foxex: Keep Calm, and Prosper

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Markets Jump on Calming Words from China

2. Trump Says Trade Talks Moving to a Higher Level

3. Steel is Melting

4. Two Retailers Diverge in Sign of Economic Times

Markets Closed

Dow
26,362.25 +1.25%

S&P
2,924.58 +1.27%

Nasdaq
7,973.39 +1.48%

VIX
18.04 -6.77%

Bitcoin
$9,528.63 -1.75%

US 10-Yr Yield
1.516 +3.41%

Markets Today

U.S. markets rally on calming words from China
DJIA UP 1.25%
NASDAQ UP 1.48%
U.S. Treasury yields bounce

In this market environment, words matter. Words move markets, and they did so today as China's Commerce Secretary said that it was opposed to escalating trade tensions, hinting Chinese authorities will not retaliate against the latest round of U.S. tariffs.

Here are the exact words (translated from Mandarin):

"We firmly reject an escalation of the trade war, and are willing to negotiate and collaborate in order to solve this problem with calm attitude"

Just a few hours later, President Trump, in a radio interview with Fox News, said that the U.S. and China are set to have trade talks on Thursday "at a different level." He didn't elaborate, but the congeniality was enough to put investors in the buying mood, sending all major U.S. averages up more than 1%.

Since Trump tweeted last Wednesday that he would be adding an additional round of tariffs on Chinese goods while urging U.S. companies to move their operations away from China, the S&P500 has made a lot of noise, but is right back where it started, about 3.3% below it's all-time high. It's a headline driven market and highly unpredictable.

Here's the S&P500 over the past five trading sessions.

U.S. 2Q GDP is in BBQ mode

2Q'19 Estimate: 2% Growth
Lower than 2.1% initial forecast
U.S. Consumers supporting growth

The Bureau of Economic Analysis released its second estimate for U.S. GDP in the second quarter, and it smells like the end of summer... BBQ. According to the BEA, the economy grew at a 2.0% rate, which is slightly lower than its initial 2.1% forecast. It's not a blazing bonfire or a cooling creamsicle - it's a slow burning BBQ that is being kept ablaze by consumer spending.

As we keep saying, the consumer is keeping the economic expansion alive in the U.S., and lower interest rates are abetting their efforts. Most other economic indicators - especially those that track manufacturing and business spending, are contracting, which is why many people are sounding the recession sirens. They are not warning about an imminent recession... they are looking out 12-36 months and don't like what they see.

The BEA's chart of GDP supports their concern as growth is definitely slowing. But, 2% growth is still growth, and any signs of real progress in the U.S. China trade talks could encourage businesses to start spending again and take the pressure off of consumers.

Steel is Melting

Spot prices have been declining for the past year
US Steel and its competitors have lost billions in market value

Tech stocks and industrials have been getting a lot of the attention in the trade war, and for good reason. They are widely held bastions of globalization, subject to the whims of trade wars and tweets.

But steel, both the commodity and the publicly traded companies that make and sell it, is melting. This is not a new problem. It's been been happening for the past year as the trade talks have sputtered.

Hot rolled steel (the benchmark) reached an all time high of 4780 in September of 2018 and a record low of 1750 in February of 2016. But almost exactly a year ago, it started a pretty steady decline after several years of gains as the global economy expanded.

As goes steel, so go the companies that make and sell it. US Steel, which was once a Dow component and one of the most powerful companies in the world, is the unfortunate case study for this problem. It was already having issues before the trade war given competition from non U.S. companies that can make it cheaper and have less regulatory oversight. But the past year has taken a 78% bite out of the company's market value.

This chart, from Charlie Bilello, shows just how and when the melting process began for U.S. Steel in the past quarter. What was once the bastion of U.S. Industrial might is now a mid cap company worth less than $2 billion.

A Tale of Two Retailers

Dollar General jumps 10% on earnings outlook
Best Buy falls 9% on earnings outlook

Both companies reported earnings today that matched or beat analysts' forecasts, and both said they are bracing for more tariffs ahead. But investors clearly made up their minds on which company can survive a prolonged trade war.

To be sure, share of Best Buy were up 18% year to date, before this morning's announcement. It seemed to have weathered the trade war and infiltration of its market by Amazon. In store and online sales were growing, and consumers were getting to like the box retailer all over again. But this morning, the company said that 60% of the cost of the goods it sells go to China. It was already bracing for tariffs to be placed on about 15% of the electronics it sells, even though the Trump Administration delayed implementing those tariffs so as not to impact the Christmas shopping season. That didn't seem to matter today as investors couldn't sell fast enough.

Dollar General, on the other hand, which is effectively the Walmart of rural communities across the U.S., had one its best days as a public company. It beat analysts' earnings estimates and provided higher guidance for the rest of the year. It is not an electronics retailer and sells much cheaper goods than Best Buy, to be sure. It does feel the impact of tariffs, but nothing like a consumer electronics retailer feels it.

While it is silly to make a generalization after just one day about which companies will win or lose if the trade war continues without a resolution, it's hard to argue with a trend like this. Dollar General (DG) is the Orange line and Best Buy (BBY), is in Blue. They traded in tandem until the end of May, but have diverged widely since then.

More News:

Activision Blizzard Jumps to 2019 High After 'Warcraft' Reboot

Behind Roku's 376% Rise this Year

Time Is Running Out for Johnson & Johnson Bulls

chart courtesy www.koyfin.com

It was Dollar General's day. Oil drillers and refiners are continuing to relish this tight supply environment because it makes for better earnings.

Investors are still not smoking Altria's plan to recombine with Philip Morris. This could be related to a reported FTC investigation of JUUL, the electronic cigarette maker, of which Altria has a stake, or maybe they just don't like the merger idea. Dollar Tree, not to be confused with Dollar General, did not meet the same reception as its competitor.

Word of the Day:

Cost of Goods Sold (COGS)

Cost of goods sold (COGS) refers to the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses, such as distribution costs and sales force costs.

Cost of goods sold is also referred to as "cost of sales."

photo of Reitwagen replica sold at Auction for $9,000, courtesy Sothebys

Today in Motorcycle History

Aug. 29, 1885

Gottlieb Daimler registers his Reitwagen (riding carriage) as German patent DRP No. 36423. With its wooden chassis and revolutionary gasoline-powered internal-combustion engine, the Reitwagen is the worlds first motorcycle--and the first mechanized vehicle for personal transport.

https://www.daimler.com/company/tradition/company-history/1885-1886.html