Where do we start?

Where do we start?  Stocks slipped yesterday as investors tried, tried, tried to avoid the drama unfolding in Washington DC.  A report early in the session that the US would not renew temporary waivers for US tech companies selling to Huawei pushed stocks down.

 

MY TWO CENTS

 

  1.  Stay focused, people!  There is a lot going on in the world these days.  Middle East trouble, China is struggling with its economy, the European Union’s economy continues to slide, and… Brexit, to name just a few.  All of these certainly have an impact on the US economy in one way or another.  In the US, economic numbers suggest that, while the economy is not growing as fast as it did a few years back, it is still growing.  Now on to the trade war which has been raging and festering for well over a year.  That has two effects on the US Economy.  There are the very real effects in which companies are paying more to bring Chinese manufactured products into the US and others who sell goods to China are being taxed or completely overlooked.  The other cost is the intangible fear that the very public trade war may cause.  It starts with businesses paring down expectations for future growth and subsequently putting off capital investments… all happening now.  Finally, there is a potential for everyday consumers to start fearing and paring their expenditures.  That has not happened yet, but it means trouble if they do.  Now on to, what I am going to refer to as “domestic political risk”.  As the DC Drama appears to be intensifying once again, many folks are finding it hard to avoid getting involved in it, one way or another.  As I wrote in yesterday’s note, the impeachment inquiry taking place in the capital should have no immediate direct impact on the market. To be sure, there are some potential risks down the road which need to be monitored.  Many market strategists are beginning to believe that there may be a silver lining in which Trump pushes to get closure on a trade deal with China to divert away from the congressional inquiry.  A deal with China… any positive deal with China… would be welcomed by the markets.  That is a very real thing, and warrants attention.  While the proceedings unfold it will be increasingly critical for investors to focus on the economy, the markets, and (excuse me for overstating this) consumer confidence.

 

  1.  Not the first… won’t be the last.  Semiconductor stocks are like a canary in the coal mine.  They are part of virtually every type of electronic device, from smartphones to computers to automobiles.  Even your old refrigerator and coffee maker contain them.  Their ubiquity is why many use the health of semiconductor companies as a leading indicator for technology.  As an industry group they tend to be rather volatile, rising and sinking with product demand.  They also tend to be very sensitive to the ups and downs of the ongoing trade war.  If suddenly Apple is unable to sell phones in China, well, chips go down, and vice versa.  A few months back the Administration began to focus on Huawei, the large Chinese telecom equipment manufacturer.  It is alleged that the company had engaged in spying and intellectual property misuse.  As a result the US put the company on a list which forbade US companies to deal with it.  As one might suspect all of those companies, which include Google, Intel, Micron, AMD, Broadcom, and Corning (to name only a few) are all struggling to fill the demand gaps caused by the ban.  Recently, the President decided to offer a temporary waiver to some companies doing business with Huawei.  Just yesterday, Bloomberg reported that the US was most likely not going to renew that waiver.  The news sent stocks tumbling and at the head of the line was semiconductors.  To put a finer point on the matter, Micron Technologies (MU) announced earnings after the bell yesterday.  While the company handily beat estimates, it lowered its profit outlook going forward.  The reason?  The trade war!  As aforementioned, Micron sells to Huawei and the restrictions have hurt the company.  Chip stocks had a rough day yesterday in response to the Bloomberg report.  Expect the softness to continue in response to the Micron announcement.  Micron is down nearly -6% in after hours trade.

 

THE MARKETS

 

It was a soft day for equities yesterday as trade fears overshadowed announcements that China was purchasing soybeans and pork (I covered this quite a bit in this week’s notes).  Also yesterday, another unicorn IPO bit the dust with Peloton, the much touted IPO, became the latest victim of fallen unicorn syndrome.  The company, which announced its IPO at $29 ultimately closed at $25.76.  The company lost nearly $200 million dollars in the year ending in June on sales of $2 billion.  The S&P500 slipped by -0.24%, the Dow Jones Industrial Average dropped by -0.30%, the Russell 2000 traded off by -1.12%, and the NASDAQ Composite Index fell by -0.58%.  Bonds advanced and 10-year treasury yields eased by -4 basis points to 1.69%.

 

WHAT’S NXT

 

– Personal Income is expected to have grown by +0.4% compared to last month’s +0.1 growth.  Personal Spending  is expected to have dropped from +0.6% to +0.3%.

– The Core PCE Deflator, the Fed’s favorite indicator of inflation, is expected to be at +1.8% year over year compared to last month’s read of +1.6%

– Durable Goods Orders are expected to have slipped by -1.0 compared to last month’s growth of +2.0%

– The University of Michigan Sentiment Index  is expected to be 92.1 compared to the last survey of 92.0.

– Fed Governor Randall Quarles, ECB Chief Economist Philip Lane, and Philadelphia Fed President Patrick Harker will speak today.

 

Have a great weekend!

daily chartbook 2019-09-27

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