Monthly Archives: December 2018

Market Week: December 17, 2018

 

The Markets (as of market close December 14, 2018)

A market correction refers to a decline in a stock or index of at least 10% following a temporary high price. After last week’s losses, the Dow, S&P 500, and Nasdaq are entering correction territory. Of the benchmark indexes listed here, only the Nasdaq remains ahead of its 2017 closing price. The Russell 2000, which had pushed year-to-date gains of over 10%, now wallows more than 8.0% below last year’s ending value. It appears last week’s sell-off was fueled by increased investor fears of a global economic slowdown resulting from unfavorable reports on Chinese and eurozone economic indicators.

Oil prices closed down last week following two consecutive weeks of increasing prices. Oil prices closed at about $51.16 per barrel by late Friday, down from the prior week’s closing price of $52.21 per barrel. The price of gold (COMEX) also fell off after several weeks of gains, dropping to $1,242.20 by last Friday evening, down from the prior week’s price of $1,253.70. The national average retail regular gasoline price was $2.421 per gallon on December 10, 2018, $0.030 lower than the prior week’s price and $0.064 lower than a year ago.

Market/Index 2017 Close Prior Week As of 12/14 Weekly Change YTD Change
DJIA 24719.22 24388.95 24100.51 -1.18% -2.50%
Nasdaq 6903.39 6969.25 6910.66 -0.84% 0.11%
S&P 500 2673.61 2633.08 2599.95 -1.26% -2.76%
Russell 2000 1535.51 1448.09 1410.81 -2.57% -8.12%
Global Dow 3085.41 2835.95 2813.48 -0.79% -8.81%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 2.85% 2.89% 4 bps 48 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week’s Economic Headlines

·         The federal government deficit expanded by over $100 billion in November over the prior month. Year-to-date, the deficit sits at $305.4 billion ($201.8 billion last year). In November, the government spent $411 billion, with most of the expenditures going to Social Security ($84 billion), Medicare ($77 billion), and national defense ($62 billion). Receipts last month totaled $206 billion, consisting mostly of individual income taxes ($93 billion) and social insurance and retirement ($93 billion).

·         Inflation was rather benign in November for consumers. The Consumer Price Index was unchanged in November after rising 0.3% in October. Over the 12 months ended in November, the CPI has increased 2.2%. Energy prices fell 2.2%, pulled down by a 4.2% drop in gasoline prices. The CPI less food and energy inched up 0.2% in November and is up 2.2% over the last 12 months.

·         Inflationary pressures at the producer level receded in November. The Producer Price Index edged up 0.1% in November following increases of 0.6% in October and 0.2% in September. Of note, a 0.3% jump in producer services drove the modest November price increase. Producer prices for goods actually decreased 0.4% for the month. Another sign that inflation is easing is evident in the 12-month rate, which was 3.4% in July and now sits at 2.5% for the 12 months ended in November. The index less foods, energy, and trade services moved up 0.3% in November, the third consecutive increase. For the 12 months ended in November, prices less foods, energy, and trade services advanced 2.8%.

·         Retail sales increased 0.2% in November from October, and are up 4.2% over November 2017. Notable sales increases occurred in furniture and home furnishing stores, electronics and appliance stores, and web-based retailers. Gasoline stations saw sales drop by 2.3% in November due to falling gas prices.

·         Import prices fell 1.6% in November following a 0.5% rise the previous month. The November decrease is the largest monthly decline since a 1.8% drop in August 2015. An 11.0% decrease in fuel prices contributed to the drop-off in import prices. Over the 12 months ended in November, import prices are up 0.7% — the smallest such increase since the index increased 0.2% from November 2015 to November 2016. Export prices fell 0.9% in November after advancing 0.5% in October — the largest one-month drop since January 2016. While agricultural export prices rose 1.8% for the month, nonagricultural export prices, particularly industrial supplies and materials, fell 1.0%. Over the past 12 months, export prices have increased 1.8%.

·         According to the Federal Reserve, industrial production rose 0.6% in November after moving down 0.2% in October; the index for October was previously reported to have edged up 0.1%. In November, manufacturing production was unchanged, the output of mining increased 1.7%, and the index for utilities gained 3.3%. Total industrial production was 3.9% higher in November than it was a year earlier.

·         According to the Job Openings and Labor Turnover report for October, the number of job openings ticked up by about 119,000, hires edged up by 196,000, and total separations fell by 85,000. Job openings increased in information (45,000), real estate and rental and leasing (38,000), educational services (20,000), and state and local government education (17,000). The number of job openings decreased in state and local government, excluding education (38,000) and transportation, warehousing, and utilities (33,000).

·         For the week ended December 8, the advance figure for seasonally adjusted initial claims for unemployment insurance was 206,000, a decrease of 27,000 from the previous week’s level, which was revised up by 2,000. According to the Department of Labor, the advance rate for insured unemployment claims inched up 0.1 percentage point to 1.2% for the week ended December 1. The advance number of those receiving unemployment insurance benefits during the week ended December 1 was 1,661,000, an increase of 25,000 from the prior week’s level, which was revised up by 5,000.

 

Eye on the Week Ahead

While the latest report on the gross domestic product is out this week, most eyes will be focused on the announcement from the Federal Open Market Committee’s December meeting. While many expect a quarter-of-a-point rate hike, recent market volatility may sway some committee members to hold off on pushing interest rates higher.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

This communication is strictly intended for individuals residing in the state(s) of CA, FL, IL, MO and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Market Week: December 10, 2018

The Markets (as of market close December 7, 2018)

Losses in technology and health-care stocks accounted for much of last week’s market drop. The tech-heavy Nasdaq and the small caps of the Russell 2000 suffered the largest declines, leading a week of high market volatility. Bank and industrial stocks also took a big hit last week. Oil prices rose on news that OPEC members agreed to cut back production next year. Uncertainty over the economy and a prolonged trade dispute between the United States and China seem to be prompting investors to capture any stock gains and invest in bonds and futures such as gold. The yield on 10-year Treasuries continued to drop as bond prices climbed with increased demand.

Oil prices closed up for the second week in a row, ending last week at about $52.21 per barrel by late Friday, up from the prior week’s closing price of $50.72 per barrel. The price of gold (COMEX) gained for the fourth week in a row, climbing to $1,253.70 by Friday evening, up from the prior week’s price of $1,227.80. The national average retail regular gasoline price was $2.451 per gallon on December 3, 2018, $0.088 lower than the prior week’s price and $0.049 lower than a year ago.

Market/Index 2017 Close Prior Week As of 12/7 Weekly Change YTD Change
DJIA 24719.22 25538.46 24388.95 -4.50% -1.34%
Nasdaq 6903.39 7330.54 6969.25 -4.93% 0.95%
S&P 500 2673.61 2760.17 2633.08 -4.60% -1.52%
Russell 2000 1535.51 1533.27 1448.09 -5.56% -5.69%
Global Dow 3085.41 2936.77 2835.95 -3.43% -8.09%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 2.99% 2.85% -14 bps 44 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week’s Economic Headlines

·         Job growth slowed in November, according to the latest report from the Bureau of Labor Statistics. Employment increased by 155,000 new jobs last month, compared with an average monthly gain of 209,000 over the prior 12 months. The unemployment rate remained unchanged at 3.7% for the third month in a row. In November, job gains occurred in health care, in manufacturing, and in transportation and warehousing. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 641,000, respectively. Both the labor force participation rate, at 62.9%, and the employment-population ratio, at 60.6%, were unchanged in November. The average workweek decreased by 0.1 hour to 34.4 hours in November. Average hourly earnings rose by $0.06 to $27.35. Over the year, average hourly earnings have increased by $0.81, or 3.1%.

·         The international trade deficit expanded by $0.9 billion in October, growing to $55.5 billion. October exports were $211.0 billion, $0.3 billion less than September exports. October imports were $266.5 billion, $0.6 billion more than September imports. Year-to-date, the goods and services deficit increased $51.3 billion, or 11.4%, from the same period in 2017. Exports increased $149.3 billion, or 7.7%. Imports increased $200.6 billion, or 8.4%. The deficit with China grew by almost $3 billion in October over September, and sits at $420.8 billion year-to-date — 23% greater than this time last year.

·         The IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ for November posted its lowest figure in three months, indicating growth in the manufacturing sector, but at a slower pace than October. More encouraging from this report was the notable growth in new orders, export orders, and employment.

·         The November purchasing managers index (PMI®) from the Institute for Supply Management® not only showed growth in the manufacturing sector, but at a higher rate than October. Survey respondents also reported increases in new orders, production, employment, and inventories. Prices and deliveries fell in November from the prior month. While the surveys from Markit and ISM® may differ in some aspects, both reports clearly show that demand remains strong in manufacturing, which is a good sign for the economy.

·         According to the Non-Manufacturing ISM® Report On Business®, the services sector expanded in November over October. Business activity, new orders, and prices also grew in October. Only employment decreased slightly from September’s survey results.

·         For the week ended December 1, the advance figure for seasonally adjusted initial claims for unemployment insurance was 231,000, a decrease of 4,000 from the previous week’s level, which was revised up by 1,000. According to the Department of Labor, the advance rate for insured unemployment claims dipped to 1.1% for the week ended November 24. The advance number of those receiving unemployment insurance benefits during the week ended November 24 was 1,631,000, a decrease of 74,000 from the prior week’s level, which was revised down by 5,000.

 

Eye on the Week Ahead

Several reports that serve as indicators of inflationary trends are out this week, including the Consumer Price Index, the Producer Price Index, and the report on import and export prices. Inflation has been inching up slowly, and these indicators aren’t expected to change that trend for this past November.

 

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

 

Content has been provided by Broadridge Investor Communication Solutions, Inc.  Broadridge does not provide Investment, tax or legal advice.  The information presented here is not specific to any individual’s personal circumstances.

This publication is provided as a service to clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information and education purposes only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.  The information in these materials may change at any time without notice.  To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

This communication is strictly intended for individuals residing in the state(s) of CA, FL, IL, MO and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

Market Commentary: December 6, 2018

Paradigm Financial Advisors

Market Update

December 6, 2018

 

Wild Ride for Investors Continues into December:

The stock market rose almost 2% on Monday after it was announced that President Trump had reached an agreement with Chinese President Xi to suspend all tariffs and continue negotiating a trade agreement over the next 90 days.   However, the rally faded quickly and the market fell  3% on Tuesday due to concerns over the flattening bond yield curve.   On Tuesday the spread between the 2-year and 5-year Treasury notes became negative for the first time since 2007.    The spread between 2-year and 10-year Treasury Bonds flattened further to .13%.

Investors became very nervous on Tuesday as the noise level rose and many commentators declared dooms day is coming because in the past an inverted yield curve has historically been a leading indicator of an impending recession. However, as the chart below shows, an inverted yield curve does not always lead to a recession and there have been a number of time periods where the U.S. economy and stock market have continued to do very well with an inverted yield curve.

 

Programmed Trading Increased Selling Pressure on Tuesday:

After looking at the volume spikes on Tuesday, it appears that the selling was exacerbated by institutional trading programs that were triggered when the 2-year and 5-year yield curve became inverted for the first time since 2007.   Many hedge funds and wall street firms have built trading algorithms that are programmed to sell stocks when certain leading economic indicators hit certain levels.  These trading programs were triggered on Tuesday as the 2-year and 5-year yield curve became inverted and the programmed trading once again dramatically increased the volume of short term selling in the stock market.  As we have discussed, programmed trading by Wall Street firms, hedge funds, etc. is designed to create short-term chaos so that they can profit from “retail investor’s panic selling”.  The wild swings in the markets are frustrating but they do not impact disciplined investors that do not succumb to emotional selling because over the long-term stock prices have consistently been determined by earnings, cash flow and other fundamentals.

 

Disconnect between the Federal Reserve and the Bond Market:

The yield curve has been flattening for several years because of the disconnect between the Federal Reserve and the bond market’s divergent outlooks for future economic growth.

The Federal Reserve believes that the U.S. economy is going to continue to grow at a healthy pace in the next few years.  However,  bond market participants do not share this view because they think the following risks could derail the U.S. economy:

a)      The Federal Reserve could derail the U.S. economic recovery by raising short term rates too quickly.

b)      S. corporate earnings may have reached a peak in Q3 2018 and earnings could fall in 2019.

c)     President Trump’s tough trade negotiations with China could lead to a full-blown trade war which could have a negative impact on U.S. and global economic growth

d)      Geopolitical risks in the Middle East could rise if President Trump decides to  punish Saudi Arabia for the brutal murder of Jamal Khashoggi by cancelling the sale of U.S. military equipment and/or imposing harsh sanctions on Saudi Arabia.

e)     The European economy may continue to struggle due to the turmoil surrounding BREXIT and Italian debt negotiations.

Long term bond yields have fallen as the bond market continues to price in all of the risks that could have a negative impact on U.S. economic growth.

 

The Federal Reserve is moving more dovish on the likelihood and pace of future rate hikes:

Federal Reserve Chairman Powell made it clear last week that they recognize that there are a number of issues that could have a negative impact on economic growth and he indicated that the Fed is going to be more “data dependent” moving forward which should result in fewer rate hikes than they originally anticipated.   In the summer, the Federal Reserve indicated that they would likely raise rates on more time in December 2018 and three more times in 2019.   The data now suggests that they will probably do one hike in 2 weeks and possibly just one more in the summer of 2019.

 

Leading Economic Indicators remain positive:

Even though the yield curve has been flattening, nearly all of the other leading economic indicators are still positive which indicates that the U.S. economy is not at risk of entering into a recession any time soon.

 

Job Growth remains strong:

  • The November ADP payroll Report came out this morning which showed 179K new private sector jobs were created last month.
  • The November Non-Farm Payroll Report will be released tomorrow and the consensus estimate has come down slightly from 200K jobs to 198K jobs.
  • Initial Jobless Claims fell by 4,000 to 231K last week from an upwardly revised 235K the previous week, which is still near a 50-year low.
  • Continuing Jobless Claims fell from 1.705 million last week to 1.631 million, which is also near a 50-year low.

 

2018 Christmas Shopping Spending stronger than expected:

  • Black Friday sales grew 23.6% year over year to $6.2 billion.
  • Thanksgiving Day was also a big up-day for retailers, bringing in $3.7 billion, up 28% from a year ago.
  • Small-Business Saturday, also part of the holiday shopping pantheon, rose 24% this year to $3 billion overall.
  • Other big retail winners over the weekend: Walmart (WMT) grew sales 23% year over year between Thanksgiving and Black Friday, boosted notably by its Click & Collect feature, which cranked up 73% from the year-ago quarter.  Target (TGT) sales over the weekend grew at 47% from a year ago.
  • Cyber Monday sales were over $8 Billion which was the largest shopping day in U.S. history.  Total sales on Cyber Monday grew at over 20% from 2017.
  • Christmas spending from Thanksgiving through Cyber Monday was reported at over $60 Billion, which is an increase of over 20% from 2017.

 

The Conference Board’s Leading Economic Indicators Index for October rose 0.1 percent in October to 112.1 (2016 = 100), following a 0.6 percent increase in September, and a 0.5 percent increase in August.  The index still points to robust economic growth and should continue in 2019.

The chart below shows that the Leading Economic Indicator Index has historically dropped below its six-month moving average before a recession. The latest index reading shows no near-term recession risk.

 

President Trump and Chinese leader Xi agree to suspend Tariffs:

Over the weekend President Donald Trump and President Xi Jinping agreed to a “truce” during their meeting at the G20 summit.  President Trump agreed to leave tariffs on $200 billion worth of Chinese goods at 10%, rather than increase them to 25% on January 1, 2019, as originally planned. In turn, President Xi pledged to immediately resume purchases of U.S. agricultural goods, including corn and soybeans, which were hit particularly hard by China’s retaliatory tariffs. China also agreed to buy an unspecified amount of energy, industrial and other products from the U.S.

The two sides agreed to continue talks to resolve contentious policies at the heart of the trade conflict. Such policies include intellectual property protection, state-sanctioned cyber intrusion and forced technology transfer.  President Trump said he is confident that they can reach an agreement within 90 days.  Trump also cautioned that if China does not follow through on their promises made at their meeting then he will increase tariffs on China to 25%.

While considerable uncertainty remains around resolution of these trade conflicts, the fact that the U.S. and China reached a tentative agreement could benefit recently troubled emerging markets stocks (EM). We believe EM stocks offer a very good opportunity for investors because many EM companies are selling at deep discounts.  Many Chinese stocks have sold off by 30% to 40% this year due to concerns over a trade war with the U.S.   The sell-off in China presents an historic opportunity for investors because many Chinese companies have strong cash flow and are forecast to grow earnings by over 20% in 2019.  If a final agreement is reached between the U.S. and China in the next 90 days it will provide a much needed catalyst that could spark a strong rally in Chinese and EM stocks in 2019.

 

President Trump’s goals:

President Trump and his team of negotiators are going to try to convince the Chinese leaders to agree to a new trade agreement that will achieve the following goals:

  1. Prevent the Chinese from stealing technology, intellectual property and trade secrets from U.S. companies.
  2. Stop the Chinese government from forcing U.S. companies to turn over their trade secrets and technology as a prerequisite for doing business in China.
  3. Get China to agree to designate Fentanyl (an addictive opioid) as a controlled substance which would subject any Chinese sellers of the drug to criminal penalties.
  4. Get China to take affirmative action to help the U.S. in its efforts to convince North Korea to end nuclear weapons development.
  5. President Trump also wants to make sure that China’s new long-term development plan, “Made in China 2025,” does not create an unlevel playing field to help China gain a lead in artificial intelligence, automation, robotics and electric vehicles by unfairly subsidizing Chinese companies while discriminating against U.S. businesses operating in China.  Currently, China has two sets of rules for conducting business in China – one that favors Chinese companies and another set of laws that make it incredibly difficult for U.S. companies to succeed in China.

 

President Xi’s Goals:

Negotiating with the Chinese leaders will be the most difficult “deal” that President Trump has ever tried to make.  China has a Communist Ruling Party but it also has a quasi-free market system and their views and goals are very different than other countries the U.S. has negotiated trade deals with.

When Xi became President in 2010, he started creating a new vision for China – he announced a new national plan to create what he called a “great modern socialist country that is going to be prosperous” and “a global leader in terms of composite national power”.  Xi’s goal is to double China’s GDP per capita to $10,000  by 2021, which is the year that China will celebrate the 100th anniversary of the founding of the Chinese Communist Party.

Xi recently announced an expanded long-term national plan for China called “Made in China 2025”.  This new plan creates a vision for China to become the global leader in key technologies including computing, robotics, artificial intelligence and self-driving cars.   Xi’s vision for China is not just about economic growth and increasing the wealth of the Chinese people, Xi’s vision is to make China powerful and make the Chinese people proud again.  China’s goal is to become the global leader in finance, automation, defense, science, technology and the arts & culture.

President Xi’s wants the U.S. to allow China to pursue its “One-China policy” which they have used to assert that Taiwan is a part of China.  The negotiations will be complicated by the fact that the Chinese leaders believe that the U.S. wants to prevent China from achieving their goal of becoming one of the world’s economic and military super powers.  The Chinese think that America’s strategy is to isolate and contain China.  The Chinese also believe that the U.S. does not want to recognize and accept the political legitimacy of the Chinese Communist Party because it is not a democratic based party.

President Trump and his team have their work cut out for them to convince their Chinese counterparts that the U.S. is not going to try to sabotage the Chinese government or try to derail China’s economic growth plans.  The U.S. negotiators will have to remind their Chinese counterparts that the U.S. led the world back to stability after the second World War.  The U.S. has also played a major role in helping China and other Asian countries prosper.  The Chinese recognize the role the U.S. has played but China does not want to be dependent on the U.S. in the future. President Xi made this clear in a speech he gave in 2014 when he said, “In the final analysis, it is for the people of Asia to run the affairs of Asia, solve the problems of Asia and uphold the security of Asia.”

 

Investors remain concerned about uncertainty of a trade deal with China:

The initial excitement wore off quickly after Monday’s announcement of the truce agreed to by  President Trump and President Xi due to the fact that there does not appear to be any formal written agreement between the U.S. and China and many skeptics have expressed doubts over the trustworthiness of China.  However, we believe that Trump and Xi will be able to reach a formal agreement because both countries have too much at risk if they allow this to turn into a full-blown trade war.  The final deal may end up being criticized by media pundits but it would still be a monumental success if China agrees to make a genuine commitment to stop stealing U.S. technology and other intellectual property, to buy more U.S. agricultural and other products and agree to label Fentanyl as a controlled substance and to prosecute Chinese illegal sellers.  President Xi has an historic opportunity to improve China’s tarnished reputation in the World Trade Organization.

 

Huawei CFO Arrest threatens to derail U.S. and China trade negotiations:

After being closed on Wednesday for President Bush’s funeral, the market opened down over 400 points today after news broke that the CFO of Chinese technology giant Hauwei, Wanzhau Meng, was arrested in Canada and she is going to be extradited to the U.S. to face charges by the U.S. Department of Justice. It is unclear at this time if President Trump and President Xi knew about the arrest at the time of their meeting on Saturday.

It is being reported that the Justice Department is investigating Hauwei based on the following potential charges:

1) they violated U.S. sanctions on Iran by selling them telecommunications-equipment

2) they violated U.S. sanctions by selling U.S. technology to Syria and North Korea

3) they violated a variety of laws by installing secret chips that provided them with a “back door” into the equipment sold in the U.S. that allows them to monitor user activity and helped them steal technology from U.S. companies and possibly top-secret information from the U.S. government.

Chinese officials immediately condemned the arrest of Meng saying it is a violation of its citizens’ rights and demanding that the U.S. and Canada release her immediately.  Meng’s arrest will certainly increase tensions between President Trump and China’s President Xi.  The arrest was made on the same day Trump and Xi had dinner and agreed on a truce on tariffs.  Neither Trump or Xi has made any comments yet to address concerns that China may suspend negotiations on a new trade agreement.  The arrest is an unprecedented move by the U.S. Department of Justice and it remains to be seen if Trump knew about the impending arrest or if the Justice Department kept him in the dark as they arrested Meng.

Meng is the daughter of Ren Zhengfei, the founder of Hauwei.  Zhenfei is well connected with Xi and China’s ruling party.  He is a former army engineer and he has led Hauwei to become one of the world’s largest sellers of smartphones and networking gear. He’s regularly named among China’s top executives and he has a similar status in China as Bill Gates has in the U.S.

Huawei has been trying to acquire U.S. technology on artificial intelligence, chipmaking and 5G wireless technology and U.S. companies have complained to the Department of Justice that they have tried to hack their networks, etc. to try to steal U.S. technology.   By arresting the CFO of Huawei, the U.S. is threatening one of China’s most successful companies.

In August, Trump signed a bill banning the government’s use of Huawei technology based on the security concerns and many U.S. allies are either imposing or considering similar moves. That same month, Australia barred the use of Huawei’s equipment for 5G networks in the country and New Zealand last week did the same, citing national security concerns. The U.K. and European Union are also considering banning Hauwei products. In November, Huawei said that banning Hauwei products will hinder the development of 5G and raise prices for consumers.

 

Impact of the arrest on trade negotiations with China:

There is no question that the arrest of Hauwei’s CFO makes it clear that the U.S. is prepared to play “hard ball” with China on the trade negotiations.  The arrest does increase the risk of a break-down in negotiations leading to a trade war with China and more punitive tariffs from both sides.  It appears that China wants to get a deal done because they have more to lose because their economy is still dependent on exporting goods to the U.S.  A protracted trade war with the U.S. will lead to rising unemployment in China which could lead to Xi’s worst fear – civil unrest that could jeopardize the future of China’s communist ruling party.  The arrest of the CFO of Hauwei should make it clear to China that the U.S. is not going to allow them to continue to steal our technology and that China is going to have to abide by international law in the future.

We will update clients on any new developments on the tensions between China and the U.S. as we get new information.

 

PFA Investment Committee

Jim Reding      Ryan Powers

 

Brad Combs    Matt Schaller

 

Bob Spindel     Matt Kellermann

Market Week: December 3, 2018

The Markets (as of market close November 30, 2018)

Stocks rebounded last week, posting their best gains since February. The S&P 500 climbed 4.85% last week, a percentage jump not reached since the end of 2011. Overall, the large-cap indexes and the tech-heavy Nasdaq outperformed the small caps of the Russell 2000, which rebounded nicely, nevertheless. As has been the case for most of the year, foreign trade made headlines early last week as President Trump threatened to impose further sanctions on China in advance of the Group of 20 summit. However, more positive rhetoric from both the White House and China at the end of the week may have quelled worries of an all-out trade war, at least for the time being. Comments from Federal Reserve Chairman Jerome Powell last week implied that the Fed may be rethinking the timing of further interest rate hikes, although another quarter-of-a-point bump in December is still a strong possibility.

Oil prices stabilized following several weeks of losses, ending last week at about $50.72 per barrel by late Friday, up from the prior week’s closing price of $50.39 per barrel. The price of gold (COMEX) gained for the third week in a row, climbing to $1,227.80 by Friday evening, up from the prior week’s price of $1,223.40. The national average retail regular gasoline price was $2.539 per gallon on November 26, 2018, $0.072 lower than the prior week’s price but $0.006 higher than a year ago.

Market/Index 2017 Close Prior Week As of 11/30 Weekly Change YTD Change
DJIA 24719.22 24285.95 25538.46 5.16% 3.31%
Nasdaq 6903.39 6938.98 7330.54 5.64% 6.19%
S&P 500 2673.61 2632.56 2760.17 4.85% 3.24%
Russell 2000 1535.51 1488.68 1533.27 3.00% -0.15%
Global Dow 3085.41 2852.37 2936.77 2.96% -4.82%
Fed. Funds target rate 1.25%-1.50% 2.00%-2.25% 2.00%-2.25% 0 bps 75 bps
10-year Treasuries 2.41% 3.03% 2.99% -4 bps 58 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week’s Economic Headlines

·         The second estimate of the third-quarter gross domestic product showed the economy expanded at an annual rate of 3.5% — the same rate as reported following the initial estimate last month. The GDP grew at an annualized rate of 4.2% in the second quarter. Compared to the initial estimate for the third quarter, this rendering indicated consumer spending, the main driver of the GDP, declined 0.4 percentage point to 3.6%, while state and local government spending also came in lower. On the other hand, business inventories expanded significantly, adding to the overall growth of the GDP. The trade deficit, a negative in the calculation of the GDP, averaged $74.6 billion in the third quarter.

·         Personal income increased by 0.5% in October. Disposable (after-tax) income also grew by 0.5%. The increase in personal income primarily reflected increases in wages and salaries, proprietors’ income, and government social benefits payments. Consumer spending for goods and services rose by 0.6% in October. Within goods, spending for prescription drugs was the leading contributor to the increase. Within services, the largest contributor to the increase was spending for household electricity and gas. Consumer prices for goods and services increased 0.2% for the month. Core prices, excluding food and energy, inched up 0.1%. For the 12 months ended in October, consumer prices rose 2.0%. Core prices are up 1.8% over the same period — 0.2 percentage point below the Fed’s target inflation rate.

·         The first month of fiscal 2019 saw the international goods trade deficit reach $77.2 billion in October. The deficit was $76.3 billion in September. Exports were $140.5 billion, $0.8 billion less than September exports. Imports of goods for October were $217.8 billion, $0.2 billion more than September imports.

·         The housing sector continues to stall as new home sales dipped 8.9% in October following a 1.0% drop in September. For the 12 months ended in October, new home sales are down 12.0%. The median sales price of new houses sold in October was $309,700 ($321,300 in September). The average sales price was $395,000 ($379,000 in September). The seasonally adjusted estimate of new houses for sale at the end of October was 336,000, representing a supply of 7.4 months at the current sales rate.

·         For the week ended November 24, the advance figure for seasonally adjusted initial claims for unemployment insurance was 234,000, an increase of 10,000 from the previous week’s level. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended November 17. The advance number of those receiving unemployment insurance benefits during the week ended November 17 was 1,710,000, an increase of 50,000 from the prior week’s level, which was revised down by 8,000.

Eye on the Week Ahead

Investors are hoping a favorable employment report this week will favorably influence the stock market.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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