foxex: Small Progress

The Market Sum | Insight after the bell

By James Early

Wednesday's Headlines

1. U.S.-China Trade Talks: Low Expectations, Except for Soybeans

2. Chinese Backlash Grows -- Along with Hurt Feelings

3. Turkey Attacks Syria. Oil Prices (Barely) Rise

4. Pay $8 billion to Man Who Grew Breasts, Says Jury to Johnson & Johnson

5. Fed's September Meeting Minutes: Recession Fears and Liquidity Love

Markets Closed

Dow
26,346.01 -+0.70%

S&P
2,919.40 +0.91%

Nasdaq
7,903.74 +1.02%

VIX
18.64 -8.09%

Bitcoin
$8,591.58 +4.63

US 10-Yr Yield
1.59 +3.38%

Image: Daniel Prudek / Getty Images

Markets Today

S&P up 0.91%
DJIA up 0.70%
Nasdaq up 1.02%
Apple up 1.17%
Johnson & Johnson down 2%

When you're down, everything looks up. At least that's how the morning started, following Tuesday's 1% drop in the S&P 500 on increased U.S.-China tensions. The market remained up throughout the day, less on rebound reflex and more on optimism that China may be willing to accept a partial deal in today's trade talks if the U.S. is willing to hold off its threatened October 15th tariff increases. That optimism waned slightly on reports that Chinese negotiators' enthusiasm had itself waned, but on balance, markets closed in the green. In affairs both domestic and international, something is better than nothing.

Apple's stock sidestepped mainland animosity at its App Store (see our story below) to net out a 1.2% today after a Canaccord Genuity analyst hiked his price target to $260 per share. Apple is $227 now.

And while an $8 billion jury verdict might be crushing news to you and me, for Johnson and Johnson, it only meant a 2% dip in stock price. That's either strength or belief that the $8 billion payout will never happen (hint: it's the second one).

But today's market was focused on the U.S.-China trade talks, and with low expectations coming in, rumors of small progress were enough to bring decade-long bull spirits back. At least a little.

The 13th Round of Trade Talks: Have Modest Expectations

Ever have the feeling that what you're about to do isn't going to work, but you still go through the motions of doing it anyway?

I may or may not have this feeling frequently, but if you're a U.S. or Chinese trade negotiator, you have it today. With new U.S. tariffs on Chinese imports kicking in on October 15th, negotiators meeting today in Washington DC are expected to do something. But "somethings" have been elusive since May as the two sides rub up against non-compromisable issues.

Then again, as a marriage therapist might say (so I hear): At least they're talking.

Former Chinese trade official Huo Jianguo told Bloomberg today: "There might be a big breakthrough in the coming talks." This would be wonderful if Huo weren't a former trade official. China is about to see its slowest growth since 1990, and U.S. manufacturing output is dancing with 2009 recession-era figures. As recently discussed in Market Sum, in gestures presumably aimed at increasing China's motivation to deal, the U.S. Commerce Department added 28 Chinese firms to its blacklist for their role in helping the Chinese government's suppression of Muslim minorities in its northwestern Xinjiang province, and the U.S. State Department restricted visas for a yet-to-be-declared number of Chinese officials involved in the suppression.

The economic irony: Despite the trade war, despite the tariffs (on $550 billion of inbound goods and $120 billion of outbound goods), despite the cross-Pacific animosity we read about, the U.S. trade deficit with China widened 1.6% to nearly $55 billion for August.

Economics is powerful stuff, folks.

The Financial Times is reporting that China may up its U.S. soybean purchases from 20 million tons annually to 30 million. That's good for Chinese pigs -- big consumers of American soybeans -- and good for U.S. soybean farmers. But proprietary Investopedia analytical methods (read: ballparking soybean prices a $366 per metric ton), show that this equates to $3.66 billion in additional China-to-U.S. purchases. That's less than 4% of the roughly $120 billion of total stuff China bought from the U.S. in 2018. That's something. But it's not the "big deal" that President Donald Trump wants. No wonder progress has stalled.

Image credit: YCharts

Hurt Feelings

Speaking of non-compromisable things, the backstory-turned-headline of American free speech vs. Chinese hurt feelings continues to draw out nerves between the two countries -- nerves that can be traced to different minds.

The NBA fallout continues, with 11 of the league's local partners -- including Tencent, which broadcasts the games -- having suspended or ended relations with the league. As we discussed in yesterday's Market Sum, Houston Rockets General Manager Daryl Morey tweeted a pro-Hong Kong democracy slogan, which the NBA, which scores $4 billion annually from China, initially rushed to apologize for before clarifying that it supports free speech.

China obviously doesn't.

And China does not mind using state media to guide popular opinion. Apple is now taking heat in the mainland for allowing an app HKmap.live to be downloaded by Hongkongers in its app store. This app allows users to crowdsource the locations of both police and protesters. Chinese newspaper People's Daily calls Apple's decision to allow it in its App Store "a betrayal of the Chinese people's feelings."

The People's Daily also blasted Apple for allowing "Glory to Hong Kong" -- a song frequently sung by Hong Kong protestors -- to be available for download in supposedly democratic Hong Kong. Undoubtedly, this also hurts feelings.

iPhones sold in Hong Kong already don't have the Taiwan flag emoji, so the precedent of the company catering to mainland pressure outside the mainland is not entirely unprecedented. Apple's sales in China -- where it derives 17% of overall revenue -- fell 4% this quarter, and that's on top of a 22% drop the prior quarter. While hurt feelings and tariffs may cause further dents, the real damage is commercial: Chinese phone makers are taking Apple's market share -- in particular Huawei, as the chart below shows.

But unlike NBA broadcasts and Apple's market share in China, the tension of international companies complying with democratic values versus complying with the Chinese government is not going away anytime soon.

Image credit: Canalys

Turkey Attacks Syria. Oil Prices Rise -- Barely

Mideast Conflict Increases Oil Prices

Yes, this sort of headline could have been written nearly any year in recent memory. But it's no less real today, after Turkey began military operations against Kurdish fighters in northeastern Syria -- this itself notably coming after President Trump's decision to withdraw U.S. troops from "endless wars," including this one. Trump's decision met heavy bipartisan criticism, but with politics outside our purview, the relevant angle here is oil price movement. Or lack thereof in this case. At least so far, both Brent and the usually cheaper West Texas Intermediate oil prices were up less than $0.20 per barrel each, to $58.43 and $52.77, respectively.

This isn't because the conflict is small beans. It's because the U.S. has been pumping out and storing enough oil to offset the bad news. Crude production stateside rose to a record 12.6 million barrels per day last week, and while inventories aren't quite above their 534,000-barrel record set in 2017, at 426,000, they're close by historical standards -- and high enough to compensate for the recent Saudi drone strike and, so far, Turkey's incipient strike.

So in a sense, the world has more oil than bad news about oil.

Image credit: U.S. Energy Information Agency

Pay $8 billion to Man Who Grew Breasts, Says Jury to J&J

When you have thousands of plaintiffs suing you regarding one of your drugs, seeing a jury award $8 billion to the first is not a good start.

But 26-year-old Nicholas Murray, if a Philadelphia jury has its way, will now have $8 billion in addition to the breasts he grew while consuming J&J subsidiary Janssen's antipsychotic Risperdal, which his counsel claimed did not come with an adequate warning about the breasts. Side effects are a real and regrettable part of medicine and should of course come with clear warnings. Far be it for me to comment on what's appropriate here, but let this former valuation wonk note that the Ferrari 488 is roughly $250,000. For perspective, the jury feels 32,000 Ferrari 488s would be a fair punitive damage for this issue. That's 32,000 more than I have, if anyone's counting.

Not surprisingly, J&J called the verdict "excessive" and plans to appeal. J&J's stock is only down a few points today, so it's safe to say that the market expects actual payouts to be a few 488s shy of what this Philadelphia jury awarded.

Image: China Photos / Getty Images

Fed Officials Fear Recession, Love Liquidity

The S&P 500 is up roughly 20% for the year, but the Fed's September meeting minutes -- released weeks later in keeping with the Fed's belief that investors can't handle the truth in real time -- show a Fed concerned with a potential U.S. recession. Big surprise, right? Well, the quarter-point interest rate cut was passed with a divided 7-to-3 vote. Two officials, in fact, wanted a half-point chop. In other words, with economics, even the best minds aren't sure what to do. Then again, the mixed Fed may have been a harbinger of mixed results: Since the meeting, the U.S. has had poor manufacturing data but also the lowest unemployment -- 3.5% -- in 50 years.

A technical point that the market seems to like today is that the Fed seemed concerned with short-term funding dislocations related to the Fed's prior shrinking of its balance sheet. These days, problem solved: Not only will the Fed be growing its balance sheet (by buying Treasuries) once again, but September minutes referenced several officials' interest in establishing a "standing" repurchase facility to facilitate short-term financing in times of crunch. This sounds incredibly boring, but the "repo" market is huge, and its freezing was a major cause of the 2008 financial crisis in the U.S., so what's good for the repo market is good for the country.

Today's Market Sum is guest written by James Early.

More News:

Why Skepticism Is Mounting About Bitcoin

5 Reasons Energy Stocks Could Surge

Charts Suggest Large-Cap Growth Stocks Are Headed Higher

(chart courtesy YCHARTS)

Sportswear maker Under Armour rose 4.2% today. Oil and gas, exploration and production company Hess also had a good day, gaining 3.6%, as did electronics manufacturer Keysight Technologies, which finished the day up 3.5%.

Fashion company L Brands fell 2.9% today while cereal manufacturer General Mills slipped 2.1%. As mentioned above, medical conglomerate Johnson & Johnson dropped 2.1% losing a suit in which the jury awarded $8 billion to a man who allegedly developed breasts as a side effect of J&J drug Risperdal, a drug used to treat schizophrenia.

Word of the Day

Repurchase Agreement

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day.

photo source: Walter Sanders/Getty Images

Today in Blanket History

October 9, 1946 :

Like surrounding yourself with an electromagnetic field? Thank this day in 1946, when retail-ready electric blankets as we know them went on sale, according to Msn.com.

So what's a non-retail-ready blanket? Glad you asked: Simpler iterations sans temperature and safety controls were used in tuberculosis sanitariums for 20 years prior, when breathing in cold night air was thought to be good for TB. And is that electromagnetic field good for healthy folks? Despite longstanding rumors, no empirical evidence linking the blankets to cancer has ever been discovered. Male fertility is a different story.