Selling in May…..

The month of May was not kind to the stock market as the move from the lows in December are now being corrected. How far will it go? We closed below the 200 day on Friday in a sign of sellers controlling the S&P 500 index. We tapped on oversold levels in the chart below, however, we still have some room to go on the downside before hitting some key support levels. In other words, it is possible to see an acceleration to the downside next week despite the oversold levels.

This last leg lower to close the week was driven by the administration and their threat of tariffs against Mexico regarding border security. Not much on details but this kind of tariff affects the states of Texas and California the most.

It doesn’t help that China plays by its own rules and may cut-off the United States from things like rare earth metals (see below) which could cause a massive disruption in the supply chain of many manufacturers. Companies like Tesla would be unable to manufacture batteries and would likely shut-down their operation, for example.

One area of strength has been the US Treasury market. Longer-term 10s & 30s have been very well bid this week as the belly of the curve dips below 2%. This type of action in Treasuries are rare and indicate that a slowdown in the economy is in the cards later this year.

It is a waiting game at this point as there are no fundamental catalysts to get the market moving higher. The trade tensions and tariffs are raising the price of goods and changing how CEOs run their companies. China plays the 100 year game while the U.S. has election cycles so this could last longer than we all expect.

Chart of the Week!

The online advertising market shows no signs of slowing down. Some formats, such as online video and social media are seeing growth rates north of 22%, as brands are shifting their budgets to match changes in media consumption. As consumers are spending more and more time on mobile devices, advertising dollars are moving to mobile inventory as well. In 2018, mobile ads accounted for 65% of total digital ad revenues, up from only 9% in 2012. 

Economic & Central Banking Snippets 

  • On Wednesday Germany (Europe’s strongest economy) reported that unemployment unexpectedly surged for the first time in almost two years as an economic slowdown is finally starting to take a toll on the labor market, according to Bloomberg. For May, the number of people out of work climbed by 60,000 compared with economists’ forecasts for a decline of 8,000, while the jobless rate also increased to 5% from a record-low 4.9%.

  • Sales of newly built homes in the US fell by the most in four months in April signalling a softer start to the spring selling season as US new home sales fell 6.9% (m-o-m). Data on Wednesday showed sales of previously owned homes, which account for the largest slice of the housing market, continued to decline.
  • Thailand’s economy grew at its slowest pace in more than four years in the first quarter of the year, as weak export demand and ongoing political uncertainty weighed on the country’s growth. GDP expanded by 2.8% year on year in the three months to March 2019, according to the National Economic and Social Development Council.
  • Data released on Monday showed that Chinese industrial profits slipped by 3.7% year on year, the fastest rate of monthly contraction since December 2015. Through April, industrial profits are down 3.4% compared to a year ago. 
  • Brazil’s economy shrank in the first quarter which marks the first contraction since 2016 as GDP fell 0.2%, according to the national statistics agency IBGE.

Macro Snippets

  • Ford will eliminate 7,000 salaried jobs, representing 10% of its global salaried workforce, as part of the auto company’s multiyear restructuring plan.
  • British Steel has started insolvency proceedings (bankruptcy), putting thousands of jobs at risk after its pleas for an emergency government bailout were rejected. The liquidation of the UK’s second-largest steelmaker came after the collapse of talks between the UK government and British Steel, its lenders and private equity owner Greybull, over an emergency state loan of around £30m. This was requested to help the business through a crisis it said was caused by a slump in orders following the uncertainty surrounding Brexit.
  • If China were to severely limit the export of rare earth metals, they would throw the global supply chain into disarray for dozens of high-tech products. While there would certainly be collateral damage, the advantage is clear: New mines couldn’t be brought online fast enough, leaving Washington extremely vulnerable, at least in the short term. Given the desperate need for these products, we wouldn’t be surprised to see rare-earth export curbs change the nature of the trade spat from ‘cold’ to ‘hot’:

  • Crop prices continue to jump after the USDA said this week that only 58% of intended corn plantings have been laid in the fields vs the historical percentage of 90% at this point in time. For soybeans, that figure is just 29% vs the long term average of 66%. For data dating back to 1980, we’ve never seen this little planted so far into the season. While not helpful for those food producers using these commodities, the American farmer has had a rough 7 years since prices peaked out and they might just finally be getting some relief. As farmers plant just once per year, the current supply issues is not easily fixed and could continue until we see next Spring’s planting conditions.

That is all for now until next week’s Market Update – thanks for reading!

Regards,

Paul J. McCarthy, III

President – Kisco Capital

paulmccarthy@kiscocap.com

Paul McCarthy

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

Leave a Reply

Your email address will not be published. Required fields are marked *