Welcome back! The summer has ended and so did the stock market rally in August. Not to worry, some of the economic data below indicates the economy is on solid footing despite being late in the business cycle. Technically, the past week has been choppy and and working off overbought conditions established in August. It wouldn’t surprise me if there were a few more choppy sessions next week or perhaps a test of the 50 day in the chart below.
Many charts of the large cap companies are still trending despite the choppiness in the indices – perhaps new leadership is needed for another leg higher in the stock market. Leadership from the technology stocks are wavering as Facebook, Netflix and Tesla have potential trend reversals or large corrections after moving higher for several years. I have been seeing much better price action in healthcare, industrials and small cap growth stocks. Trade noise with Canada and China are still on tap (they will both capitulate) and soon the November election will make you want to turn the channel to Football or the MLB playoffs (don’t forget about the NHL). At least markets provide a price pattern for us to follow.
What to watch next week:
- Trade news regarding China but more likely just Canada.
- A reversal to the upside in stocks – you’ll know when you see it.
- Inflation data – CPI (consumer) and PPI (commercial).
Chart of the Week!
Its back to school season! Be glad you don’t live in Sweden or Estonia!
Economic & Central Banking Snippets
- US consumer confidence leapt again in August to hit its highest point in nearly two decades as Americans’ view of the economy keeps growing rosier. The consumer confidence index, as measured by the Conference Board, came in at 133.4 as consumers are feeling good about the current economic climate, as well as the prospects for the near future. Notice that we are now approaching the 1999-2000 peak.
- A leading indicator of US home sales unexpectedly fell in July as tight supply and affordability remain key challenges to the housing market. Pending home sales fell 2.3% from a year ago and on an annual basis were down for the seventh consecutive month. “It’s evident in recent months that many of the most overheated real estate markets are starting to see a slight decline in home sales and slower price growth,” said Lawrence Yun, chief economist at NAR. He added: “The reason sales are falling off last year’s pace is that multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it”. This is evident in the chart below that shows the rising price of new home sales. Notice that we are well above the height of the real estate bubble in 2005.
- India’s economy grew 8.2% in from April to June of this year, its fastest pace of expansion since Prime Minister Narendra Modi’s 2016 cash ban, a shock that drained liquidity from the economy.
- Economists were surprised by the strength of the ISM manufacturing report for August. US factories are firing on all cylinders as the Institute for Supply Management said its manufacturing index jumped to a 14-year high of 61.3% in August. “2018 has been a banner year for manufacturing, despite concerns about tariffs and trade barriers that have been ongoing for months. The increases in the prices of various input materials from tariffs and natural inflation pressure hasn’t significantly dampened overall activity. We do not see anything in the data that portends a slowdown,” said Thomas Simons, senior money market economist at Jefferies.
- The latest non-farm payrolls data continue to cast the US economy – which in the June quarter grew at its fastest pace in nearly four years – in a positive light, even as consumers and investors try to get a handle on the potential fallout from the US’s trade war with its allies. The labor market added 201,000 jobs since last month, from a downwardly revised 147,000 in July (previously 157,000), according to the Bureau of Labor Statistics. Last year, the economy added an average 182,000 jobs a month. (FT)
- No 2018 debt issuance from the top 10 US multinational holders of overseas cash following the December 17th tax reform. Why? The reduced tax rates mean that companies are no longer incented to issue debt in lieu of re-patriating their cash earned overseas. A good by-product of the tax reform which means more dollars invested domestically. The chart below is a stark difference, indeed.
- A decade-long boom in auto sales around the world is coming to an end. After growing annually by 5% on average since 2010, sales will rise just 1.8% this year, according to forecasting firm LMC Automotive. Recently, Continental AG, the world’s second-largest auto-parts supplier, warned profits could take a hit from softer demand for cars in Europe and China. It “comes at a very difficult time as [the industry] transitions to more electrification and the robocar arms race sucks up research and development money,” said Dave Sullivan, an analyst with consulting firm AutoPacific Inc.
- India is set to overtake China as the biggest source of growth for oil demand by 2024, according to a forecast by Wood Mackenzie. The country’s expanding middle class will be a key factor, as well as its growing need for mobility.
- Argentina’s central bank pumped up interest rates by 15 percentage points to 60% after the peso plunged by 15% and after Argentina’s president Mauricio Macri asked the International Monetary Fund to speed up the disbursement of its $50bn bailout package. (FT)
- Theranos, the blood-testing company accused of perpetrating Silicon Valley’s biggest fraud, will soon cease to exist. The company will formally dissolve, a move that comes after federal prosecutors filed criminal charges against Theranos founder Elizabeth Holmes. (FT)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital