 The Market Sum | Insight after the bell
By James Early Tuesday's Headlines 1. Markets Rise, and then Drop Down on Yield Curve Inversion 2. Altria and Philip Morris Reuniting? 3. Trump Says China Called. China Says it Didn't 4. Who Needs a Trade War When You Have Costco? Markets Closed
 Markets Today
Ever have that feeling that someone else knows better than you? The stock market did today. The Dow Jones Industrial Average started out with a 155-point gain, perhaps still fueled by President Trump's optimism about a China deal, before noticing that the dreaded inverted yield curve from the bond market was back. Specifically, 2-year Treasury yields climbed 5 basis points above yields for 10-year Treasuries, a gap not seen since 2007. If prior recent inversions were momentary flirts, this was a peck on the cheek: still nothing major, but progress in a relationship the market doesn't want to see happen.
At roughly $40 trillion dollars, the U.S. bond market is twice the size of the U.S. stock market, and is generally believed to be the smarter money (apologies to the stock market analysts reading). Because the Treasury market is hovering right around the inverted-or-not inverted level, we can expect to see more stories like this until rates meaningfully change, or investors become numb to this flickering signal. And although we're talking about only Treasuries inverting for now, know that flat or inverted commercial yield curves would be bad for banks, which are supposed to make money from the spread between higher-yielding long-term debt and lower-yielding short-term debt. Bank of America was down 1.16%, and JP Morgan dropped 1.06%. In another reversal, this time for the better, Johnson & Johnson's stock rose 1.44% today, after being down nearly the same in after hours yesterday. Perhaps after hearing additional Johnson & Johnson commentary criticizing the verdict, which J&J says was brought under the weird, flawed "public nuisance" legal theory, investors decided that the $572 million Oklahoma verdict--which Johnson & Johnson will appeal--wasn't as bad as expected after all. And perhaps markets aren't as efficient as was once taught.  Altria and Philip Morris May Reunite Remember when the idea of domestically focused Altria spinning off its international division as Philip Morris International was the best idea ever? That was so 2008.
These days, the tobacco giants confirmed they're in talks to get back together, presumably to fight a common enemy: falling cigarette sales. Philip Morris saw a 3% volume decline last year, for example. Altria, whose pre-announcement market cap was $88 billion, will own something like 48% or 49% of the re-combined entity, whereas larger Philip Morris ($121 billion market cap) will own 51% or 52%, according to anonymous sources cited in Bloomberg and CNBC.
Altria and Philip Morris have seen the handwriting on the wall about the future of combustible tobacco, and apparently decided the last line reads: "Juul." As the companies turn toward e-cigarettes and cannabis for growth, the largest immediate opportunity seems to be using Altria's 35% ownership of Juul to plug the vaping products into Philip Morris' global network.
Tobacco stocks have long been heralded as an example of against-the-grain investing success: despite regulatory headwinds, taxes, advertising restrictions and (to not sidestep the obvious), a product that may ultimately kill its customers, tobacco has been a strong-performing industry. Until recently. We'll see if this merger, should it happen, can erase the slide.
Although this is being billed as a merger of equals, Altria's stock spent much of the day trading up 7%-8%, whereas Philip Morris' shares were down several points. If you're new to mergers, this is a common phenomenon: Most mergers--80% by some sources--don't work out, and that's usually to the detriment of the acquirer. In this case, the market sees larger Philip Morris as contributing more and thus perhaps less likely to get a good deal.
The surest winners in a deal like this may be the investment bankers. China Won't Confirm Calls You would think caller ID could solve this sort of thing.
Following Friday's tariff tussle, we do know that over the weekend, Chinese Vice Premier Liu He steered the U.S.-China trade conversation in a positive direction with references to a "calm attitude," and "consultations and cooperation." We also know that Trump responded positively, praising Xi Jinping as a "great leader."
However, a surprisingly big deal is being made over Trump's additional mention that China had called the U.S. over the weekend in an apparent effort to restart trade talks. China's Foreign Ministry says it is not aware of any phone calls made by China to the U.S. in an attempt to restart talks.
Umm. That's awkward.
What really happened? Did Trump simply embellish Liu He's attempt at good vibes by adding a detail that didn't actually take place? Or did the Chinese really call, but wanted to keep it on the down low for fear of looking overly eager? One thing's for sure: China is sensitive to being seen as showing weakness, and tends to look for indications of weakness in opponents; if Trump did run a little too far with the ball, China may interpret that as a sign of overzealousness from the U.S.
The latest refrain from Xinhua, a Chinese state-run media outlet: "China did not and will not surrender."  Why Worry About a Trade War When You Have Costco? At least thousands of Shanghainese thought so.
As someone whose passport holds roughly 50 stamps from the Middle Kingdom, I can say this: China is big on "big"--especially big, frenzied attempts to pounce on opportunities. And the opening of the first Costco was just that. So big that local traffic and schools were affected. So big that the government asked the store to close an hour early to ease crowd control. Cars had to wait three hours to park, and police eventually came to form a physical barrier to prevent more patrons from entering the store.
As far as first-day problems go, there are worse. In fact, Hu Xijin, editor of the arch-nationalist tabloid Global Times said--on the banned-in-China Twitter, of course--that this type of success shows the importance of the China market to American companies. An American VPN company apparently has Hu's business, too.
In China, as in the U.S., Costco expects to make the bulk of profit from annual membership fees, and not from merchandise itself; Chinese membership fees will be $42, rather than the $60 Costco charges in the U.S.
The wet blanket in me could say this is just one good day for one retailer, and we've yet to see what happens once the buzz dies down. But it does show that Chinese aren't retaliating against U.S. companies the way they did against Korean or Japanese businesses during China's political spats with those countries. A longer-term issue is that except for IKEA, Western big-box retailers largely haven't succeeded in China. Home Depot didn't last. Walmart-esque Carrefour, in China since 1995, couldn't make money and sold to a local company. Even Walmart itself has had mixed results. But if today's results are any indication, the desirability of a 30-roll pack of toilet paper--Costco's most popular item in the U.S.-- may be something shoppers everywhere can agree on.
Programming note: The Market Sum will be guest written until August 28th while Caleb is out for a little summer fun with his family. 
chart courtesy www.koyfin.com  Shares of Salesforce.com rose by over 2% after its Q2 earnings and revenue beat market estimates. Newmont Mining's stock price climbed more than 2% higher today, following an increase of the company's short interest.  L Brands maintained its top spot from yesterday—its stock price having actually fallen further to over 9% today—following market analysts singling the continued struggles of Victoria's Secret as the main thing dragging its parent company down. Shares of Hasbro decreased by almost 9%, amid the company dropping $4 billion to buy Entertainment One, although a D.A. Davidson note on the purchase posited that the drop might have been overdone.  Although many countries suffered today, India actually did alright for itself, even when compared to the other three victors. Meanwhile, there were no winners in Europe and the Americas, with Brazil taking the heaviest loss. Word of the Day: The Efficient Market Hypothesis, or EMH, is an investment theory whereby share prices reflect all information and consistent alpha generation is impossible. Theoretically, neither technical nor fundamental analysis can produce risk-adjusted excess returns, or alpha, consistently and only inside information can result in outsized risk-adjusted returns.  Image credit: FPG/Getty Images
Today in Fossil Fuels History Aug. 27, 1859: Colonel Edwin Drake successfully drills the first oil well in the U.S., in Titusville, Pennsylvania. Crowds had been coming to ridicule "Drake's Folly"--Drake's attempt to drill through nearly 70 feet of rock and dirt, using a drill and method of his own invention. An invention financed, at the end, by a $500 loan Drake took out after his partners gave up on him. Although the U.S. is the No. 1 oil exporter in the world now, with 15.6 million barrels per day, vs. 12 million for No. 2 Saudi Arabia, Drake died in poverty, having failed to patent the drill he invented.
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