 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. U.S. Markets Rebound from Monday's Losses 2. China Readjusts Currency Peg Higher 3. Gauging Investor Fear 4. Disney Misses Markets Closed
 AP Photo/Yam G-JunI Markets Today
A day after the worst stock selloff all year, markets made back a little under half their losses Tuesday following news that the Peoples Bank of China raised the Yuan to Dollar peg a bit higher into the 7:1 range where it sat prior to Monday. Larry Kudlow, one of the President's economic advisers told CNBC that the Trump is still willing to negotiate and is looking forward to hosting the Chinese trade delegation in September.
Corporate earnings are winding down, but have taken a back seat to news headlines, which are driving sentiment. That sentiment has led to 7 days of heavy volatility and the rotation from stocks into bonds and gold.
That said, the S&P500 is still up nearly 16% year to date - an impressive gain off of the lows of late December. But if you roll the calendar back even more, you'll find that the market is exactly where it was a year ago. While we've seen record highs, the drawdowns have been equally severe. That's characteristic of a news driven investing environment that is separated from fundamentals. Between the trade war and interest rate debates, the stock market has made a lot of noise, but basically gone nowhere in one full trip around the sun.  China, a Currency Manipulator? Late Monday, the U.S. Treasury Department officially named China a currency manipulator after the Peoples Bank of China devalued the Yuan in response to new tariffs imposed by the U.S. set to take effect on September 1st. While mostly a symbolic move, the naming opens the door for the Trump administration to consult with the International Monetary Fund to eliminate any unfair advantage China's currency moves have given the country.
Read more: U.S. Names China a Currency Manipulator
In a statement released by the U.S. Dept. of the Treasury, the department said, "China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market."
This is the first time the U.S. has labeled China a currency manipulator since 1994, and comes just four months after the U.S. Treasury chose not to make the formal designation as part of its semiannual currency report. Why it Matters? As we said, it's mostly a symbolic move, but an important one if the U.S. wants to leverage the weight of the IMF and members of the World Trade Organization to put pressure on China. The IMF would have to agree that China is indeed manipulating its currency to impact its favorability in global trade, and then work with other member countries to agree on how to proceed. That could take months or years. But the symbolism is important because it allows the Trump Administration to use the phrase over and over on the global media stage. If Trump has proven anything, he has proven that he likes to use labels or made-up names to denigrate his opponents repeatedly.
What's Next? China doesn't have to do anything to respond to the labeling. It has already instructed its state owned agricultural businesses to stop selling to U.S. customers, which impacts supply chains across the U.S. Midwest. If the Trump administration decides to raise the new tariffs it plans to levy on the additional $300 billion worth of Chinese imports from 10% to 25% in September, economists at Bank of America suggest China may respond by doing one or all of the following things:
Every one of these measures, including the increased U.S. tariffs, would represent a major escalation in the U.S. China trade war, which has suddenly become a 'Currency War'. The tariffs have materially decreased the amount of China imports to the U.S. to where it is no longer America's number one trading partner. More aggressive measures will certainly impact the GDP of both countries at a very vulnerable time.  Feeling the Fear The recent selloff in global markets, especially the U.S., is tied to investor anxiety, which makes sense. Uncertainty and unpredictability are kryptonite for investors, and we are swimming around in a big pool of it.
One measure of anxiety or investor fear that we often refer to is the VIX, or Volatility Index. It measures the short-term (30-day) market volatility of the option prices of the S&P 500 Index (SPX), taken from a range of both call and put options.
(Reminder: 'Puts' are options trades that bet on lower prices ahead. 'Calls' are options trades that bet on higher prices ahead)
VIX levels above 30 generally tend to indicate high volatility; those below 20 tend to indicate low volatility.  As you can see, it has been peaking over the past week and a half since Trump announced the new round of tariffs on China. It was at full tilt yesterday during that selloff, but has settled a bit today.
Bank of America's Technical Research team charted the 5-day put-to call ratio, and took it all the way back to 2014 for perspective.
While this recent bout of anxiety matches levels we haven't seen all year, it barely measures up against the fear we felt back in late December when the market fell into bear territory for a few days. Anxiety is higher than it was during the mini selloff in June, but it's still not that high compared to other market moving events since 2014. It's sometimes useful to have the historical perspective when we are faced with uncertainty and sour sentiment in the stock market. Chart courtesy of BofA - Zoom in to see key dates.  Disney Misses on Earnings - Shares Fall
Disney seemed to be the media company that couldn't miss. It has 5 of the top 6 highest grossing films of all time, and a blockbuster slate on tap for the rest of the year. It opened its Star Wars theme park this year, and it's on the verge of launching Disney+, its new streaming network that has every movie anyone under 35 wants to see.
Its third quarter earnings, however, badly missed analysts' estimates, as the media giant pulled in $1.35 per share against the $1.75 estimate from analysts. Revenue came in at $20.25 billion, versus the $21.47 expected. Disney said attendance at theme parks were lower than expected, but all other divisions appear to have performed well.
Shares fell 4% after-hours, but I have this sense that investors may change their tune once they read the full earnings report. Disney made a change in its accounting that delays revenue recognition for some of its businesses. It also incurred a $207 million charge for severance packages relates to its $21 billion acquisition of 21st Century Fox. 
chart courtesy www.koyfin.com  Transdigm Group Inc. (TDG) saw its shares pop nearly 14% today as the maker of specialty aircraft products reported much better than expected earnings and declared a special one time dividend of $30 for each share of common stock. Make no mistake... this is not normal. Video game maker Take-Two Interactive bounced back after yesterday's selloff when Trump blamed the recent mass shootings on violent video games and the internet. The company also reported strong earnings and sales growth earlier today.
 Pharmaceutical and health care companies traded lower today as news circulated about a potential $10 billion settlement related to the opioid crisis. This is just the beginning of these talks, but given today's reaction, things could get worse.  A slightly better day for global markets today - except for Peru and Australia. Word of the Day A dead cat bounce is a temporary recovery from a prolonged decline or a bear market that is followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. Frequently, downtrends are interrupted by brief periods of recovery — or small rallies — where prices temporarily rise. The name "dead cat bounce" is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.  image FRB.gov (Volcker is on the left) Today in Financial History Aug. 6, 1979: Paul Volcker takes office as Chairman of the Federal Reserve Board. Inflation, the chief destroyer of America's household wealth, will soon be on the run -- and interest rates will drop almost continuously for the next twenty years, creating a stock-market boom and a flood of new home ownership.
At 6'7, Volcker is also the tallest Fed Chair in history, although that's meaningless. It's just notable when you meet him for the first time.
Incidentally, Volcker joined former Fed Chairs Janet Yellen, Ben Bernanke and Alan Greenspan in submitting an editorial column to the WSJ today, stressing the importance of the independence of the Federal Reserve. http://www.ny.frb.org/aboutthefed/PVolckerbio.html
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Tuesday, August 6, 2019
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