10 Sep Capital 19 Catch-Up – Sep 10

After a rough start on Tuesday, markets rallied hard through the rest of the shortened week with all three of the major indices building impressive gains. A data report showing US manufacturing activity decreased in August for the first time since 2016 wasn’t enough to compete with positive news in trade talks as well as silver linings in the Brexit debacle and out of the protests in Hong Kong.

Brexit

Wednesday and Thursday were the big moving days. Wednesday seemed to be the catalyst as China’s services sector expanded by its largest amount in three months, Hong Kong leader Carrie Lam junked the extradition bill that had started all of their troubles, while the UK conservative party junked Boris Johnson’s plan for a no-deal Brexit with enough rebels voting with the opposition to block the government’s plans.

A no-deal Brexit has been considered by many to be perilous for the British and European economies, and indirectly for the global economy. The move is likely to see the UK forced back to the polls which will no doubt bring more chaos to an already chaotic situation. Either that or we’ll see something out of the box from Boris who has been backed into a corner by his own party and will be willing to try anything to wrestle back control. Interesting times for Old Blighty.

By the middle of the week, we also had news that the trade negotiations were back on. China’s top negotiator Liu He, along with US Trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin agreed to meet in Washington DC early in October, while consultations will be made in mid-September to work out the details.

In the past, it has always been these pre-negotiations that have fallen over so it will be interesting to see if we get anything different here. I’m suspecting its just another ploy on the part of the Chinese to delay anything real happening. It will all depend on how the US react to this. In the past the response has been to send angry tweets. I’m backing the October meetings are only a fifty-fifty chance of ever happening. I’d love to be proved wrong through.

With talks supposedly resuming between the two world leaders it was technology and finance that led the rally. The semiconductor index jumped 3% on Thursday as hopes returned of Chinese access for the chipmakers. Caterpillar (CAT) was also a standout, as it is also heavily reliant on access to China, gaining 3.3% and leading the Dow. Boeing also gained more than 1%.

Job growth slowdown

On Friday the non-farm payrolls disappointed Wall St with 130,00 jobs being added when 150,000 were expected. It was the third straight month that the jobs number has fallen, with June only higher because May was so shockingly low. It was also improved with 25,000 jobs added to help with the 2020 census – a one-off occurrence that has helped sugarcoat a much more disappointing number. Luckily it was better news for wages, which rose higher than expected at 0.4%, while the unemployment rate remained steady at 3.7%.

Overall the S&P500 gained 1.8% for the week. The Nasdaq matched the benchmark index and also finished with a 1.8% gain. The Dow managed a 1.5% rise, while the Russell 2000 struggled a little but still moved higher by 0.7%.

Lululemon (LUL) was the star of the week, and as we predicted in last week’s Catch Up it easily surpassed expectations with earnings of 96c per share and revenue of $883.35 million. Importantly, they also increased forward guidance with CEO Calvin McDonald saying he sees a “significant runway” ahead. Lulu’s line of men clothes was the key driver, up 35%, while online sales climbed 31%.

The aim going forward is to boost its share of the menswear market and expand into more product lines, including shampoos, deodorants, and moisturisers. They also plan to open more “experiential” stores in the future. This is the new buzzword in retail and refers to making a shoppers experience more interactive or immersive. For Lululemon, this will include yoga studios, juice bars, and meditation spaces.

LULU jumped 7.82% on Friday, following the earnings announcement after the close on Thursday. Their shares are up 54% from the start of the year and it wouldn’t surprise me if they continue to grow from here. It is a great stock to pick up during a market dip – which we have had a fair few of lately. So keep an eye out for the next one.

The impact of the trade war

Over the weekend we saw data out of China that showed exports falling unexpectedly. Not surprisingly exports to the US fell by 16%, while imports from the US were down by 22.4%. A definitive sign that the trade war is having a harsh impact on both economies, and something that we hope will get them rethinking their battle plans. China has already announced stimulus measures for its banks by reducing the amount of cash reserves they need on hold. I imagine there will be similar boosts to follow for all parts of their economy.

The week ahead seems to be on the uneventful side at first glance. Although with trade talks, Brexit, and the Hong Kong protests still waiting for resolutions you never know what may pop up to surprise us. We’ll also be looking closely at the Fed for any assurances that we’ll be getting a rate cut this month. CME group have an interesting FedWatch tool which you can find here if you’re interested in following it: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/ . It currently has the chances of a September rate cut at 91.2%.

And of course who could forget everyone’s (well perhaps my) favourite event of the year – The Apple Product launch. As per usual we’re expecting improvements to the new iPhones including improved water resistance, better shatter resistance, wider camera angles and new photo and video capabilities, and of course the annually upgraded battery. The Apple Watch 5 series is expected to improve on the 4, while we’ll see software improvements for iOS, tvOS, watchOS, and macOS.

The big highlight of the gathering in Cupertino California will be the introduction of Apple TV+. Apple’s new video streaming service designed to take on the Netflix’s and Amazon Prime’s and of course the hotly anticipated Disney Plus. With it will come original TV shows and movies, along with a pricing and rollout schedule. Most likely it will be bundled in with Apple Music which is the only real way I can see it succeeding at this stage. I’m fascinated to know what Apple’s plans are to take over the streaming sector. We’ll know more by tomorrow morning.

Earnings wise we are winding down to a standstill in the last month of the quarter although we will have a couple of highlights. Videogame retailer GameStop (GME) will report tonight, pot leader Aurora Cannabis (ACB) will report tomorrow (and don’t forget to check out our special report on the marijuana stocks here:  https://capital19.com/category/investing-in-the-cannabis-industry/)

While chipmaker Broadcom (AVGO) will report on Thursday, along with grocery store operator Kroger (KR).

Data wise we have interest-rate sensitive reports coming out in the Producer Price index and the Consumer Price index and core CPI on Wednesday and Thursday. We also have an ECB meeting on Thursday with their own interest rate decision and the potential for further monetary easing to be announced.

Take a look below for a more in-depth look at the earnings and data for the week ahead.

Cheers,

Paul.

Earnings:

• Tuesday: Dave & Busters Entertainment (PLAY), Farmer Brothers (FARM), GameStop (GME), Innovation Pharmaceuticals (IPIX), Peak Resorts (SKIS)
• Wednesday: Tailored Brands (TLRD), Value Line (VALU)
• Thursday: Broadcom (AVGO), Fred’s Inc (FRED), Innovative Designs (IVDN), Kroger (KR)
• Friday: Ameritek Ventures (ATVK), HypGen (HPGN)

Economic Data:

• Tuesday: NFIB small business index, Job openings, Real median household income
• Wednesday: Producer price index, Wholesale inventories
• Thursday: Weekly jobless claims, Consumer price index, Core CPI, Federal budget
• Friday: Retail sales, Import prices, Consumer sentiment, Business inventories.