Last week was a crazy week for the stock market. Once the dust settled by the closing bell on Friday, anyone on vacation that hadn’t seen the action or paid attention to the news would have figured out it was a ho-hum week and congratulated themselves for taking the week off.

Of course, it was more like a humdinger than a ho-hum as the US-China trade war moved into a new phase that includes open currency manipulation and conventionally moving farther away from the notion there will be a resolution. I think the market had already come to grips with the notion that a deal would be a long way off – many believe it will never happen.

Be that as it may, China allowed the yuan to move to 7/USD, which is considered a red flag by many, and a declaration of a currency war by the administration. Those developments roiled the market and have made the cloud of doubt over trade larger, darker, and more ominous. The saga continues!

Remember Earnings

The stock market made some remarkable bounces during the week as another factor beyond the trade war and the Federal Reserve’s influence on investing decisions: corporate earnings. Don’t look now, but the long-feared earnings recession isn’t going to happen. On the contrary, the results are looking very good.

Earnings Scoreboard

The second-quarter 2019 (2Q19), 450 companies have reported:

Revenue

• 56.6% beat consensus (long-term average 60%)
• Blended average: +4.7%
• Ex-energy: +5.2%

Earnings

• 73.3% beat consensus (long-term average 65%)

• Blended average: +2.8%
• Ex-energy: +3.5%

Guidance

• 54 issued negative third quarter (3Q19) warnings
• 19 positive (3Q19) guidance

• (f) Price-to-earnings (P/E) ratio: 17.1%

Eleven S&P companies will report this week that will include names to give us a better understanding of the impact of current tariffs and potential impact from proposed tariffs. Technology names and their percentage of sales in China include Cisco (CSCO) (16%), Nvidia (NVDA) (16%), NetApp (NTAP), and Applied Materials (AMAT) (19%).

John Deere (DE) is also reporting and will give insight into the farm equipment demand in the United States.

King Dollar

With China allowing its currency to weaken, the People’s Bank of China (PBOC) mitigated the impact of the trade war; it comes at a monster cost, which is the country’s economy. President Trump was very vocal about the negative impact of the strong dollar in a world of declining global currencies. While I’m inclined to agree with my friend Steve Forbes, we want the dollar to be strong. There are circumstances when it can be too strong.

If the Dollar Currency Index (DXY) were to dip toward $92.00, it would help U.S. corporations and investors, and it wouldn’t threaten its role as the world’s reserve currency.

The strong dollar is an earnings killer for multinational businesses like Procter & Gamble (PG). In its last earnings release, PG posted beats on the top and bottom, but the stock soared because of organic sales.  Nonetheless, look at how much stronger the results would have been if the dollar (FX or foreign currency impact) wasn’t so strong.

P&G 2Q19 Sales	Volume	Price	Mix	FX	Net
Beauty	+2%	+2%	+5%	-5%	+3%
Grooming	-1%	+3%	+1%	-6%	-3%
Health Care	+8%	+3%	+4%	-4%	+13%
Fabric & Home Care	+5%	+4%	+1%	-4%	+5%
Baby & Family Care	+1%	+3%	+1%	-4%	+1%
Total	+3%	+3%	+2%	-4%	+4%

Portfolio

Communication Services	Consumer Discretionary	Consumer Staples
1	3	1
Energy	Financials	Healthcare
1	2	1
Industrial	Materials	Real Estate
2	3	1
Technology	Utilities	Cash
2	0	3

Today’s Session

The major indices are lower as the Hong Kong protests weigh on the markets.  Hong Kong International airport cancelled all departures for rest of the day.  The violent protest has been ongoing since June. 

Also weighing on the markets is the continued uncertainty around the U.S.- China trade dispute. 

Comments

Short term thinking is the nemesis of humanity. Sure there may be short term economic pain due to the tarriffs, but the long term gains economically and more importantly in national security and international strength easily "trump" the short term pain (pun intended). We must give China heavy pain to stop intellectual theft and to increase national security from this communist menace. William L. Baumner III on 8/12/2019 11:43:29 AM

D. Trump had to try to negotiate with the Chinese to arrive at an evenly shared trading market. The Intellectual Properties had to be dealt with. The early negotiations, my guess, had only 1 purpose, to figure out what D. Trump wanted. The Chinese have no intentions to let the US having access to the Chinese market. The Chinese market leaders are approved “Oligarchs”. The China has total control and will not change soon. Many of the Chinese production will be redirected to other nations with less duties. Some will even be moved back to the US. The cost of the duties will not be totally at the US buyer expense. What will change the Chinese way to do business, is to have a new emerging competition. I believe a potential competition is possible. The Brexit can be the rebirth of the Commonwealth. The US will join and the cheap labor will come from India. It will be called the “All English-Speaking Common Market”. The main members will be: England, USA, Australia, New Zeeland, Singapore, India, plus a couple of other ex-Commonwealth members, plus why not Japan? This will be competition the Chinese will think twice about? Marcel Depart on 8/13/2019 8:33:14 AM

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