foxex: Slippery

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. U.S. markets slip as uncertainties linger

2. Oil prices fall 0.9% as traders weigh disruption to oil markets

3. The U.S. trade deficit shrinks to its lowest levels under Trump

4. Why trade deficits matter

5. Tesla's Musk dances as stock clears $470

Markets Closed

Dow
28,583.68 -0.42%

S&P
3,237.18 -0.28%

Nasdaq
9,068.58 -0.03%

VIX
13.79 -0.43%

Bitcoin
$8,060.67 +5.56%

US 10-Yr Yield
1.827 +0.88%

Markets Today

U.S. markets gave up today's early gains, closing lower across the board. Uncertainty is still in play as investors assess the potential fallout from the fatal U.S. attack on Iran's top military general last week. Oil prices fell nearly 1% as traders assessed the impact of the conflict between the U.S. and Iran. Gold futures edged up nearly 0.5%, but remain below yesterday's 7-year high. Data storage stocks Micron and Western Digital were among today's biggest gainers after the release of an analyst report touting their growth potential from the upgrade to 5G smartphones. Also, an oil exploration company finds something very precious off the coast of Suriname.

Headlines

The U.S. trade deficit contracted to $43.1 billion in November, the lowest level seen during the Trump administration, with much of the decrease coming from a reduction of the trade deficit with China. The deficit with China decreased $2.2 billion in November to $25.6 billion owing to a $1.4 billion increase in exports and an $800 million decline in imports. The fall in imports is not expected to last, but will likely contribute to stronger fourth-quarter GDP numbers. (More below)
Apache Corp. and Total SA announced the discovery of "significant" deposits of oil off the coast of Suriname, fueling investor excitement that it could be yet another major discovery in the region, following a major strike offshore of Guyana by Exxon Mobil. Shares of Apache soared more than 25% Tuesday - its biggest daily gain since 1973.
Eurozone inflation hit a 6-month high in December driven by a rise in the price of oil. Inflation was 1.3%, up from 1% in November, according to official figures. Food, alcohol, and tobacco prices rose the most in December (2.0%, compared with 1.9% in November), followed by services (1.8%, compared with 1.9% in November).
Goldman Sachs is expected to reveal an overhaul of its entire business at its first investor day at the end of the month, according to The Wall Street Journal. The legacy Wall Street bank has seen its stock price flatline in recent years despite efforts to move into consumer banking and less risky enterprises.
Tesla's Shanghai plant will begin manufacturing Model Y vehicles. The announcement was made at Tuesday's Model 3 delivery event. CEO Elon Musk was present. He predicted that "ultimately Tesla Model Y will have more demand than probably all the other cars of Tesla combined." (see below)
Nissan has said it will continue to take appropriate legal action against its disgraced former CEO Carlos Ghosn. The automobile executive, who was awaiting trial in Japan for financial misconduct charges, made a movie-worthy escape on Dec. 29 to Lebanon. Reports say he was smuggled out of the country in a box on a private jet. Japan has also issued an arrest warrant for Ghosn's wife.
Borden Dairy filed for Chapter 11 bankruptcy protection, the second big dairy producer to do so in the last two months.
The Iranian government announced that it had fired missiles at an American base in western Iraq to take revenge for the U.S. airstrike which killed Iran's top general.

Why Trade Deficits Matter

The trade deficit has seen a lot of attention in the past year as the U.S. and China have been entangled in a trade war. President Trump has devoted a lot of his presidency to the promise of reducing the trade deficit with China and other countries. He and his advisers have argued that renegotiating trade deals, promoting "Buy American" policies, and confronting China will shrink the trade deficit, create jobs, and strengthen national security.

A trade deficit is when a country's imports exceed its exports. It represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT), and looks like this on the blackboard:

Trade Deficit = Total Value of Exports – Total Value of Imports

As Harvard Economics professor Martin Feldstein explains, the reason for the deficit can be boiled down to the United States spending more money than it makes, which results in a current account deficit. That additional spending must, by definition, go toward foreign goods and services. Financing that spending happens in the form of either borrowing from foreign lenders or foreign investment in U.S. assets and businesses.

As the Council for Foreign Relations notes:

More government spending, if it leads to a larger federal budget deficit, reduces the national savings rate and raises the trade deficit. A portion of the budget deficit is effectively financed through a rise in the total amount Americans borrow from abroad.
The exchange rate of the dollar is important, as a stronger dollar makes foreign products cheaper for American consumers while making U.S. exports more expensive for foreign buyers.

The U.S.'s largest trade imbalance is with China. The United States ran a $419 billion goods deficit with China in 2018. The next largest trade deficit, at $151 billion, is with the European Union, followed by Mexico at $81.5 billion. If you are wondering why the Trump Administration has focused its tariff arrows on China; the EU through tariffs on wine, whiskey and cheese; and Mexico and Canada through the USMCA and the abolishing of NAFTA, look at the chart above.

As for the U.S. Dollar, the Trump Administration has been doing whatever it can to weaken it to make U.S. exports cheaper around the world. That strategy, and the trade deficit strategy, are both working right now.

Elon Musk is Dancing

18 months ago, Tesla CEO Elon Musk couldn't stay out of trouble. He'd run afoul of the SEC for his infamous, "Funding Secured" tweet. He openly (and legally) smoked marijuana on a popular podcast, and he was losing top executives who could not tolerate his antics or irascible leadership any longer. Tesla was the most shorted stock on the S&P 500 and its shares were mired in a downtrend.

This is Musk earlier today at the Tesla's Shanghai plant.

photo courtesy foxbusiness.com

Musk was clearly excited about Tesla's advancements in China, which include shipping out Model 3 electric vehicles made at its factory there. He must also be excited that Tesla shares crossed the $470 mark for the first time, giving the automaker an $82 billion market cap. That's the highest market cap for a U.S. automaker ever, surpassing Ford at its peak in 1999, and General Motors, before or after its bailout by the U.S. government in 2008.

chart courtesy marketwatch.com

More News:

JPMorgan Chase Earnings: What to Look For

Active Traders Waiting for Pullback in Consumer Staples

Judgment Day Approaches for T-Mobile and Sprint

(chart courtesy YCHARTS)

Oil extraction and production firm Apache rose an enormous 26.4% today, its largest single-day gain since 1973, when the Arab Oil Embargo caused oil prices to skyrocket. The spike came as the Apache announced that it had found "significant" oil deposits off the coast of Suriname. This find was part of a joint venture with French energy firm Total, and comes right on the heels of Exxon Mobil's development of a large oil field off the shore of nearby Guyana. Data storage manufacturing firms Western Digital and Micron Technology jumped today after a Cowen analyst upgraded them to "Outperform," because 5G devices will require more memory. Microchip Technology rose today after it offered increased sales guidance.

Alcoholic beverage maker Constellation Brands, which is scheduled to release earnings tomorrow, fell slightly today, implying investors may be expecting bad news.

Word of the Day

Balance of Payments

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

Credit: REUTERS / Rebecca Cook

Today in History

January 7, 1980

Today in 1980 President Jimmy Carter signed the Chrysler Corporation Loan Guarantee Act of 1979, which bailed out the U.S.'s third-largest automaker, which was facing bankruptcy. Oil prices drastically increased in 1979 due to the fallout from the Iranian Revolution. This decreased the demand for cars, especially the larger, less fuel-efficient cars that Chrysler was known for. This difficulty was compounded by increased competition from Japanese and German cars, which were often more fuel efficient. The oil crisis coincided with the Federal Reserve raising interest rates to fight inflation, which made car loans more expensive, further putting pressure on sales. This resulted in a buildup of inventory and a downgrading of Chrysler's debt by credit-rating agencies. In order to prevent the major economic shock that Chrysler going under would cause, Congress guaranteed $1.5 billions in additional loans made to Chrysler to help it recover. During the 2008 financial crisis, automobile sales were similarly hurt, and Chrysler received another bailout from the federal government. However, it still declared bankruptcy in 2009, before being purchased by Italian automaker, Fiat, in 2014.

Source: https://www.investopedia.com/articles/economics/chrysler-bailout.asp