Duty Free or Bust

The S&P 500 moved up slightly this week (0.38%) but mostly consolidated after breaking a major resistance line in the chart below (yellow line).

SPX: S&P 500 Index

The market is focused on any news regarding a trade deal with China as trade uncertainty has caused CEOs to re-think international supply chains and how they do business which threw a wet blanket on growth over the summer. Progress of any kind should begin to alleviate the uncertainty regarding supply chains and margins but we will have to wait until something is announced to be sure.

Behind the curtain, our friends at the Fed are expanding their balance sheet as you can see in the chart below. Currently, the Fed is now buying $60B of T-Bills to support the short-term lending markets.

Federal Reserve Balance Sheet Treasury Holdings

Eventually, the liquidity created by this new T-Bill program will end up going into the stock market (give it some time). The yield curve is also beginning to steepen which may be signaling one of two scenarios. The optimistic scenario is that the economy is about to show better growth prospects like after an economic slowdown (or trade tariffs). The pessimistic outlook is that the steepening after an inversion means a recession is right around the corner and that the stock markets will tumble.

My read is that the markets are not signaling a recession. A protracted trade war could cause a recession but it looks as though both sides are going to capitulate just like the Fed did last month. The timing of a deal is elusive, however, and if there is a “no-deal” scenario then the markets will reverse course and an economic slowdown will become a reality.

Chart of the Week!

Disney is gearing up to launch their Disney+ streaming service on November 12, which will cost viewers $6.99 per month. It’s one of the most competitive prices, only beaten by Apple TV+ at $4.99 per month.

Economic & Central Banking Snippets 

  • Need a little more evidence the U.S. economy is holding up just fine? The Institute for Supply Management’s non manufacturing (services) index perked up to 54.7 in October, well above the 50-mark that separates expansion from contraction. It had fallen to the lowest level since the summer of 2016 in September, sparking concerns that troubles in the manufacturing sector were spreading throughout the economy. A separate purchasing managers index was less rosy: IHS Markit said its U.S. services index fell to 50.6 in October,  the lowest since February 2016. (WSJ)
  • German factory orders in September surprised to the upside with a 1.3% m/o/m increase vs the estimate of up .1% and August was revised up by 2 tenths. The Economic Ministry was hopeful that this “could signal a bottoming out of orders.” After the tough run the industrial side of the German economy has had this year, that would be a nice turn of events if the case. This said, orders were still down 5.4% y/o/y and down for the 16th straight month y/o/y. (Boock)
  • The Bank of England (BoE) left rates unchanged as expected but unfortunately two members think a benchmark rate of .50% is somehow more stimulative to growth than one that is at .75% all while inflation is still well above and other central banks have gotten trapped around zero give or take. (Boock Report)

Macro Snippets

  • U.S. homeowners are staying in their residences much longer than before, keeping inventory off the market and helping explain why home sales have been sputtering. Homeowners nationwide are remaining in their homes typically 13 years, five years longer than they did in 2010, according to a new analysis by real-estate brokerage Redfin. When owners don’t trade up to a larger home for a growing family or downsize when children leave, it plugs up the market for buyers coming behind them, Laura Kusisto reports. (WSJ)
  • Under Armour faces U.S. inquiries. Law-enforcement officials are investigating the sportswear maker’s accounting practices, including whether it shifted sales from quarter to quarter to appear healthier. (WSJ)
  • SoftBank reported a quarterly net loss of ¥700bn ($6.4bn) after its outsized investment in crisis-hit property group WeWork soured, jeopardising Masayoshi Son’s ambitions to launch another $100bn investment fund. The dismal results came two weeks after SoftBank agreed to a $9.5bn package to rescue the US office-sharing group following an aborted attempt to go public. (FT)
  • A committee of Argentina’s biggest bondholders say they are ready to negotiate with incoming president Alberto Fernández over roughly $50bn owed in sovereign debt, but warn that too harsh a restructuring would make the country “uninvestable”. The group is pushing to give Buenos Aires more time to pay back debts without so-called haircuts to the face value of bonds. (FT)
  • Due to concerns over rising rents, Jersey City residents voted overwhelmingly in favor of stricter regulations on short-term rentals, rebuking Airbnb, which spent at least $4.2M on an effort to sway voters. Officials at Airbnb fear the new proposed regulations would mean an outright ban on listings in New Jersey and that it could mean an end to the company altogether as it prepares to go public. (Seeking Alpha)
  • Greece has lost the dubious distinction of being the riskiest government borrower in the eurozone after its bond yields dipped below Italy’s for the first time since 2008. Greek bonds have staged a powerful rally this year as investors hungry for yields have snapped up debt from former euro area crisis spots — a trend that gained further momentum after Standard & Poor’s upgraded Athens’ credit rating to BB- late last month. (FT)
  • OPEC and several other countries allied with the cartel are considering further production cuts to bolster crude oil prices, which have fallen to around $62 per barrel from their recent April highs of $75 per barrel. OPEC’s next meeting is in early December in Vienna. (Investopedia)

That is all for now until next week’s Market Update. Thank you for being a subscriber.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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