07 May Capital 19 Catch-Up – May 7

Wall St fought back hard at the end of last week as the unemployment rate fell to its lowest point in 50 years. It only took the weekend to snuff out the late rally, however, as the trade negotiations between the US and China took a turn for the worse. For the week the S&P500 closed just .2 points away from its all-time closing high at 2945.64. The main benchmark was only up 0.2% over the five sessions. The Dow managed to stay relatively even, losing just 0.1% and closing at 26,504.95. While the Nasdaq closed the week out with a 0.2% gain, but its best-ever close at 8,164.

Jobs Report

The April jobs report was an absolute beauty on Friday as the US added a healthy 263,000 jobs for the month, and unemployment fell to 3.6%, its lowest level since December 1969. Back in 69, man landed on the moon for the first time, the Beatles released Abbey Road, the Dow closed at 800 for the year, and the average house cost $4,640. What a time to be alive.

Of course, the unemployment rate isn’t the most useful number to use when measuring the success of the economy. Especially in the US where the long term unemployed slip off the official books and are conveniently forgotten about by the statisticians. In fact, over the last few months over 70% of the new hires had not been counted as unemployed the previous month.

You can add the lost workers back into the mix, however, by looking at the working age employment rate. This is the job rate of all people between the ages of 25 to 54 – the age in which you will find the majority of people looking for full-time employment.  Here you will find that while job rates have been improving every year since 2012, it is just now getting back to 2006 levels.

But at least things are certainly starting to move in the right direction. Wage growth is finally improving after a decade of stagnation, and we’ve now seen it top 3% for the last nine months straight. This is the first real sign of an improving job market and a great sign for the economy. The only thing that could stuff it up now would be say………… some sort of trade dispute between the world’s two biggest superpowers. As if that is going to happen.

Trump’s threats to China

Oh yes, also over the weekend Trump jumped on Twitter again and threatened China with further tariffs if they didn’t come to the party on the current negotiations. As the Catch Up has been predicting over the last few months, it turns out both sides aren’t quite as close to a resolution as the reports coming out of the US camp initially suggested.

Trump was in “tough-talking” mode on Sunday when he tweeted “For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billion Dollars of additional goods sent to us by China remain untaxed but will be shortly, at a rate of 25%. The tariffs paid to the USA have had little impact on production cost, mostly borne in China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”.

And wow, did that set a fire underneath the imminent trade meeting to be held in the US on Wednesday. The Chinese were of course offended and threatened to pull out of the meeting. However, overnight they have agreed to attend but with a smaller delegation than originally planned.

Trump’s negotiating technique isn’t going to make him any friends, especially on Wall St. But that’s not the intended purpose of course. I’m pretty sure he’s willing to shut the whole thing down and slap all of the threatened tariffs on China as soon as possible. And when you are willing to carry through with your threats you can be as aggressive as you like.

I can’t imagine China is going to take too kindly to being bullied. There’s a real chance negotiations will stall here. But possibly the purpose is to bring China back to the table in 6 or 12 months time when the tariffs really start to hurt their economy. Warren Buffet, in an interview overnight, said although he would never negotiate like this, sometimes in negotiations, people need to act “half crazy” to get results.

The markets initially cratered on the tariff news. However, stocks spent the rest of the session recovering, and in the end, the losses were only minimal. The next few days could be quite volatile however with rumours on how the negotiations are going continuing to push and pull market sentiment.

What’s our view?

Our view is Trump is just posturing to try and put pressure on the deal and get a better result for the US. We see no coincidence that he did this when the market was at all-time highs. He knew how the market would react but he could afford it at all-time highs. He would not have done so if the market was at December levels. It is all just posturing, and this is why stock traders largely shrugged it off and spent the whole session buying stocks at depressed levels. After all, isn’t that what you are supposed to do, buy stocks when they are cheap?

The technology industry is most at risk in case of a tariff war. The chip makers especially head the list of a who’s who of companies which are heavily influenced by Chinese sales. I won’t name each one – it’s pretty much all of them. But you can add to them the likes of Apple (AAPL), Boeing (BA), Caterpillar (CAT), Wynn Resorts (WYNN), Autozone (AZO), Bed Bath and Beyond (BBBY), and Floor and Decor (FND). And of course, US-listed Chinese stocks such as Ali Baba (BABA), Tencent Music (TME), and Autohome (ATHM).

The Berkshire Hathaway pilgrimage and Warren Buffet.

In other news, the Berkshire Hathaway pilgrimage was held over the weekend in Omaha Nevada. The annual love-in where Buffet buffs come from all over the world to catch a glimpse of the genius investor and his offsider Charlie Munger.  It’s really more like a carnival, with Warren Buffet cut-outs, oversized Heinz tomato ketchup bottles, oversized Duracell batteries, oversized Oscar Mayer hot dogs, and oversized every other Berkshire product there is available. There are food stalls, and running shoe stalls, a Coca-Cola booth, and vote Warren for President badges.

And amongst the hoopla, Warren and Charlie actually hold a shareholders meeting where they discuss everyone and everything. Amongst other things we heard that Berkshire has been buying shares in Amazon (AMZN), has held all of its stake in Apple (AAPL), and that they plan to invest heavily in renewable energy in the future, particularly wind.

Buffet still doesn’t like Bitcoin, referring to it as a type of gambling, and he isn’t worried about Tesla competing with his General Motors business or the electric carmakers plans to offer a car insurance product. He also made a guest appearance at the Variant Perspectives Conference held by the top female investors. Did you know that a 2018 study showed that female stock analysts have historically made more accurate predictions than their male counterparts, despite making up less than 20% of all Wall St analysts? Something to take on board when looking at analyst recommendations in the future.

Coming up this week we have plenty of big earnings results including game maker Electronic Arts (EA), newly listed company Lyft (LYFT), and LNG leader Cheniere Energy (LNG). The big one, however, will be Walt Disney (DIS) after the close on Wednesday, coming off their recent massive hit Avengers Endgame. Box office profits from the movie won’t be included in this earnings of course but it is now one of only five films to make more than $2 billion – the others being Avatar, Titanic, Star Wars: The Force Awakens, and Avengers: Infinity War. It’s already taken $2.188 billion in only two weeks and it will be interesting to see whether it can knock Avatar ($2.8 billion) off the mantle for the highest grossing film of all time.

It’s pretty quiet on the data front this week. But I suspect it will be all about the trade negotiations anyway. It’s going to be a very interesting week ahead. Take a look below for a snapshot of earnings and all other economic data.

Enjoy the rest of the week.

Cheers, Paul.

Earnings

• Tuesday: 3D Systems (DDD), Dean Foods (DF), Electronic Arts (EA), Fossil Group (FOSL), Lyft (LYFT), Qorvo (QRVO), Sturm Ruger (RGR), Trip Advisor (TRIP)
• Wednesday: Chesapeake Energy (CHK), Jack In the box (JACK), Match Group (MTCH), McKesson Corp (MCK), Office Depot (ODP), Walt Disney (DIS), Wendy’s Co (WEN)
• Thursday: AutoWeb (AUTO), Cheniere Energy (LNG), Dropbox (DBX), Keurig Dr Pepper (KDP), News Corp (NWSA), Trade Desk (TTD), Yelp (YELP)
• Friday: BroadVision (BVSN), Marriot International (MAR),Viacom (VIAB)

Economic Data

• Tuesday: Job openings, Consumer credit
• Wednesday: None
• Thursday: Weekly jobless claims, Trade deficit, PPI, Wholesale inventories
• Friday: CPI, Core CPI, Federal budget