China is NOT Going to Play Dead, Another Whistleblower Emerges and Earnings Season Gets Ready to Kick off

Things you need to know.

• China not rolling over to play dead

• A second whistleblower emerges with hints of more to come

• Earnings season getting ready to kick off

Good morning to our friends in North & South America, Good afternoon to our friends in Europe and Good evening to our friends in Asia….no matter where you are in the world – thanks for stopping by. 

Stocks staged another comeback on Friday after the NFP (Non Farm Payroll) report suggested that we are creating enough jobs on a monthly basis – that there is NOTHING to worry about – No recession, no crash, no angst, no nothing….just bright sunny days ahead…..Unemployment?  Oh, yes, that dropped too to levels not seen since December 1969!  Unemployment fell to 3.5% down from 3.7%, while payrolls for both July and August were revised UP – another bullish sign…. completely wiping away any fear that the slowing ISM Manufacturing number which spooked the mkts on Tuesday will take its toll on the US economy.  Remember – while we do pay attention to manufacturing – it is but a small piece of the US economy – Services is what drives us, and the ISM Services report is still holding above the 50 line – suggesting ongoing expansion.  Now, the trendline continues to get weaker, which is not good, and this gives the FED the ‘permission’ to continue to cut rates as expected and that is what excited mkts. By the end of the day – the Dow surged higher adding 372 pts or 1.4%, the S&P raced ahead by 41 pts or 1.4%, the Nasdaq rallied by 110 pts or 1.4% and the Russell tacked on 14 pts or 0.96%. 

Now over the weekend - news that the Chinese have no intention of signing a broad trade deal hit the tape.  Their negotiations this week will not include any talk of reforming Chinese industrial policy or gov’t subsidies – both issues that are at the top of the Trump Trade Train.  This decision most likely a direct result of Trumps proposal to limit US investment in China – something that WH Trade Policy Director Petey Navarro disputes – calling it ‘fake news’. Either way, the Chinese are not going to roll over and play dead at all.    Remember that the next set of negotiations are to take place in DC on Thursday/Friday this week, so this news is putting pressure on global mkts overnight and this morning. 

The other bit of news that is adding pressure to the tone is that there are now ‘multiple whistleblowers’ that confirm Donny’s dealing with the Ukraine. Mark Zaid – the lawyer representing Whistleblower #1 now confirms that his firm – Compass Rose Legal Group – now represents Whistleblower #2 and Andrew Bakaj – another lawyer for the same firm confirms that “my firm and my team represent multiple whistleblowers.  There are definitely multiple whistleblowers’”.  Multiple?  Does that mean more than 2?  I mean a ‘couple’ means 2 – but multiple usually means more than that.  What makes #2 interesting is that he (or she) supposedly has direct knowledge of Trumps conversation with the Ukraine’s President Zelenski vs. #1 that has secondary knowledge of the call – and while this political drama is interesting to watch – in the end – it carries a lot of risk for both sides and it means nothing for stock prices.

And we are now on the verge of 3rd qtr earnings season and as usual – analysts all around the street are now jockeying for position as they cut their estimates – due to company guidance -  attempting to scale back expectations ahead of the formal start of the quarterly ‘beauty pageant’.  And it is this weakening of estimates that will be the next catalyst for the mkts direction as investors around the world worry about a global slowdown that appears to now be infecting the US macro data.  Look – a lot of companies have tried to be proactive – warning investors that earnings may not meet the expectations (thus the analyst cuts).  Expectations are for earnings to fall by 4% in the 3rd qtr y/y.  And if that is the case – then that would be the largest y/y drop since 2016.  But we know this – ‘expectations are for earnings to fall….’

Now some companies will use the stronger dollar to try and soften the blow because a stronger dollar negatively impacts the big multinationals.  And to that I call BS!  Every big multinational and every analyst out there knows that the dollar can negatively or positively impact earnings.  It is not a surprise at all, so a stronger dollar should have been figured into the earnings estimate’s calculations – which will have a negative effect – but that is known – that should not be a surprise.  So, for companies that disappoint and then point to a stronger dollar as the culprit, I say full stop.  You can’t blame the stronger dollar on the fact that you missed your own estimates…. you can use the stronger dollar to guide your estimates lower – and that is different than missing the estimates and then blaming the stronger dollar – capisce?  And by the way – investors that invest in big multinationals understand the impact that both a weaker and stronger dollar has on the bottom line. 

This morning we find that US futs are under pressure   – Dow futs are down 85 pts, S&P’s are lower by 9, Nasdaq lower by 23 and the Russell giving up 5 pts.  China trade, impeachment, coming earnings, estimates for 3rd Qtr GDP now running at 1.8% down from 2% and a survey by the National Association for Business Economics (NABE) – that got released this morning – all impacting algo functionality.  The poll – conducted in mid-September - now has 80% of the economists surveyed expecting the risk of a recession to rise – why?  You guessed it – the ongoing trade war.  This contrasts with the 60% that expected a recession back in June.   But what does this really mean?  So what?  They expect a recession – Brilliant!  Everyone expects a recession at some point – surveys like this do nothing other than create angst.   And btw – what are you supposed to do with this information now?  Change everything? 

Look – last week – stocks broke both short and intermediate term trendline supports at 2950 and 2927 falling to 2910 – by Friday we managed to retake 2950 – but this morning – the concerns are once again going to force us to test those trendline supports again.  I would not be surprised as we enter earnings season to see the mkt test lower to see where the bodies lie.  But so much hinges on the headlines and how the algo’s react to them.  Stay tuned and look for the value in names that have gotten beaten up.  Talk of a Warren nomination is now starting to impact a range of sectors – healthcare at the top of the list – and while it is still too early to make that bet – the algo’s may overreact creating opportunity for the savvy investor. 

Eco data this week includes: Tuesday we get the  PPI (Producer Price Index)  report -  m/m - exp of +0.1%, Ex food and energy m/m of +0.2%,  PPI y/y exp of +1.8%, Ex food and energy y/y of +2.3% - and this reports speaks directly to the level of inflation….This index tracks the cost of production from the sellers perspective – while the CPI (Consumer Price Index) tracks the difference in cost from the consumers perspective.  As the cost goes up – it is regarded as inflationary – because the producer will pass the increase in cost along to the consumer. 

On Thursday we will get the CPI report – m/m of +0.1%, Ex food and energy m/m of +0.2%, while y/y is expected to be +1.8% and Ex food and energy y/y of +2.4% - both of these reports if they come in as expected would be in line with the prior reports.  If they are stronger then expect to hear about how inflation may be getting ready to rear its ugly head (Not what I expect to hear at all.)

On Wednesday – we will hear from the FED – with the release of the FOMC mins and expect Jay Powell to clarify any of the confusion that these mins create.

 

Spinach & Edamame Pesto 

For this you need fresh trimmed and cleaned baby spinach, frozen edamame beans, Fresh Parmegiana, olive oil, garlic, s&p, and toasted pignolis nuts

In the food processor - add, 3 handfuls of spinach, 2 cloves of garlic, olive oil and chop, add more spinach and more oil and chop until you have chopped all the spinach.  Next add in a handful of edamame beans (you will have to put them in a pan of boiling water first and let them all rise to the top before they are done – once done – rinse under cold water) and Chop.   Now add in two handfuls of parmigiana cheese and some of the pignolis nuts and chop again.  You want a creamy consistency...if you need to add more oil - go for it. Repeat this process until you have enough pesto sauce.

Bring a pot of salted water to a boil. Add the linguine and cook until aldente.  Strain - reserving a mugful of water.  Add back to pot - add back a bit of the water and stir...now add the pesto sauce and toss.  Before you serve – put some of the reserved edamame beans on top and serve immediately - have more cheese on the table for your guests. Delicious.