- MSM says it’s the BIGGEST week for the markets in 7 weeks
- What, you don’t remember? Oh, well…
- Some real financial news: Two sectors overcome trade war chatter
- Forget the Sept. 30 shutdown deadline: Oct. 15 really matters
- FANG stocks continue to bite (but they’re doing better than MoviePass)
- What did an Iranian ever do to you?
“Storm of News to Hit Global Economy This Week Before August Calm,” says a hype-y Bloomberg headline.
“People charged with running or monitoring the world economy are set for a busy week before those in the Northern Hemisphere get to enjoy their summer vacations,” says the lead.
Here’s what’s shaking this week…
- Bank of Japan policy-setting meeting
- Federal Reserve policy-setting meeting
- Bank of England policy-setting meeting
- Friday: Labor Department issues U.S. job numbers.
If you’re experiencing a bit of déjà vu, that’s because on June 11 — only seven Mondays ago — Bloomberg regaled us with a similar headline: “Brace for the World Economy’s Most Important Week of the Year.”
At the time we said we’d be shocked if any of that week’s scheduled events proved to be of long-term significance to the markets. Then too, many of the world’s major central banks held meetings and issued statements. In addition, there was the aftermath of the G-7 summit… the Trump-Kim Jong Un meeting… and a meeting between Russia’s President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman.
Aside from maybe the Trump-Kim meeting, do you remember anything from that week?
Us neither. We’re quite certain that seven weeks from now, you won’t remember a thing about the “news” Bloomberg insists is of earth-shaking importance this week.
That’s the problem when establishment news sources can’t separate the news from the noise. Everything in that Bloomberg story is noise. There’s not a shred of information that can help you make money.
And so we step back this morning for a bit of perspective…
“As you know, the market has been in a holding pattern since February,” says our Zach Scheidt. “That’s when Trump first started discussing the changes he wants to make to the trade arrangements the U.S. has with other countries. Investors have sold many of their stock positions in anticipation of a full-blown trade war emerging.
“So if you look at the prices for most stocks right now, you’ll see that these investments are trading at a level that assumes the worst.
“But as a long-term income investor, this is the exact scenario I want to be buying stocks in. Because I’m getting a chance to buy shares of great companies from investors that are willing to accept pessimistic prices.”
With Zach’s words in mind, we turn to the marquee earnings report of the day. It’s Caterpillar.
Three months ago, CAT delivered standout numbers. But on the conference call, company honchos said those numbers might be as good as they get all year. CAT shares ended the day down 7.5%, dragging down the Dow 400 points.
Three months later, the story has shifted.
CAT execs told analysts today it expects tariffs to trim as much as $200 million from its bottom line during the second half of 2018. But they also said they expect they can recoup those losses by jacking up prices to customers.
That’s bad news if you consume goods that require a bulldozer or a backhoe somewhere along the production chain; those higher prices might be ultimately passed onto you. But it’s good news for CAT’s share price (along with an earnings “beat” and a $750 million share buyback). At last check, CAT is up nearly 1% on the day — helping limit the Dow’s losses to about a quarter-percent.
CAT’s action reinforces a point Zach’s been keen to make in recent days.
“If the trade war heats up, stocks are already priced at levels that assume the worst,” says Zach. “So we shouldn’t see much of a move lower from here.
“On the other hand, if the trade war fears ease, stocks will ramp sharply higher.
“That’s because investors will stop focusing on this single concern and will instead look more closely at the earnings that American companies are generating.”
Zach likes two sectors in particular right now:
- Banks. The big banks launched earnings season just over two weeks ago. Since then, share prices for Citi, Bank of America and JPMorgan Chase are up 7–9%.
“This entire sector has strong tail winds behind it,” says Zach, “like rising interest rates, a now widening spread between short- and long-term rates and businesses taking out more loans to grow their operations”
- Homebuilders. Despite signs of a slowdown in the housing market, the homebuilders still have a tail wind. D.R. Horton is up 11% since reporting earnings, as just one example.
“The record low supply of houses is pushing home prices higher. Mortgage rates are still hovering around historic lows. And millennials are finally moving away from rentals in favor of homeownership for the first time!
“If you’re currently looking for places to put your money, buying high-quality stocks on sale in this trade war-haunted environment is an excellent place to start,” Zach concludes.
Banks and homebuilders? Tail winds. The FANG stocks, not so much. “I’m talking about the strong and well-capitalized businesses that have weathered storms like this in the past.”
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Uhh, about those FANG stocks — they’re still hurting today.
Facebook — which started the rout last Thursday when it acknowledged its blistering pace of growth was finally slowing — is down another 4%. Ditto Netflix. Amazon and Google parent Alphabet are down about 1%. The Nasdaq as a whole is down about 1%.
Elsewhere, crude has recovered the $70 level for the first time in two weeks. Gold remains mired in the low $1,220s.
So we’re looking at the prospect of a “partial government shutdown” on Sept. 30. We daresay the more important date to watch for is Oct. 15.
Over the weekend, the president said he wouldn’t mind a shutdown at the end of the fiscal year on Sept. 30 if Congress doesn’t come up with enough money for the border wall to suit his desires.
As with almost all of these shutdown threats, it’s kabuki theater. There will be a shutdown only if the president and congressional Republicans decide it would be to their advantage going into the midterm elections in November.
But Oct. 15 could ramp up the trade dispute with China to a whole new level, warns Jim Rickards.
Whether it’s the result of market forces, manipulation or both… the Chinese yuan has fallen nearly 6% against the dollar since mid-June. A falling yuan effectively softens the impact of U.S. tariffs on Chinese goods.
“If Trump puts a 25% tariff on Chinese imports but China then devalues its currency 25%, then the net effect is zero,” Jim explains. “The impact of the devaluation offsets the impact of the tariff and then you’re back where you started.
“Once Trump focuses on this, he’s likely to be infuriated and retaliate against China in the currency war and take steps to penalize China for currency manipulation over and above the existing tariffs and penalties for theft of intellectual property. This has a hard date of Oct. 15, 2018. That’s the date of the U.S. Treasury’s semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.
“That report is the formal mechanism for labeling a trading partner such as China a ‘currency manipulator’ with severe consequences. Oct. 15, 2018, is just three weeks before the midterm elections, so it could be a highly popular political move in addition to being economically important.”
And not just political theater. Trump’s predecessors have long toyed with the idea of the “manipulator” designation. Trump has held it in reserve since taking office. But he might be ready to unleash it soon.
For the record: MoviePass is *this* close to circling the bowl.
We first tipped you off to MoviePass in early March — offering “all you can eat” access to movie theaters nationwide for the impossibly low rate of $7.95 a month. Which then became $9.95 a month. Which then became $9.95 a month, some restrictions apply. As the weeks wore on, those restrictions became ever more onerous — i.e., “peak pricing.”
Last Thursday, users ran into “technical” difficulties when they showed up at the box office — because MoviePass had run out of money. A $5 billion loan was enough to tide over the service — but only through Friday. By the weekend, customers were once again complaining their app and cards weren’t working.
And if they were working…
This morning, shares of MoviePass parent Helios and Matheson Analytics (HMNY) are down 46%. And they’re down 99% for the year.
To the mailbag, and a line of thought we figured we’d hear after Friday’s 5.
“Dave, it is incomprehensible to me that you can describe the ‘Joint Comprehensive Plan of Appeasement’ as the one good thing that Obama did.
“The cash and gold that we shipped to Iran was used to fund war in Yemen and Syria, as well as terrorism by Hezbollah — not ‘slash the risk of a devastating Middle East war.’ All military facilities are off limits from the inspection program — a huge gap that prevents any assurance of compliance.”
Says another reader… “Obama negotiated a 10-year delay? Essentially that assures that those jolly guys screaming, ‘Death to America,’ would love to have to bring about that DEATH.”
The 5: Let’s address a couple of these specific points and then zoom out for the big picture. I mean the really big picture.
- First, the cash belonged to the Iranian government — it wasn’t some giveaway, as so many of the deal’s critics love to imply. It was Iranian money frozen by Washington starting in 1979, and the amount that was unfrozen was probably only a third of the total
- Iran used that money to help its allies in Yemen and Syria? Who ginned up the conflicts in Yemen and Syria to begin with? Why, yes, that would be mostly Washington’s best buds in Saudi Arabia — that wonderful democracy where they behead people for sorcery
- About the fact the inspectors are barred from nonnuclear military sites: C’mon. No regime that expects to retain the consent of the governed would give foreigners the run of their military installations.
Oh, and the “sunset” clause? Israel’s Prime Minister Benjamin Netanyahu said something very interesting about that in 2015, which we mentioned a few months later.
The Israeli daily Haaretz quoted an anonymous senior official. “Netanyahu said at the meeting that it would be impossible to catch the Iranians cheating simply because they will not break the agreement.”
As the paper explained it, “Netanyahu also told the ministers that in 10–15 years… the Iranians will show that they met all their obligations. They will then receive a ‘kashrut certificate’ from the international community, which will see Iran as a ‘normal’ country from which there is nothing to fear.”
At that time, Iran would no longer be a pariah state. It would be a regional power on the same level as Israel and Saudi Arabia. That’s what Netanyahu feared.
But let’s not argue over trifles. Let’s ask a much bigger question…
What did an Iranian ever do to you?
Did an Iranian cut the dollar’s last tie to gold in 1971, so that you need $6.19 today to have the same purchasing power of that 1971 dollar?
Did an Iranian hijack the U.S. health care system so that — just as one example — having a baby in the hospital with no insurance costs nearly 20 times what it did in the early 1950s? (and that’s after you account for inflation.)
Did an Iranian bail out the banks in 2008? Push down interest rates after 2008 to wreck fixed-income investments for seniors? Turn higher education into a ruinously expensive scam for young adults?
No, all those things were done by Republicans and Democrats in the United States.
Donald Trump has tinkered at the margins a bit — slowing the pace of new regulations and cutting taxes (but without offsetting spending cuts, so it’s just borrowing from the future) — but he hasn’t changed the fundamental trajectory.
Political leaders throughout history have found they can distract the masses from their miseries by demonizing foreigners.
For the last 24 months — the Obama FBI opened its bogus “Russiagate” investigation two years ago tomorrow — Democrats have tried to divert attention away from their epic failures of governance and a horrendously mismanaged 2016 campaign… by lashing out against Russia.
Meanwhile, Trump knows full well that rising interest rates and rising oil prices could tip the economy into recession just as the 2020 campaign will be heating up in another 12–18 months. No one should be shocked if he too is angling for a foreign distraction.
The 5 Min. Forecast
P.S. Even if Iran never escalates to the level of hot war, don’t forget the critical economic angle: The Chinese and Russians are already looking to break free of a global financial system dominated by the dollar. Washington’s withdrawal from the Iran nuclear deal is only accelerating that program.
If the Europeans ultimately follow their lead… the 1971 dollar that’s worth $6.19 today will be effectively worthless.
There’s a long arc to this story, and we’ll be following it the whole way…
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