[heard on the street] 20181015-20181021

TARIFFS

The latest tariffs, a 10% levy on $200 billion of Chinese imports, including bicycles and bicycle parts, took effect in September and are slated to rise to 25% at year-end. In all, the U.S. has levied tariffs on $250 billion of Chinese imports, from steel and aluminum to bamboo furniture and luggage. China has responded with tariffs on $110 billion of U.S. exports.

Influence:

• The Trump administration says tariffs on Chinese imports will shift manufacturing back to U.S. factories, but some small and midsize companies that have done just that say the tariffs are hurting, not helping, their business.
• Finished goods from China could lose their advantage over U.S.-made goods with Chinese components.
• Companies hit by the tariffs aren’t simply raising prices to offset the added costs. Some business owners say they are delaying plans to expand their U.S. footprint.

More firms are concerned about a stronger dollar, raw materials costs, higher wages, and tariffs. 

China's trade surplus with the US hit a new record as suppliers try to get ahead of the tariff hikes.

MACRO

U.S.

American consumers are feeling pretty good right now—confidence is high, job growth is strong, wages are advancing. Bloomberg's national economy sentiment index keeps climbing to levels not seen since 2002.

Inflation gets lower.

CPI decreases. 

Financial conditions have tightened recently.

Labor: U.S. job openings topped seven million for the first time

Federal deficit: thanks to an increase in spending, rising interest costs on debt and increased military funding, the government ran a $779 billion deficit in fiscal year 2018—the largest in six years.

Empire Manufacturing continues to show strength in factory activity.

Housing starts and building permits drifting lower.

CHINA

China’s economic expansion slowed to its weakest pace since the financial crisis. The rate of growth in the third quarter dropped to 6.5%, falling short of market expectations.

The CPI climbed as expected.

The PPI continues to moderate.

Retail and production at the low point.

Business confidence has been softening.

EQUITY

overview

U.S.

GO THROUGH INDEX

Strong quarterly earnings reports helped the Dow Jones Industrial Average eke out slight gains for the week after turbulent recent days for U.S. stocks. U.S. stocks soared Tuesday, lifted by upbeat jobs data and healthy corporate profits that suggest the country’s economic expansion remains strong. This sent the Dow Jones Industrial Average up more than 450 points.

So it was Tuesday: 

• The Labor Department said the number of available jobs in the U.S. outnumbered the number of jobless Americans actively looking for work by 902,000, the highest on record.
• Goldman Sachs and Morgan Stanley reported earnings Tuesday that beat analyst expectations by a wide margin. The near-term outlook for both is for continued strong profits. 

On Thursday, losses accelerated throughout Thursday’s session, pulling the Dow industrials down as much as 471 points at one point, as investors confronted several more threats to the market, including companies struggling with rising costs, further instability in the European Union and increasing pressure between the U.S. and Saudi Arabia.

On Friday, Procter & Gamble’s best quarterly sales growth in five years boosted shares of the consumer-products giant and helped lift the blue-chip index into positive territory. The Dow industrials ended the day up 64.89 points, notching a 0.4% weekly gain, its first after three weeks of declines.

DRIVERS

A solid U.S. economy and healthy corporate profits have been ballasts for a nine-year-old bull market. When doubts have flared—a deepening trade conflict, a sudden run-up in bond yields, worries about the economy overseas—both have been there to hold stocks up.

Three things continue to unsettle investors: trade tensions, the Fed’s interest-rate path and next month’s midterm elections. Lingering concerns about tariffs weakening the global economy and lukewarm data outside the U.S. also continue to hang over financial markets.

A combination of sharply rising bond yields and continuing trade fears has stirred investors to cut riskier stocks from their portfolios. However, proved by strong corporate profit, the selloff was driven more by passion than by careful spreadsheet calculations.

The Fear & Greed Index shows the market in "fear" territory.

SECTORS

BANK

Big banks in the U.S. delivered upbeat earnings for the third quarter, reflecting strength in the economy in the face of geopolitical turmoil, and helped the market recover from most of its early declines Wednesday, with the S&P 500 financials sector rising 0.9% as earnings season for lenders continued.

HOMEBUILDER

A total disaster

• Climbing Treasury yields: When Treasury yields rise, mortgage interest rates follow. Don't forget. When it gets more expensive to borrow, potential homeowners face bigger hurdles to getting a mortgage.
• Tariffs: The National Association of Home Builders said of the 6,000 items on the list of Chinese imports now subject to tariffs, 463 are "ubiquitous" in home construction. If the Trump administration goes ahead with a planned tariff hike to 25% on Jan. 1, the total cost increase for the industry could be$2.5 billion.

TECH

Shares of rapidly growing technology companies, which had led markets higher through much of the year, helped lead the market bounce Tuesday. Facebook Inc. shares rose 3.4%, while Alphabet Inc. added 2.8% and Microsoft Corp. climbed 3.2%.

Next week is the busiest week of the earnings season is upon us with Microsoft, Amazon.com and Google parent Alphabet among the companies slated to report results.

UTILITIES

CONSUMER

ENERGY

A recent slump in energy stocks also continued Wednesday, with oil prices dropping 3% following data showing a larger-than-expected increase in U.S. crude stockpiles.

OTHERS

Travel, manufacturing and materials companies more sensitive to global economic growth have been among the market’s laggards in 2018. 

CHINA

China's stock market is having a tough year. The Shanghai Composite hit the lowest level since 2014.

China’s economic expansion slowed to the weakest pace since the global financial crisis.

Economic expansion decelerated to 6.5%, while growth in industrial output and consumption also weakened. Chinese officials initiated an extraordinary coordinated effort to calm nervous investors today after the country’s third-quarter GDP growth fell short of market expectations.

President Xi Jinping’s economic czar, as well as the central bank’s governor and other top regulatory officials, delivered statements aimed at calming worried investors.

Mr. Liu told state media the government attaches great importance to the healthy development of the stock market. He also said the trade conflict with the U.S. is hurting market sentiment. “Frankly, the psychological impact is bigger than the actual impact,” he said.

Chinese stocks rallied after dropping earlier in the day. The benchmark Shanghai Composite Index closed 2.6% higher at 2550.47.

But even with Friday's rally, the Shanghai Composite has lost nearly 23% so far this year, making it the worst performer among the world’s major indexes, and Thursday’s close was the lowest since November 2014.

RATES

Long-term bond yields have been a blessing and a curse for stock markets this year. Higher yields generally signal confidence that the economy will be strong enough for the Federal Reserve to keep raising short-term rates. But too big or too sudden a climb can be destabilizing: High rates deter borrowing.

Meanwhile, the Federal Reserve released minutes from its most recent meeting showing it plans to continue gradually tightening financial conditions. Officials voted last month to raise the benchmark federal-funds rate to a range between 2% and 2.25%. 

Many analysts expect another rate increase in December, and some think further signs that the trend will continue in 2019 could cause stocks to swing again.

President Trump reiterated his complaint that the Federal Reserve is raising short-term interest rates too fast, calling the U.S. central bank "my biggest threat."

Till the Friday end, 10 yr bond yield is 3.194%.

CURRENCY

China's yuan has fallen more than 9% against the dollar since the U.S. Treasury's last currency report in April.

But arguably the yuan should have weakened more. It is being pushed down by a slowing economy and easier monetary policy, at the same time that the dollar is being pushed up by the supercharged U.S. economy and higher interest rates.

The U.S. Treasury again declined to designate China a “currency manipulator,” but singled out the nation’s practices as a source of “particular concern.

OIL

BIG COMPANIES

HARRIS

Harris Corp. and L3 Technologies announced plans to combine in the largest-ever defense merger, reacting to Pentagon efforts for companies to boost investment and speed the development of weapons.

The enlarged company would have annual sales of around $16 billion this year and 48,000 staff, ranking sixth among U.S. defense contractors by revenue as the industry enjoys a bump in Pentagon spending after five years of budget cuts.

SEARS

Sears filed for Chapter 11 bankruptcy. A retailing pioneer collapses. For Sears, it's a familiar story: Dozens of retailers have sought chapter 11 protection in recent years because of the consumer shift to online shopping, expensive store leases and heavy debt burdens.

So where did it all go wrong?

• competition: By the 1990s, Sears was being outgunned by big-boxers Home Depot and Walmart...and when Amazon changed the game entirely, Sears couldn't keep pace.
• underinvestment: "Sears invested just $4 billion in capital expenditures between 2006 and 2017..."
• mismanagement: Recently, CEO Eddie Lampert sold off many of Sears's assets (like Lands' End) to bring in cash. But critics say without those assets...Sears offered no value to customers. Fun fact: Lands' End's market cap is ~$487 million. Sears's is less than $50 million.

UBER

Uber Proposals Value Company at $120 Billion in a Possible IPO

LYFT

Ride-hailing firm Lyft recently selected underwriters for an initial public offering that is expected in the first half of 2019. JPMorgan Chase will lead the offering along with Credit Suisse and Jefferies. Lyft’s valuation is expected to top the $15.1 billion it was valued at earlier this year

MICROSOFT

Microsoft co-founder Paul Allen died Monday, two weeks after revealing that a cancer he successfully received treatment for several years ago had returned. He was 65 years old.