Switzer on Saturday

Donald keeps kicking the hornets’ nest! Stocks slide.

Founder and Publisher of the Switzer Report
Print This Post A A A
[table “393” not found /]

The headline that follows isn’t a good one but CNBC sees it as an accurate portrayal of what Donald Trump is up to: “European markets close lower after Trump stokes recession fears; Stoxx 600 hits 3-month low.” And this is not just another chapter in the US President’s fight with China. No, now he’s promising to slug Mexico with a tariff. And because there’s a lot of trade and production between these two neighbouring economies, Wall Street can’t ignore the potential negative effects.

The latest edict/tweet from the Oval Office is that from June 10 Mexico faces a 5% tariff on, wait for it, everything. This is only 10 days away! This tweet explains his thinking: “In order not to pay tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our auto Industry, and come back home to the USA. Mexico must take back their country from the drug lords and cartels. The tariff is about stopping drugs as well as illegals!”

This might surprise you but Donald’s acting White House chief of staff, Mick Mulvaney, has a different view on why tariffs are coming to Mexico. “These are not tariffs as part of a trade dispute,” Mulvaney said on the call. “These are tariffs as part of an immigration problem. The USMCA is a trade matter and completely separate.”

Anyway, whatever the reason, this policy shift is stoking fears on the New York Stock Exchange that Donald is sowing the seeds of a recession. It comes when the bond market took bond yields down this week, explaining why those Yanks who were long stocks, have had a bad week at the office this week. The chart below graphically shows it:

Source: au.finance.yahoo.com

To understand why Mexico is important, GE was down 4.2% on the news and Ford was off 2.7% early in trade, as they have production facilities there. Constellation Brands, which makes Corona, was down over 6%, showing how hard Donald makes investing in 2019.

The tariffs will happen if the Mexican Government doesn’t act to stop the immigration problem. If no action follows and tariffs commence, we could be in a genuine Mexican standoff, involving both Mexico and China. And that’s when the R-word becomes too relevant for my liking.

The “worst case scenario is foreign governments (China/Mexico) simply wait Trump out given we’re 19 months from an election,” wrote Tom Essaye of The Sevens Report. “In that outcome, there is no China trade deal and tariffs (Chinese and Mexican) act as an anchor on global growth and market sentiment for 18 months, increasing the chances of a recession.” (CNBC)

And on the subject of China, the trade war is having an effect, with the official manufacturing Purchasing Managers’ Index (PMI) for May coming in at 49.4, which was down from April’s reading of 50.1. Any reading under 50 means contraction.

And yep, Donald did it again for us, with our market down 59.1 points (or 0.9%) on the S&P/ASX 200 to finish at 6396.9 for the week. This is real ‘fly in the ointment’ stuff, with our market at one stage this week up over a huge 15% year-to-date. But that’s going to change next week with this Mexican news.

The week featured some big swings in stocks to the good and the bad side. Costa group was slugged over 20% after a profit downgrade linked to poor quality fruit and fruit flies! Leave me out of companies that have so many uncontrollable threats!

Link was another Aussie firm that has struggled overseas, with its UK expansion not netting good results. Brexit and the EU challenges have been hurting the company’s operations and its share price lost a big 22.5% to $5.97.

With its takeover offer from the Swedes at EQT, Vocus surged 18% to $4.59. Of course, China’s threat to withhold rare earths from the US was great for Lynas, with its share price up 29.2% to $3.02.

Shareholders of this historically pesky company will be loving Donald and the Chinese right now!

What I liked

  • Positive headlines about a bottoming housing market when it comes to prices.
  • The second estimate of spending in 2019/20 was $99.139 billion, up 12.8% on 2018/19 and the strongest increase in seven years.
  • The ScoMo effect was seen, with the weekly ANZ-Roy Morgan consumer confidence rating rising by 1.2% to 118.6 points. Consumer sentiment is above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990. The four-week moving average for family finances over the next year rose to 28.2 points – the highest level since 26 February 2017.
  • US economic growth in the March quarter was 3.1% as expected, up from the 2.2% annual growth pace in the December quarter. (That was a good number but the guesses going forward are becoming less positive.)
  • US Consumer confidence rose from 129.2 to 134.1 in May (forecast 130).
  • The Greek share market rose 6.1% after Prime Minister Alexis Tsipras called a snap election in response to a heavy defeat by his ruling Syriza party in the European elections. Investors hope the new government may be more business-friendly.

What I didn’t like

  • Private sector credit (effectively outstanding loans) rose by 0.2% in April (consensus: +0.3%.) Lending growth for housing is the slowest since records began in 1976.
  • New business investment (spending on buildings and equipment) fell by 1.7% in the March quarter after rising 1.3% in the December quarter.
  • Council approvals to build new homes fell by 4.7% in April. There has been no change in approvals over the past three months. Annual approvals are now in line with the decade average.
  • Oil prices fell this week, linked to the ongoing trade war.
  • Talk that interest rates might fall three times with the cash rate going to 0.75%, makes me think the economy rebound I was expecting post-election could be too optimistic.
  • “US investors fretted that an inverted yield curve (short-term yields above longer-term yields) could signal an economic downturn.” (CommSec’s Craig James)
  • The Dallas Federal Reserve manufacturing index fell from +2 points to -5.3 points in May (forecast +5.8 points).
  • Chinese industrial profits in April fell 3.7% from a year ago. In March, profits were up 13.9% on a year earlier. In the four months to April, profits earned by China’s largest industrial firms dropped by 3.4% from a year earlier, compared to a 3.3% fall in the January to March period.

A huge horrible hate

To quote good old Rodney Rude: “I hate it. I hate it when…” I see news like “The Dow has its longest weekly losing streak in 8 years!” Yep, coming in May when traders like to run away doesn’t add to optimism, with this China and Mexican madness coming out of the White House.

I hate it when my investments are turning on a dime, that someone like Donald is tossing the coin. Buckle up for a tough week next week. But knowing Donald, he could be calling the Mexican President an ‘amigo’ by Wednesday, while scoffing down a tortilla!

The Dow ended down 354.84 points and that’s a 1.41% fall. Another week with Donald lies ahead – fingers crossed!

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday June 3 – Business indicators (March quarter)
Monday June 3 – Purchasing managers index manufacturing (May)
Monday June 3 – CoreLogic home prices (May)
Tuesday June 4 – Reserve Bank Board meeting
Tuesday June 4 – Balance of payments (March quarter)
Tuesday June 4 – Retail trade (April)
Tuesday June 4 – Reserve Bank Governor speech
Wednesday June 5 – Economic growth (March quarter)
Wednesday June 5 – Purchasing managers index services (May)
Thursday June 6 – International trade (April)
Friday June 7 – Lending (April)

Overseas
Monday June 3 – US ISM manufacturing (May)
Monday June 3 – US Construction spending (April)
Monday June 3 – China Caixin manufacturing (May)
Wednesday June 5 – China Caixin services (May)
Wednesday June 5 – US ISM services (May)
Wednesday June 5 – US ADP employment (May)
Wednesday June 5 – US Beige book
Thursday June 6 – US Challenger job cuts (May)
Thursday June 6 – US Trade (April)
Friday June 7 – US Non-farm payrolls (May)

Food for thought: 

“Value investing is at its core the marriage of a contrarian streak and a calculator.” – Seth Klarman

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

Only five of the companies that make up the Dow Jones Industrial Average were set to finish up in positive territory for the month of May as of Thursday US time. This chart from CNBC looks at the performance of the 30 Dow stocks along with each company’s Chinese sales exposure:

Source: CNBC

Top 5 most clicked:

Recent Switzer Reports:

Monday 27 May: Trump humps, must do’s before June 30 and 4 rising stars

Thursday 30 May: Stock tips galore!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.