Still Of The Night
We all knew this was coming. Still, broadly speaking, U.S. equities behaved on Thursday as if today would never come. Maybe stocks were just technically oversold. Equity index futures are trading overnight as if all eventualities are already priced in. It would seem likely to me that this somehow changes in between the time that I submit this morning's Market Recon, and the time that you read it.
Today is "Jobs Day." The slope of the yield curve for U.S. Treasury markets flattened further in the wee hours. The 2/10 spread managed to compress to less than 28 basis points while you were resting that ugly melon of yours. I would think that particulars such as labor market conditions, and credit market health would matter more immediately to U.S. markets as well as the domestic economy than the kickoff of a potential trade war, but as far as headlines go, this will not be the case on Friday.
The United States and China both levied tariffs on $34 billion worth of each others' exports, as there would be no last ditch effort made on either side to avoid these first steps. If you are Chinese, you are retaliating against new, unprovoked aggression as previous conditions had become, in your opinion, normal. If you are American, you are finally retaliating against decades of abusive trade practices. Does it get worse? When does this episode blow over? How do we navigate these potentially rough waters? Those would be the important questions.
According to the U.S. Census Bureau, the United States only exported $129 billion worth of goods to China in 2017, while $505 billion worth of goods went the other way. President Trump spoke last night on the expected implementation of another $16 billion worth of tariffs in two weeks, and then the potential for a secondary tranche of $200 billion, followed by a tertiary tranche of $300 billion (up from a previously stated $200 billion). Do the numbers add up? It seems the president's implication is that if necessary, the U.S. will tax every single thing China exports to the U.S.
What is obvious here is that China has much more to lose than does the U.S. China can not possibly go tit for tat on the further implementation of tariffs, so they will have to be selective on where they hit, going for the president's political base as the mid-term elections approach. Does it matter to the president that a majority of these initially taxed Chinese imports will be products manufactured by non-Chinese companies, with a substantial portion of that majority being American companies? I really don't think so. I think the president sees himself as the defender of the American laborer over the American consumer, as one should, in theory take care of the other.
Who Blinks First?
The two sides will eventually negotiate. I promise. President Xi does not have to worry about getting his party elected. Xi will come to the table when the economics of it all actually start to impact the ability of the Chinese economy to grow. For President Trump, who I truly believe feels that he is doing the right thing, this will be political. If public perception is on his side going into the mid-terms, he will ratchet up the heat on China. If this plays negatively in the electorate, then the president finds a way to play ball.
3 (Sort of) "Under The Radar" Stocks
The big question posed over several days now has been how to steer clear of trade wars. In the past, I have answered these questions broadly by suggesting cloud names. Some of these have done very well, such as Salesforce (CRM) . Others not so much -- like Splunk Inc (SPLK) . I have also been a believer that defense budgets would trump all. I still believe that to some degree -- but a more peaceful planet, at least on the surface, has slowed market enthusiasm for the group. However, there are, my friends, several ways to skin a cat. Let's check out a few. CRM is an Action Alerts PLUS holding.
1) Verizon (VZ) -- Not really under the radar you say? Perhaps true. After all, this is a Dow stock. Still, running with a three-year rate for sales growth at -1%, the name trades at just 10x next year's earnings. Consider this. The firm's core telecom business is largely domestic in nature, and the coming advent of 5G coverage should improve conditions for both revenue and margin growth. Oh, did I mention the 4.6% dividend yield? You all know that when the crowd gets nervous they reach for yield.
2) CarMax (KMX) -- A little riskier in my opinion, as the industry seems to be on to this one of late. No dividend. The name trades at a below-average 15x forward looking earnings. This is the interesting part: We all know the autos are at risk in a trade war. How about used cars? This firm runs operations out of 189 locations in 41 states. The company has become more efficient, sporting a three-year earnings growth rate of 12%, coupled with a sales growth rate over that time frame of 6%. Oh, and get this: 10% of the float has been sold short. That could get me fired up. You have potential here for a bit of a squeeze if you can first see a a bit of a pop -- and it looks like we might be seeing the start of that pop.
3) Aurora Cannabis (ACBFF) -- Know what? The people who smoke pot are going to smoke pot. People who smoke pot will not care if the U.S. and China are involved in a trade war. Especially Canadian cannabis growers who sell to Canadian cannabis users. Speculative? You bet. This is a seven dollar name that is trading toward the middle of nearly an eleven dollar rage over the last twelve months. Keep a couple of things in mind. On October 17, Canada becomes the first G-7 country, and I believe the second nation on the planet, to legalize recreational pot usage on the federal level. On top of this, many alcohol companies such as Constellation Brands (STZ) , and Molson Coors (TAP) have either taken a financial interest or at least kicked the tires of producers of Canadian cannabis. This stock is in the "Stocks Under $10" portfolio that I co-manage along with Chis Versace. STZ is an Action Alerts PLUS holding.
June Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 193K, Last 223K.
Average Hourly Earnings: Expecting 2.8% y/y, Last 2.7% y/y.
Average Weekly Hours: Expecting 34.5 hrs, Last 34.5 hrs.
Participation Rate: Expecting 62.7%, Last 62.7%.
Unemployment Rate: Expecting 3.8%, Last 3.8%.
Underemployment Rate: Last 7.6%.
All Other Macro (All Times Eastern)
08:30 - Balance of Trade (May): Expecting $-43.7B, Last $-46.2B.
08:30 - Exports (May): Last $211.25B.
08:30 - Imports (May): Last $257.25B.
10:30 - Natural Gas Inventories (Weekly): Last +66B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 858.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: SFUN (0.04)