Use Your China Illusion

The stock market continued higher this week being led by housing (low interest rates) and the oil/energy sectors. However the outlook is strained and the White House is clearly waving the flag of worry as they seem to be rushing out pronouncements over progress on a trade deal with China. Tough to think such a complicated agreement is close to completion as the enforcement mechanisms around intellectual property are a big unknown. If they are rushing, then the administration is trying to underwrite a short-term insurance policy for the financial markets.

Another thing to consider is that the administration knows it may have to shutdown the southern border as enforcement officials are up against a record number of arrests (4,000 daily, apparently). The effect of a shutdown would immediately haircut the prospects for GDP growth in 2019. So, is the administration hurrying up a trade deal (or the appearance of a deal) to offset a border shutdown? That strategy would explain the rush as I wouldn’t have expected an inked China deal for several more months (at least).

Below is the chart of the S&P 500 which worked a bit higher to close out the week. As you can see, we are in a zone between the January 2018 top and the all-time highs achieved last Fall. Anyone who bought last Fall may be looking to cash in their chips in the coming sessions. What pushes us to new highs? China deal? Earnings? Fed policy change? A re-test to the downside looks needed as we are approaching overbought territory and the chart looks extended here.

Other things to keep in mind:

  1. The yield curve normalized (steepened) this week but is still showing signs of inversion – a sign of potential weakness for the economy.
  2. BREXIT is still a concern for the U.K. and mainland Europe. The EURO and British Pound have been picking up in volatility – an extreme move by one or both currencies could disrupt global markets.
  3. Earnings season begins next week with the banking sector. Many analysts are predicting the reports this quarter will be disappointing across the board.
  4. After the Friday close, Boeing announced they are cutting their manufacturing pipeline in what may be a harbinger to come for the manufacturing sector. Boeing is THE leading stock in the DOW for some time now so its performance next week is a good barometer for the stock market in general.

Chart of the week!

Economic & Central Banking Snippets 

  • China’s manufacturing PMI for March rose 1.3 pts to 50.5 (a reading over 50 indicates growth). Combining manufacturing and services puts the composite index at 54 and that’s the highest since September. (Boock Report)
  • The UK manufacturing PMI was better than forecasted jumping 3 pts to 55.1. However, Markit attributed it to mostly stockpiling which hit a fresh survey record ahead of a possible no deal Brexit. Markit then went on to say “The stock building boost introduces a major headwind for demand, output and jobs growth moving forward. Manufacturers are already reporting concerns that future trends could be constrained as inventory positions across the economy are unwound.” (Boock Report)
  • The rapid decline in the 30YR mortgage rate (4.36%) in March has caused refinancings to skyrocket by 39% w/o/w which brings the y/o/y gain to 58%. Purchase applications to buy a home rose 3.4% w/o/w and 10% y/o/y. Of note, 9.5% of total mortgage loans were ARMS (adjustable rate) which is the most since July 2008. (Boock Report)
  • There was more bad news for German manufacturing when factory orders data for February dropped 8.4% from a year earlier, the biggest plunge since 2009.  (Bloomberg)
  • Jobs: March payrolls grew by 196k, 19k more than expected while the two prior months were revised up by 14k. However, the labor force shrunk by 224k which kept the unemployment rate unchanged at 3.8% (not good). The details of the jobs report show that the March jump was influenced by part-time workers, which rose by 60k, while full-time workers dropped by 190K – the biggest monthly decline since August of 2018. This month’s headline figure brings the 3 month average to 180k vs the 6 month average of 207k vs the 12 month average of 211k. The average in 2018 was 223k which means that the pace of job growth is slowing for 2019. (Boock Report/Zero Hedge)

Macro Snippets

  • Overseas investors are dumping Japanese stocks by the largest margin in 31 years as market participants unloaded about 5.63 trillion yen ($50 billion) worth of shares on a net basis for 2018. And yet this barely caused a ripple in asset prices because the Bank of Japan’s (BOJ) asset purchases absorbed all of the net sellers – exposing the central bank’s outsize role in the market. (ZH)
  • Saudi Arabia revealed details to investors that show its national oil company is the world’s most profitable business, demonstrating that the cloistered kingdom is willing to undergo unprecedented scrutiny to tap the international bond market. With $111 billion in net income in 2018, Saudi Aramco, as the firm is known, had bigger returns last year than Apple and Exxon Mobil combined. (WSJ)
  • Auto sales in the U.S. wrapped up an ugly first quarter with dismal results for the month of March as the buying frenzy from last year’s tax cuts wore off and the economy continues to decelerate. Of the sales data that was reported for the month, Honda was the only major automaker that didn’t see a year-over-year sales decline. (FT)
  • Weighed down by fading memory chip demand and rising smartphone competition, Samsung Electronics expects to post a 60% decline in Q1 operating profit. A figure of 6.2T South Korean won ($5.5B) would put it on track for its weakest quarterly profit since late 2016, when the firm issued a costly global recall of Galaxy Note 7 handsets that overheated. Samsung reports final results later this month. (Seeking Alpha)
  • Tesla said new vehicle deliveries in the first quarter fell 31% from the previous three months as the electric car maker strained to ship its Model 3 compact car to Europe and China for the first time.

That is all for now until next week’s Market Update.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.