Financial Review

Fade Summer

…Longest bull market can’t shake the correction. China-US trade talk talk. Trump wants cheap money Fed. Greece finishes bailout era but not out of the austerity era.

DOW + 89 = 25,758
SPX + 6 = 2857
NAS + 4 = 7821
RUT + 5 = 1698
10 Y – .05 = 2.82%
OIL + .17 = 66.60
GOLD + 5.50 = 1191.10

 

The Dow Industrial Average entered correction territory on Feb 8, when it dropped 10% from its recent peak. Since then, the Dow has failed to trade 10% above the closing low of 23,533 hit on Mar. 23. The Dow has been in correction territory for a long time, but it might be on the verge of a break out with a close above 25,886, or you could look at the previous high of 26. Or that previous high of 26,616 from January 26. Both levels will provide resistance. Also, just because the Dow and S&P are into correction territory, it doesn’t mean the end of the bull market. The bull market turns 3,453 days old this Wednesday. Barring a 20 percent decline between now and then, it would mark the longest bull market in history. A correction can be nothing more than the pause needed before the market pushes higher. This is the long way of saying the markets haven’t moved yet – we are still in a range, and until we break out or break down from the range, the markets aren’t really moving. The Dow has seen a mild rally on news of trade talks between the US and China – which is still just talk.

 

It seems that the summer is a time of extreme passivity about real events that should impact the market.  This summer has been no different, with a variety of pressures building up, while big-money investors blow them off so as to not interrupt their beach vacations.  At least, that’s what it feels like. As summer winds down, it can be expected that investors will get more focused on a variety of overvaluation indicators in stocks, credit quality issues brewing in bonds and the tendency for “glamour” stocks to be treated as a cut above the rest. Autumn is a time to be eyes-wide-open about your portfolio and the risks it may be hiding from you.  Because sometimes, it’s too late to think about what you should do differently.

 

With the second-quarter earnings season largely over, trade will likely remain a key focus for investors, with any sign of improving or deteriorating relations between the US and China driving a corresponding move in investor sentiment. However, this week will also see the imposition of 25% tariffs on $16 billion worth of Chinese imports, an action by the Trump administration that China has said it would retaliate against. This morning also started 6 days of public hearings on the proposed tariffs of up to 25 percent on $200 billion of Chinese imports. The new duties will force Americans to pay more for items they use throughout their daily lives. Unlike previous rounds of US tariffs, which sought to shield consumers by targeting Chinese industrial machinery, electronic components and other intermediate goods, thousands of consumer products could be directly hit with higher tariffs by late September.

 

In an interview with Reuters today, Trump said he doesn’t expect much from trade talks with China this week in Washington.  Trump said in an interview that he had “no time frame” for ending the trade dispute with China. And, to toss a monkey wrench in the gears, Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by National Iranian Tanker Co for nearly all of their imports to keep supply flowing in the face of the re-imposition of economic sanctions by the United States. The shift demonstrates that China, Iran’s biggest oil customer, wants to keep buying Iranian crude despite the sanctions. The United States is trying to halt Iranian oil exports to force the country to negotiate a new nuclear agreement and to curb its influence in the Middle East. China has said it is opposed to any unilateral sanctions and has defended its commercial ties with Iran.

 

The Turkish lira moved higher today even after S&P Global Ratings and Moody’s Investors Service cut Turkey’s credit rating. Italian and Spanish banks’ exposure to Turkish assets pose the greatest contagion risk. Though this latest volume of trade tariffs and sanctions has nothing to do with saving American manufacturing and everything to do with the release of an American evangelical the Turks believe wanted to derail their government, Trump seems willing to dig in. Turkish leader Erdogan only has a few players who can save him. Germany backed away from any relief efforts. Russia or China might step in to fill the void, but for now it looks like Qatar. Last week, Qatar pledged to invest $15 billion in Turkish financial markets and banks. Turkey maintains troops in Qatar as a defense against the Saudis.

 

Today, the dollar weakened against a basket of rival currencies, after Trump ramped up criticism of the Federal Reserve’s monetary policy just days ahead of the central bank symposium in Jackson Hole, Wyoming. The Dollar Index started the day in the green, after recording its first weekly loss in a month last week, but slid following reports that Trump said at a fundraiser he expected Fed Chairman Jerome Powell—whom he appointed—to be a cheap-money central banker. Trump previously said he wasn’t fond of the Fed’s tighter monetary policy and a strong dollar. The criticism continued today. In an interview with Reuters, Trump said he was “not thrilled” with Powell for raising interest rates and accused China and Europe of manipulating their respective currencies. The Fed has raised rates twice this year and is expected to do so again next month, and possibly in December. The criticism will probably backfire. The Fed will probably feel the need to raise rates to assert their independence.

 

After eight years and roughly $330 billion in loans, Greece is putting bailouts behind it. As of today, Greece officially exited the last of the three enormous rescue programs that saved it from going bust and abandoning the euro. In exchange for the money, Greece agreed to drastically cut spending and implement painful economic reforms. Government employees had their salaries slashed, their pensions frozen, and their retirement age pushed higher. Consumer spending plummeted, unemployment spiked and many businesses shut down. The third “memorandum of understanding” expires today. With Greece’s completion of a three-year, 61.9-billion-euro eurozone emergency-loan package, it can once again borrow at market rates. The expiration of the memorandum also ends, for now, the direct control by Europe’s “troika”—the International Monetary Fund, the European Commission, and the European Central Bank—over the Greek government. But its conditions, constraints, and consequences will endure. 2010 to 2018 will go down in Greek history as an epic period of asset stripping and privatization; of unfunded health and education; of bankruptcies, foreclosures, homelessness, impoverishment, unemployment and suicide. Household incomes fell by over 30 percent, and more than a fifth of people are unable to pay basic expenses like rent, electricity and bank loans. A third of families have at least one unemployed member. And among those who do have a job, in-work poverty has climbed to one of the highest levels in Europe. The Greek economy is now three-quarters of the size it was in 2007, before the crisis started. And it still faces a range of challenges. On paper, the government has put its house in order. Crucially, the cost of borrowing has come down. The country’s creditors have also agreed to restructure its debts, making it possible for the government to manage future payments. The memorandum can end, but austerity will not; the debt still looms in the long term, so the commitment to surplus extends for more than 40 years.

 

Meanwhile, the populist Five Star government in Italy is planning to ignore budget rules imposed by the European Union to rebuild the country’s ailing infrastructure following the Genoa bridge collapse. Last week, the Morandi Bridge in Genoa collapsed killing 43 people, which sent shockwaves across Italy. Matteo Salvini, the Italian Interior Minister said: “The Italian state must invest all the money needed to ensure the safety of our roads, railways, schools and hospitals, regardless of limits and mad European rules imposed on us.”

 

Meanwhile, Venezuela moved to shore up its crumbling economy. Inflation is expected to top 1-million percent this year. The recovery package introduced today includes measures such as raising taxes, increasing gas prices for some drivers, and introducing a rebranded currency – the sovereign bolívar – which will have five fewer zeros than its inflation-stricken predecessor, the bolívar.

 

Pepsi announced that it is spending $3.2 billion, or $144 per share, to acquire at-home seltzer maker SodaStream. Pepsi is betting that the future of soda is at home and more in the realm of sparkling water than in aluminum crammed with sugar. The deal, which Pepsi plans to fund with its cash on hand, values SodaStream at a 32% premium to its 30-day volume-weighted average price and a 10% premium to its closing price on Friday.

 

JP Morgan is back to predicting a Tesla stock plunge because funding to take the stock private was “not secured”. The firm slashed its December price target for Tesla shares back to $195, representing 36 percent downside to Friday’s close. After the note, Tesla shares closed up 1 percent today.

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