufacturing economy). Factory orders rose 0.3% in October, an OK number. The economy produced a robust 266,000 new jobs in November and the unemployment rate returned to a 50-year low of 3.5% (about 50,000 GM workers returned to work, inflating the report, but in spite of that it is a strong report).
The manufacturing economy is weak, the service economy looks strong, and employment is good. On balance it looks like a stable slow growth economy, a good thing. There are a couple of cracks to watch out for if they worsen down the road.
There was a NATO Summit in London last week, and while all leaders appear committed to the alliance, there is more strife there than in the past. As I see it, that is not good for the US.
One major bone of contention is the US withdrawal from the Iran Nuclear Deal, without consultation with our NATO allies, and without Iran violating any of the terms of the deal. The US just dishonored its commitment, it re-imposed US sanctions on Iran, and threatened to impose secondary sanctions on any nation trading with Iran (except for humanitarian goods). The US is able to enforce secondary sanctions because so much international commerce is conducted in US dollars, and those trades ultimately are settled in the US via a private banking system called CHIPS, or by a Federal Reserve clearing system.
The US has much of the world under control of its banking system. It knows much of what is transpiring because it can see the flow of payments. Europe is powerless to resist. As long as everyone feels the US does not abuse its position of power, there is no need to do anything else. Europe seems to think the US is abusing the power it has, and it is looking for a way to regain its financial independence, from what they perceive as an abusive overseer. The effort started a year ago when the US withdrew from the Iran Nuclear deal.
Europe is attempting to set up its own payment clearing system, outside of the US dollar denominated system.
Nov. 29, 2019 – Six European nations say they will join a fledgling financial system to bypass U.S. sanctions against Iran, challenging U.S. President Donald Trump days before he meets leaders of some of those nations in London.
In a joint statement Friday, Belgium, Denmark, Finland, the Netherlands, Norway and Sweden said they are in the process of become shareholders of the Instrument in Support of Trade Exchanges (INSTEX). Britain, France and Germany launched INSTEX in January to enable companies to trade with Iran without using U.S. dollars or going through U.S. banks, thereby shielding such companies from U.S. sanctions.
Trump has been toughening U.S. sanctions against Iran since November 2018 as part of a campaign of “maximum pressure” on Tehran to reach a new deal to stop its perceived malign behaviors. Earlier last year, he pulled the U.S. out of a 2015 deal in which world powers eased sanctions on Iran in return for curbs on the Iranian nuclear program. Trump said that deal was not tough enough on Tehran.
The Trump administration has warned other nations not to engage in various transactions with Iran or face secondary U.S. sanctions. But the 28-member European Union has pledged to do what is necessary to uphold its nuclear deal commitments, seeing the deal as a major contributor to global nonproliferation and Mideast stability.
In their joint statement, the six European nations said: “In light of the continuous European support for the agreement and the ongoing efforts to implement the economic part of it and to facilitate legitimate trade between Europe and Iran, we are now in the process of becoming shareholders of INSTEX, subject to completion of national procedures.”
Trump has unilaterally driven a wedge between the US and the EU, with overlap with our NATO allies. Europe questions how good of an ally the US is, when it takes unilateral action that involves them, without any consultation with them. The result is this action expressing their desire to be independent of unilateral US dictates.
The rest of the world is OK with the US controlling the financial payments system, as long as we live up to international commitments we have made, act consultatively with our allies, and act reasonably. So, now we have the seeds of a rebellion. Europe will not allow the US to control all of the payments since they do not want to be controlled by an unreliable partner who breaks its commitments without consultation with our partners.
Will this alternate payment system succeed? I don’t know, the EU is still a fairly fractious lot. If it succeeds as wildly as the Euro (sarcasm alert!), it will fail. But, the member nations may find enough common interest to pull this off, and asserting their financial independence from an unreliable US partner just may do it.
What has this got to do with the stock market? This week, absolutely nothing. But in the long run, if we alienate Europe bad enough and they succeed in setting up an alternate payment system for themselves, the US will have given up a measure of control of international commerce, potentially for no gain. That will ultimately weaken the US. Allowing a healthy distrust of the US by our trading partners can inject bias into our dealings and cause former partners to choose to do business with other sources, just to weaken the US and limit the amount of control we have over their affairs. We already see it altering the course of foreign affairs.
I defy you to write a better script for Russia to extend its influence in the world, by weakening the US in ways that are not even apparent to our US citizens.
Trust is an extremely important commodity in business and foreign affairs. It is only earned, never given. A small rupture of that trust can take a long time of observation in order to overcome and repair.
PS: China and Russia are working on an alternative system also.
Oct. 29, 2019 – An alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) global payment system, which is being drawn up by China, Russia and India, has a fair chance to end the dominance of the US dollar in the global financial sector, Chinese analysts said Tuesday.
Russian news outlet RT reported Monday that China, Russia and India are working on an alternative to SWIFT that would connect an eye-catching 3 billion people in the three BRICS emerging economies.
Huang Qifan, a former mayor of Southwest China’s Chongqing Municipality with a reputation of being a financial expert, on Monday openly blasted SWIFT, saying that it – along with the Clearing House Interbank Payments System (CHIPS) – is being degraded into a financial tool of US long-arm jurisdiction and global hegemony.
SWIFT is an interbank, nonprofit cooperative organization that provides transaction clearance services for its member banks. SWIFT takes strictly neutral positions. However, the US has great influence on the organization, to the point that it is capable of controlling SWIFT, industry observers said.
CHIPS is an important component of SWIFT, as well as the key method for converting payments into the US dollar, processing transactions, and making electronic payment transfers and clearances. CHIPS deals with cash flows, while SWIFT is for information communication.
Huang is seen as the architect of the miracle of Southwest China’s Chongqing, the nation’s fourth provincial-level municipality, which had a record run of double-digit economic growth. He said at the Shanghai Bund Summit that SWIFT is out of date, inefficient and extremely expensive.
According to RT, Russia, India, and China aim to connect their financial messaging systems to bypass SWIFT.
The market corrected a little early in the week on bad news about the China trade negotiations, then recovered later in the week on positive news about them. We don’t know what is really going on, so I don’t know why the govt. officials try to say anything. It all looks premature and therefore like senseless noise at present.
Technically the market remains in good shape. RSI at the top of the chart is in high-neutral at 63 and rising, and momentum shown by MACD at the bottom of the chart is moving sideways in neutral mode. The price action is good, but we are still living near the top of the channel we have been in for the last half of the year, so we remain vulnerable to a correction.
Let’s talk about earnings. That is what the stock market should trade on, earnings, or profits. Q3 came in flat, and Q4 is projected by Factset to be flat. In fact, calendar year 2019 has been flat all year. Looking ahead to 2020, Q1 is projected at +5%, Q2 at +7% and all of calendar 2020 at +10%, meaning the second half of 2020 would have to come in strong indeed, like +15% for two quarters. Will that happen? Factset changes their estimates as the time gets closer, based on feedback from the companies themselves, so it certainly could change. What is the thesis by which Factset projects such strong earnings growth next year? It is not stated, but with the labor market in a strong position, the theory could be that consumers are flush with cash and willing to spend and carry the economy. We’ll see.
What am I doing? Not much. I sold into strength and hold a lot of cash. The next big move in the stock market will probably be driven by an announcement on the China trade deal. I expect an initial pop higher, then some pullback as folks realize it is not much of a deal (I have been known to be wrong though). It appears right now the market just wants to go up until there is a reason to correct. In a situation like that, I will usually pick a sector or two and start buying small amounts on a daily basis (like the financials, XLF), and keep a close “trailing stop loss %” order under the position. That gives me a little participation, without much risk. We’re in the time of the year where we get a “Santa Claus Rally” into year end, sometimes, since at this time of year the analysts estimates for next year are usually at their highest because they have not been marked down.
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Rich Comeau, Rich Investing