foxex: Reversal

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. U.S. Markets Climb as Commerce Dept. Eases Huawei Restrictions

2. Retailers Getting Kicked Around

3. Tesla Skids on Analyst Downgrade

Markets Closed

Dow
25,877.33 +0.77%

S&P
2,864.36 +0.85%

Nasdaq
7,785.72 +1.08%

VIX
14.95 -8.34%

INV Anxiety Index
108 Very High

US 10-Yr Yield
2.426 +0.41%

U.S. Markets Turn Around as Huawei Restrictions are Lifted

Huawei, China's telecom giant, again finds itself in the middle of the trade war. After President Trump blacklisted the company on May 15th, effectively making it illegal for U.S. companies to do business with the world's number two smartphone maker, the U.S. Commerce Dept. temporarily lifted some of those restrictions late Monday evening.

The Commerce Dept., overseen by Wilbur Ross, announced the reprieve in a press release, stating:

"The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services," said Secretary of Commerce Wilbur Ross. "In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks."

That was enough to turn Asian, European and U.S. markets higher Tuesday, as semiconductor stocks, which were sold off on Monday, given the ban, led Tuesday's rally. James wrote about the semiconductor ETF SOXX, yesterday, but, as it turns out, semiconductors have been a pretty good proxy for the overall stock market since the beginning of the year. The SOXX is the lower line.

chart courtesy www.koyfin.com

That makes sense, given their sensitivity to consumers who buy smartphones and computers, their multi-national sales, and the technology they're built upon.

Remember, the trade war with China is very much about intellectual property, trade secrets and Forced Technology Transfer. The U.S. contends that Chinese companies like Huawei force U.S. companies to turn over sensitive technological information if they want to do business with them. We'll explain that in more detail a little further down.

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Retailers Feel the Squeeze

As earnings season winds down, retailers are in focus, since they are usually the last sector to report their results. So far, it's been a tale of two cities, with retailers like Walmart and Macy's beating expectations, while Kohl's, JCPenney, and Home Depot have suffered. You can blame Amazon for Kohl's and JCPenney, but the trade war has not been helpful to any company that sources merchandise from China, or plans to sell to the Asian markets.

Home Depot reported results this morning, and while the retailer met expectations for sales and earnings, same store sales fell short. The company blamed a lumber shortage, and a wet Winter and Spring for the miss. But, it also said that the increase in tariffs on Chinese imports will raise its annual cost of goods sold by $1 billion. Kohl's executives said the company sources 20% of its goods from China, and the increased tariffs were a direct hit to its bottom line. Retail stocks, as tracked by the ETF XRT, have had a difficult year, even as consumer spending has improved.

screenshot from Nike commercial, 1989

It Must be the Shoes

Spike Lee said it best in his 1989 TV commercial with Michael Jordan, but he was likely referring to Jordan's ability to fly through the air, and not the impact of a trade war with China. But, the retail sector that may be most vulnerable to the trade war is footwear and sneakers. The U.S. imported $11.4 billion worth of footwear from China last year, according to data from the U.S. Census Bureau, where cheap labor costs and materials help boost profit margins.

Yesterday, more than 170 shoe retailers, including Nike, Under Armour and Adidas, sent a letter to President Trump, imploring him to remove footwear from the list of products on Section 301 from the U.S. Trade Representatives. Anything on that list is subject to a 25% tariff increase.

The Footwear Distributors and Retailers of America (FDRA), which represents American footwear companies, said, among other things, that the increased tariffs, which range from 11.3% to 67.5%, would mean that consumers would end up paying nearly 100% duty on their shoes.

It's worth reading the entire letter, but here is a key paragraph:

"...There should be no misunderstanding that U.S. consumers pay for tariffs on products that are imported. As an industry that faces a $3 billion duty bill every year, we can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer. It is an unavoidable fact that as prices go up at the border due to transportation costs, labor rate increases, or additional duties, the consumer pays more for the product."

Retailers, especially shoe companies, better tighten their laces. China's President Xi told supporters today that China is preparing for a "new long march", signaling no end to the trade war anytime soon.

More News:

Why To Sell Apple Now Before Trade War Gets Too Hot

4 Investor Strategies To Avoid Steep Losses As Trade War Rages On

Cabot Oil Gas Stock Ready to Break Out

Charts courtesy of www.koyfin.com

Autozone reported better-than-expected quarterly earnings and sales, which explains the 5% bump.

Kohl's dropped 12% today. We already know why. They missed their quarterly targets. And the trade war isn't doing any company that sources 20% of its goods from China any favors.

Word of the Day

Forced Technology Transfer

If you want to better understand the trade war, this might be one of the most important terms to get familiar with:

Forced technology transfer (FTT) is a practice in which a domestic government forces foreign businesses to share their tech in exchange for market access. The practice is common in China. When a company wants to enter the Chinese market, the Chinese government can compel the firm to share its technology with Chinese companies.

photo of Charles Lindbergh prior to departing on his historic flight, courtesy of the National Archives.

Today in History

May 21, 1927 Charles Lindbergh completes the first transatlantic flight as he lands his airplane, The Spirit of St. Louis, in Paris, 33 1/2 hours after taking off from Roosevelt Field on New York's Long Island. The Spirit of St. Louis was built by a company called Ryan Airlines (no relation to the Ireland based company) and Lindbergh's backers, which included several stockbrokers, paid $6,000 for it. Lindbergh decided to attempt the trip, which was actually a race for the $25,000 Orteig Prize, while he was flying his mail carrier route.

Sources: Frederick Lewis Allen, Only Yesterday: An Informal History of the 1920s (John Wiley & Sons, New York, 1997, reprint of 1931 ed.), and https://mohistory.org/blog/the-story-behind-the-spirit-of-st-louis/

Chart of the Day: Shares of Troubled Tesla Show Long-Term Stagnation

Even as U.S. equity markets have rebounded strongly since late-December lows, shares of Tesla Inc. (TSLA) have been in a sustained tumble during the same time period. The company has long been known as a favorite target of short sellers, and Wall Street analysts have been joining the Tesla-bashing. On Tuesday, a Morgan Stanley analyst cut his worst-case price for the stock to $10 from $97. To put this price target in context, TSLA traded at $205.08 on Tuesday's close, and this is after five months of sliding sharply from the high $300s. In issuing this rather extreme price target, the analyst cited rising debt, declining demand, and U.S.-China trade tensions that could significantly hurt the company's revenues.

The chart above shows the past five years of price action for Tesla's stock. Clearly, any buy-and-hold investor owning the stock from May of 2014 to now would not be very pleased. On May 21, 2014, exactly five years prior to Tuesday's close, TSLA closed at $199.45. On Tuesday, as noted, the stock closed at $205.08, for a measly five-year gain of 2.8%. In contrast, the benchmark S&P 500 has gained more than 50% during the same time period. Of course, TSLA's all-time high in 2017 was just shy of a whopping $390. But this year's slide has erased much of the gains of the past few years.

Will TSLA reach all the way down to Morgan Stanley's $10 target? While that's really just a worst-case scenario, the technicals and fundamentals are both flashing bearish signals, suggesting that the stock could have significantly further to fall from its current price.

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