Memorial Day, Trade War & A Weekend Visitor

By Jeff Kelly on May 23, 2019

Memorial Day weekend beckons and, with it the promise of summer. I remember as a kid on the last day of school when that bell rang (yes, they actually had bells back in the day) and you were free. We had a seemingly endless stretch of time to swim, play and never have to even think about school. It remains one of the most powerful feelings of freedom I’ve ever known.

For troops in Afghanistan there is no summer vacation. There are no trips to the lake or the shore. There are no long weekends with family and friends. There are no beers at a ball game. As Americans today, we are enmeshed in arguments about things decided long ago. However, those things are being questioned because of those on the fringes of society and our enemies wish it so.

This weekend and the celebration of this holiday is about those who have sacrificed for our country, for us. It is about the selflessness of those that stormed Omaha Beach, those who traveled across the frozen ground of Korea, those who endured the heat of the Iraqi desert, and those whose locations we are completely unaware of yet they are sacrificing their lives to keep us safe. There are no Democrats or Republicans in the heat of battle. There are just those on your side and those on the other side.

Gratitude is a special gift. We have much to be grateful for, but you would not know it from the news or the temperament of our nation. Lets take a few moments this weekend between barbecues, soccer games and gatherings with friends to think about and remember those who have given so much to keep us strong and free. An old poem below but one I do believe in:

It is the Soldier, not the minister
Who has given us freedom of religion.

It is the Soldier, not the reporter
Who has given us freedom of the press.

It is the Soldier, not the poet
Who has given us freedom of speech.

It is the Soldier, not the campus organizer
Who has given us freedom to protest.

It is the Soldier, not the lawyer
Who has given us the right to a fair trial.

It is the Soldier, not the politician
Who has given us the right to vote.

It is the Soldier who salutes the flag,
Who serves beneath the flag,
And whose coffin is draped by the flag,
Who allows the protester to burn the flag.

On to an update on the markets. The equity markets look dreadful at this juncture. We have seen several levels of support broken. The good news is that the market has been down five of the last six days and the Dow Jones Industrial Average is down for the fourth week in a row. While this does not sound like good news, historically that performance has often led to a short-term rally. However, the forces pushing on the market are strong. We saw a small uptick in data out of Europe earlier this spring, but that is now gone. The data in the U.S. is still mixed, but as we head into the third quarter we are entering a period with the toughest comparisons of the whole cycle. This at a time when the economy is slowing and the trade war rhetoric is at its peak. We are looking for a more difficult period over the next 3 months.

Charts From The Week Past

The 10-year treasury yield has fallen to the lowest level since 2017.

We think it is likely the Federal Reserve will cut rates later this year.

Source: StockCharts.com

A staple in the construction of our market outlook is the four-quad process from Hedgeye.

The markets have been in Quad 3 for the bulk of 2019. This is favorable for equities such as energy, technology and emerging markets. We are now moving closer to Quad 4. This is less favorable for equities and more favorable for bonds, and bond proxies such as utilities and REITs.

Source: Hedgeye

The trade war is weighing on the market.

The slowing economy, and lower profit and sales growth aren’t helping either.

Sources: Bloomberg, Hedgeye

German business confidence is still heading lower.

Sources: IFO, Bloomberg

Some good news is we saw a nice rebound in truck tonnage April.

70% of U.S. goods move by truck.

Source: ATA

Global trade is getting hit hard.

But remember, trade war wars are “easy to win” according to the President.

Sources: BMO, CM, Macrobond

Further, the trade war is taking a toll on many other parts of the world.

South Korea semiconductor exports were -33.0% in first two weeks of May vs. -13.5% in April. Exports to China were -15.9% vs. -4.5% in April.

Sources: Bloomberg, Korea Customs Service

Short bets against the SPY (an ETF which tracks the S&P 500) have climbed to the highest levels of the year.

Eventually this will be fuel for the market if it turns higher. Shorts need to be covered (i.e. bought back), which will translate into investors buying at some point.

Sources: IHS Markit, Bloomberg

This is what it would look like if all threats made by the President were implemented.

The amount of damage this would cause is significant. Hopefully, he is just posturing.

Sources: U.S. Department of Trade, U.S. Customs

The trade war and other global uncertainties have the attention of European companies.

Sources: Barclays Research, Bloomberg Company transcripts

Oil demand fell in March for the first time since early 2017.

This is another gauge of worldwide economic weakness.

Sources: EIA, Bloomberg, Reuters, Australia Dept. of Energy, India ministry of Energy, China Customs, ANP Brazil

The dollar’s strength against the Chinese Yuan has not been good for world equities.

A move by the Yuan above 7 to the dollar would likely trigger some more risk-off activity.

Source: Bloomberg

Semiconductors are suffering on several fronts – trade problems, no new blockbuster devices and a general slowdown in world economies.

The industry is on track for the worst period since the financial crisis.

Source: Bloomberg

Capital expenditures are lower from a year earlier.

Significantly so because of all the trade uncertainty.

Sources: Wall Street Journal, Calcbench

Interest rates charged on credit cards are at all time highs.

This is another reason people dislike banks, which is an opportunity for innovative financial companies.

Source: The Daily Shot

The supply of residential real estate is far below historical averages.

This could be fuel for a future boom in home building.

Sources: U.S. Census Bureau, Hoya Capital

The European financials have missed the entire recovery since the lows in 2009.

This is a remarkable chart.

Source: Bespoke

Weekend Homework

Boyd: The Fighter Pilot Who Changed The Art Of War – A great read about someone you’ve probably never heard of.

John Boyd may be the most remarkable unsung hero in all of American military history. Some remember him as the greatest U.S. fighter pilot ever — the man who, in simulated air-to-air combat, defeated every challenger in less than forty seconds. Some recall him as the father of our country’s most legendary fighter aircraft — the F-15 and F-16. Still others think of Boyd as the most influential military theorist since Sun Tzu. They know only half the story.

Jocko Podcast 177: What To Do When You Fail. Dealing W/ Betrayal From A Bro. Motivation: Customers vs Money. Advice For New Leaders – From a former Navy Seal, this podcast deals with betrayal from someone close to you. It’s a great listen about honor, resolve and building a better you.

I hope you have a wonderful holiday weekend. We are meeting our daughter’s “significant others.” It’s a big deal! Wish us (or maybe him) luck! Also remember to take a few minutes to honor those who have made us free.