Did the Grinch Steal the Christmas Rally?

Dec 14, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Ordinarily, this time of year we would be talking about a Christmas rally in the markets.  However,this year feels a little different as talks of another government shutdown highlight the difficulties facing our nation and economy.  The honest to goodness truth is that much of the“problem” is self-inflicted with both parties jockeying for prominence before the transition of power in the House of Representatives.  It is unfortunate since the economy, albeit slowing, remains not far off the historical norm of 2.5-3% year-over-year growth.  The media, appealing to both extremes, flames the fire and causes a heightened sense of doom and gloom.  It is no wonder the markets can’t seem to gain any traction in this environment. 

Talk about self-inflicted, the trade war is starting to have a real impact on both China and the United States.  China reported it is on track for the first drop in auto sales since 1990.  Chinese automobiles sales fell 14% in November to mark the fifth month in a row of declining volume.  In the U.S., soybean sales (primarily to China) fell off a cliff and drove soybean prices sharply lower. China accounts for roughly 60% of all U.S. overseas shipments in deals valued at more than $12B.  Despite China making its first big buy of soybeans since the Trump-Xi meeting, inventories remain at historic highs. 

However, the issue runs deeper than just sales.  At risk is manufacturing in both the United States and China.  Several German automobile companies are evaluating their presence in the United States, most notably BMW, Volkswagen, and Mercedes who cumulatively employ over 50,000 American workers.  On the flip side, production of electronics in China may be moving elsewhere due to the slow slide toward a trade war.  Apple is exploring manufacturing opportunities outside of China given an estimated $1 per share,or roughly a 7.5% hit to earnings, if the U.S. imposes a 10% tariff on phones produced in China.  GoPro has plans on moving some of its production outside of China too by next summer also fearing the potential tariff impact.  While the balance of trade has been far from balanced these past three decades, righting the ship will necessarily cause pain in the near-term.  The negotiations between the U.S. and China will remain headline news for the foreseeable future and will likely be the cause for heightened volatility.

In company news, the battle between Apple and Qualcomm heated up this week.  Qualcomm won a preliminary ban in China on some models of Apple’s iPhone.  The People’s Court of China found Apple violated two of Qualcomm’s software-related patents.  Qualcomm is hoping China places a more permanent injunction on all iPhones until this issue is resolved.  Another story that caught my eye involves United Airlines.  It seems the company is considering charging more for some coach seats. “Preferred” seats will offer customers a seat closer to the front of the plane, giving them access to in flight services sooner and the opportunity to deplane sooner.  Yep.  The same economy seat, just more expensive depending on its proximity to the front of the plane.  While this is a subtle money grab, it seems United is simply following rivals American and Delta in making this change.

I could dedicate an entire email (and then some) to the issue of Brexit, Theresa May, and the European Union (EU).  However, to do it justice would require going into more depth than is warranted in this weekly synopsis.  So, to summarize this week’s developments,Theresa May survived a coup within her party to retain the title of Prime Minister.  However, she may lack support to pass the negotiated Brexit deal and it is unlikely the EU will renegotiate the deal.  The fate of the U.K. is very much up in the air.

In closing, I came across a story that surprised me.  California is often far out in front when it comes to issues like immigration, the environment, healthcare law, etc.  It was early in the fight against plastic bags and plastic straws, the size of soda containers, higher fuel efficiency requirement for cars, and legalized marijuana years before other states followed suit.  This week state regulators in California have proposed creating a surcharge on text messaging.  The goal would be to generate roughly $45 million annually to help fund phone service to the poor.  However, more surprising is that the regulators proposed making this surcharge retroactive going back five years and could amount to a bill of more than $220 million for California consumers.  Fortunately,we have the wireless carriers on our side telling the FTC they view text messaging as an information service like email, not a telecommunication service subject to the commission’s authority.  Now you know.

December 13, 2018

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