The Fire That I Need
My Alarm. Always set. Usually not necessary. In this business, there is a need to get to work hours earlier than what most folks would even consider to be the morning hours. The simple fact is that waking at 4 am or 5 am just does not leave enough time for a proper level of mental preparedness. Regardless... the anticipatory thrill of daily existence truly on the edge rarely permits that alarm to ring. It is with two feet on the ground, and two fists at the ready, that we approach each and every morning. For on this day, we are together granted one more chance to be great. So, you and I... let us stand together and shine, because we understand that opportunity is only for those who can see it's gift. We rise in gratitude. We rise as one. Monday morning. Let us rock.
Broadly speaking, U.S. equity markets rallied on Friday, albeit on lighter volume, and still leaving the major indices lower for the week. However, there was some positive movement seen across the Treasury yield curve. Not positive for those debt securities mind you, positive for the curve. It would appear that the brief inversion last Wednesday of the spread between the yields of the US two year note and the US 10 year note may have done what all of our writing and hollering could not. It seems that enough folks have finally been woken up. In time? Time will tell.
No, the U.S. economy is not close to being in a state of economic contraction. The facts are though that the economies of the UK and Germany most certainly are. The economies of both China and Japan are certainly not healthy. Even in the U.S., while there is a headline growth saving level of strength in personal consumption, that itself is reliant upon a still robust labor market. How long that would last on it's own, with confidence surveys surely waning, and a national industrial base clearly closer to contraction than is the rest of the economy, is anyone's guess.
It's not just broadly slowing global economies, or more acutely... actual contraction in developed economies, it's the conflicts over trade that perhaps rushed these conditions along, as well as the clear negative turn of fortune whereas multi-national large cap profitability is concerned. The most recent data we have from FactSet puts S&P 500 earnings growth for the second quarter (approaching completion) at a blended rate of -0.7%, on top of a Q1 that printed at -0.4%. I guess we can not call it until the last few (26 this week) firms report, but it is clear that the U.S. is very likely either already in an "earnings recession" or skating on very thin ice. Currently, consensus for third quarter S&P 500 earnings growth is for -3.1%, so even if the group squeaks by in aggregate for Q2, the long hard battle continues.
So, it is that the ECB prepares their big bazooka (stimulus package) for September 12th. So it is that Der Spiegel reports that the German government might relax balanced budget rules, and German Finance Minister talks about $55 billion (E50) in potential fiscal spending that the beleaguered nation might come up with. Elsewhere, the People's Bank of China (PBOC)... China's central bank has announced that beginning this week, the bank will improve the mechanism used to establish the nation's loan prime rate. The idea is not just to improve on the efficiency of rate transmission, but likely to lower the cost of business financing across the planet's second largest economy. Is this change really akin to a guided reduction in benchmark interest rates? Sure seems that way. We'll know more as the central bank sets the new rate once a month, on the 20th. That's tomorrow (Tuesday).
All this goes down, as President Trump indicated through Twitter posts that the U.S. and China are continuing to talk out differences on trade. The president later also seemed to empathize with Apple (AAPL) CEO Tim Cook's stance on how tariffs harm a company like that. These events have put global equities as well as U.S. equity index futures in rally mode over night. Perhaps the most optimistic input, from a markets' perspective is the speculation that appeared to run rampant this weekend that Fed Chair Jerome Powell might use the symposium at Jackson Hole this weekend as an opportunity to signal that he does "get it." Powell is expected to welcome attendees with an opening address on Thursday as well as scheduled speech on Friday morning. Should Powell intentionally avoid any signalling, it is my belief that the yield curve might react very poorly provoking yet another sharp algorithmic response across markets.
Taiwan Goes Shopping
While presidents Xi and Trump play the headline game over the trade war between the two nations, and while Chinese troops appear to be forming outside of Hong Kong as pro-democracy protests continue to rage on in what has been a capitalist hub in that part of Asia, the autonomous island of Taiwan passed last Thursday an 8.3% increase in military spending for the year 2020. Bear in mind that China does not recognize Taiwan as an independent government, and that while the U.S. has no formal ties to Taiwan, the U.S. is bound by law to help provide the island with the means to defend itself.
On Friday, it was leaned that the Trump administration had given informal approval to sell an advanced version of the F-16 fighter aircraft to Taiwan. The island has ordered 66 of these craft, manufactured by Lockheed Martin (LMT) . The sale is believed to have bi-partisan support in Congress. The sale is expected to amount to $8 billion that would be in addition to last month's State Department approved sale of M-1 Abrams tanks (General Dynamics (GD) ) and Javelin missiles (Raytheon (RTN) and Lockheed Martin) for about $2 billion in aggregate.
While the modern version of the F-16 is still a fourth generation fighter, as opposed to fifth generation (stealth), it will be equipped with the latest radar system that is present in more modern fighters such as the F-35, and F-22 (Both Lockheed Martin). That modern radar, the APG-83 AESA, is a Northrop Grumman (NOC) product for those keeping score. You'll recall that LMT has long been a Sarge fave among defense names. Regular readers already know that we had recently revised out target price to $390, and our panic point to $359.
Economics (All Times Eastern)
No Headline Level Data-Point Releases Scheduled.
The Fed (All Times Eastern)
No Public Events Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (EL) (.54)
After the Close: (BIDU) (3.18)