foxex: Stuffed

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. U.S. markets trade lower on manufacturing weakness
2. Trump launches new tariffs on steel from Brazil and Argentina
3. Cyber-shoppers spend record amounts on holiday deals

4. FAANG stocks still rule the roost

5. Remembering Enron

Markets Closed

Dow
27,783.04 -0.96%

S&P
3,113.87 -0.86%

Nasdaq
8,567.99 -1.12%

VIX
14.91 +18.15%

Bitcoin
$7,316.33 -0.93%

US 10-Yr Yield
1.836 +3.38%

credit: REUTERS / Andres Stapff

Markets Today

The nasty Nor'easter that blew into the Eastern Seaboard today was accompanied by a full belly of negative investor sentiment as U.S. markets suffered their worst losses since October. Weak manufacturing data out of the U.S. plus a new round of tariffs on steel and aluminum from Brazil and Argentina. The only S&P 500 sector with positive returns today was oil due to more potential production cuts ahead of the OPEC meeting, set to begin in Vienna this week. December is traditionally a peaceful month for stocks, but that certainly wasn't the case last year, and it definitely isn't today.

Headlines

Manufacturing activity in the U.S. continued to contract last month, according to the Institute for Supply Management. The ISM Manufacturing Purchasing Managers Index PMI dipped to 48.1 in November. It was the fourth straight month of declines, and while manufacturing only makes up about 20% of GDP, the continued declines are raising doubts about the overall strength of the economy despite waning recession fears.
President Trump said this morning he will raise tariffs on metal imports from Brazil and Argentina. In a tweet, he said: "Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries." (More below)
On Sunday, Chinese trade officials reiterated they would not sign phase one of the trade agreement with the U.S. unless existing tariffs are dropped. As a reminder, a new set of tariffs on Chinese goods, mostly electronics, will go into effect on Dec. 15.
China's manufacturing Purchasing Managers' Index (PMI) surprised analysts by rising from 51.7 in October to 51.8 in November, according to Caixin/IHS Markit. The pace of improvement was the strongest since Dec. 2016. Output and new orders saw increases and employment was stable. However, stricter environmental policies and market uncertainty weighed on business confidence, which slipped to a five-month low. China's official manufacturing PMI climbed to 50.2 in November from 49.3 in October, the first expansion since April.
Goldman Sachs is reportedly not keen on setting strict profitability targets or discussing its consumer banking efforts at its first Investor Day in January. According to a Financial Times report, the bank will steer the conversation toward its core Wall Street businesses and announce details of its plan to create a new merchant banking division with $135 billion of assets under management.
Oil prices rose more than 1.3% as investors expect existing cuts to extend through mid-2020 and were buoyed by the health of China's manufacturing sector. The Wall Street Journal reported that Saudi Arabia will push for OPEC and its partners to extend restrictions on oil output through mid-2020 to help drive interest in the Saudi Aramco IPO. The cartel and its Russia-led allies, called OPEC Plus, are set to meet in Vienna on Dec. 5 and 6, and they will debate whether to prolong their agreement to reduce output by 1.2 million barrels a day.
Twitter and Square's Jack Dorsey says he will be moving to Africa for three–six months of the year. While Africa is a hotbed of mobile commerce, investors of both companies are questioning how effective he will be running those firms from a different continent.

Trump's Heavy Metal Tariffs on Brazil and Argentina

In a move that surprised many, including the political leaders of Brazil and Argentina, President Trump said this morning he will raise tariffs on metal imports from Brazil and Argentina. In a tweet, he said: "Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries."

Both the Argentine peso and the Brazilian real have been declining against the U.S. dollar, as have most global currencies. Currency manipulation happens when countries purchase U.S. dollars to weaken their own currencies, making goods on international markets artificially cheaper, but both Brazil and Argentina have been net sellers of the dollar as those countries face rampant inflation. Neither Brazil or Argentina are on the U.S. Treasury Dept.'s list of currency manipulators or have been labeled as such, as is the case with China.

While the U.S. imports a relatively small amount of aluminum and steel from Argentina, imports from Brazil have been on the rise—especially over the past year as the U.S. and China have been in a trade war. Imports of steel from Brazil are up 19% (see chart above) in 2019 alone. Trump and Brazilian President Bolsonaro are said to have a good relationship, and the latter said he has an open line of communication to the U.S. president. It might be a good time to test that.

chart courtesy Bespoke Investments

FAANGs Still Dominate

We've written a lot about the influence of the FAANG stocks on the overall market in the past two years for a reason. They dominate the U.S. equity indexes, ETFs, and most growth portfolios. The bigger they get, the more influence they have on the overall market. If you add Microsoft to the list and take out Netflix (call it the FAAMGs), those stocks alone have accounted for a full 25% of the S&P 500's 25% gain so far this year. Plenty of other stocks have outperformed the FAAMGs, but they just don't have the market caps to influence the overall market.

If you are an index fund or ETF investor who is long on U.S. stocks, you can thank these companies for your returns this year.

More News:

The Bear Case for Surging Netflix

AeroVironment Breaks Out After Analyst Upgrade

How a Holiday Bull Market Could Reap Big Gains for Investors

chart courtesy YCHARTS

Oil drillers rallied today on the news that OPEC will support more production cuts at its meeting at the end of the week. While less production seems bad for business, less production usually translates into higher prices for crude oil and other commodities, which helps improve these drillers' profit margins.

Apache Corp. was one oil and gas company that did not participate in the energy sector's rally today. That's because Apache reported disappointing results from its Suriname project, which is core to the company's future success. L Brands, which is the parent company of Victoria's Secret, continues to face challenges on sales and strategy, even in its busiest season.

Word of the Day
Cyber Monday
Cyber Monday is an ecommerce term referring to the Monday following the U.S. Thanksgiving weekend. As brick-and-mortar stores do with Black Friday, online retailers usually offer special promotions, discounts, and sales on this day.

U.S. shoppers are expected to spend $9.4 billion shopping online today, up from a record $7.9 billion last year. Last year the nationwide average order was $138, and retailers lost up to $187 million in potential sales due to visitors to their sites seeing an out-of-stock message. The term "Cyber Monday" was first coined in 2005 by Scott Silverman, a former executive director at Shop.org, for a press release.

Gregory Smith / Getty Images

Today in History

December 2, 2001

Enron files for bankruptcy. The conspiracy and the magnitude of the crime were so deep that the FBI created a special task force to handle it. Here's the FBI's account:

"...The collapse of energy company in December 2001 precipitated what would become the most complex white-collar crime investigation in the FBI's history.

Top officials at the Houston-based company cheated investors and enriched themselves through complex accounting gimmicks like overvaluing assets to boost cash flow and earnings statements, which made the company even more appealing to investors. When the company declared bankruptcy in December 2001, investors lost millions, prompting the FBI and other federal agencies to investigate."

The sheer magnitude of the case prompted creation of the multi-agency Enron Task Force, a unique blend of investigators and analysts from the FBI, the Internal Revenue Service-Criminal Investigation Division, the Securities and Exchange Commission, and prosecutors from the Department of Justice.

P.S. If you are looking for a great book on the rise and fall of Enron, I recommend the masterful, Smartest Guys in the Room, co-written by Bethany McLean and Peter Elkind. It was also turned into a documentary that was nominated for an Oscar.