CWS Market Review – August 9, 2019

“When trade stops, war comes.” – Jack Ma

The trade war heated up again this week, and that shook the stock and bond markets. Gold is at a six-year high, while the yield on the 10-year Treasury fell to a three-year low.

The stock market recently dropped for six days in a row. The S&P 500 touched its lowest point in two months. There’s now talk that interest rates in the U.S. could go negative very soon. That’s already happened in much of Europe. I’ll tell you what it all means.

Also this week, we got our final two Buy List earnings reports for this earnings season. Becton, Dickinson had good news, while Disney did not. I’ll have all the details in a bit. But first, let’s look at the latest ructions in the trade war.

Interest Rates Are Plunging Around the World

Last week, the Federal Reserve cut interest rates by 0.25%. That was the spark in a series of mini-explosions that shook the market for a few days. President Trump tweeted that he was going to add more tariffs on $300 billion worth of goods from China. That move probably increased the odds that the Fed will cut rates again next month. In fact, some people suggested that the Fed could cut them by 0.5%. There’s also the chance that the Fed could do a surprise cut before the next meeting.

The People’s Bank of China, which is China’s Federal Reserve, struck back and allowed the yuan to sink below seven to the dollar (meaning a number that’s higher than seven to the dollar). This hasn’t happened in 11 years. Until now, the PBOC has defended the yuan at seven to the dollar. The yuan trades at the official rate inside China and at the unofficial rate outside China. (When in doubt, believe the price not controlled by the government.) Both markets had the yuan sinking below seven.

China also said it will no longer buy U.S. agricultural products. China used to be a major buyer of U.S. soybeans. China has a massive population to feed. The soybeans aren’t for people but for pigs. Half of the world’s pigs are in China. I don’t see the point of this move. American farmers will find new buyers. The only ones hurt will be poor people in China who will have to pay higher prices. China will turn to countries like Brazil and Russia to fill the void.

The problem with a trade war is that each action spurs a reaction, and that causes a counter-reaction. Small disputes can quickly escalate into something much bigger.

That’s why China’s currency decision caused a global freakout. It showed that China is fighting back against President Trump’s tariffs. After that, I tweeted to watch out for the next move, which would be the U.S. Treasury Department’s labeling China as a “currency manipulator.” A few hours later, that’s exactly what happened.

The stock market dropped nearly 3% on Monday. That’s really not that much for a one-day loss, but it was the biggest drop in several months, so it probably will have a larger psychological effect. Conversely, the bond market soared. The yield on the 10-year Treasury fell below 1.6% this week. That’s less than half the yield from November. The 10-year yield is now 30 basis points below that of the three-month yield.

This has brought up talk of a worldwide deflationary trend. All over the place, commodity prices are falling, with the exception of gold and silver, which are soaring (as is Bitcoin). Prices for copper, iron, oil and other commodities are down. The impact is being felt everywhere. In Japan and in several countries in Europe, one-year government bonds carry negative yields. Right now, about $15 trillion worth of bonds carry negative yields. That’s about one-fourth of the world’s total. In Germany, the entire yield curve is negative.

All of the recent events are reinforcing the current trend. The dollar is strong and may get much stronger. Last quarter, China had its slowest quarter of economic growth rate in 27 years. Lower commodity prices have an unexpected impact. For example, transportation companies can be negatively impacted. Also, trade routes are reestablished. Vietnam has done well thanks to President Trump’s trade policies. We’re witnessing a historic shift in interest rates.

If this trade bickering continues, there’s a real risk of a global recession. I don’t think the U.S. is in serious danger, but Europe may be. I don’t want to frighten investors. Our portfolio is in a good spot.

In fact, with the market being so nervous, our Buy List has performed very well lately. Of course, I mean that in relative terms. We outperform when everyone else gets scared. Our Buy List has outperformed the S&P 500 for the last 11 days in a row. For the year, we’re beating the market by 22.33% to 17.20%.

Now let’s look at earnings from Becton, Dickinson and Disney.

Earnings from Becton, Dickinson and Disney

On Tuesday, the last of our Buy List stocks reported results for the Q2 earnings season.

Before the opening, Becton, Dickinson (BDX) said they made $3.08 per share for the third quarter. That was three cents more than Wall Street had been expecting. This was a pretty solid report from Becton. Revenues rose 1.7% to $4.35 billion.

In May, the company lowered its full-year forecast, so there was some nervousness that it might happen again. Fortunately, Becton stood by its current range of $11.65 to $11.75 per share. The company expects constant-currency revenues to grow by 5% to 6%.

“Third quarter performance was strong. Our revenues highlight the breadth and diversity of the growth drivers in our portfolio, and we are seeing strength across all three segments,” said Vincent A. Forlenza, chairman and CEO. “As anticipated, our performance has accelerated, and we expect this momentum to continue. We remain confident in our outlook for fiscal year 2019 and our ability to deliver value to customers and shareholders.”

Becton has three major business segments. For Q2, BD Medical had constant-currency revenue growth of 6%. BD Life Sciences was up 5.4%. BD Interventional was up 5.2%. To give you an idea of the currency impact, BDX saw revenue outside the U.S. fall by 1.6% for the quarter. Adjusted for currency, it was an increase of 6.5%.

I suspect someone was expecting bad news because shares of BDX dropped off on Friday and again on Monday before the earnings announcement. The good results clearly mollified investors. BDX rallied on Tuesday, Wednesday and Thursday for a combined gain of 6.4%. This week, I’m raising my Buy Below on Becton, Dickinson to $260 per share.

After the closing bell, Disney (DIS) reported a big earnings miss. For Q2, the Mouse House earned $1.35 per share. That was 40 cents below estimates. I’ll confess, this was a big shock to me. I was expecting an earnings beat.

The story behind Disney’s Q2 is pretty complicated and not nearly as bad as the surface numbers suggest. Some of the problems are legacy issues that won’t be a factor in the near future. For example, Disney had incurred costs to complete the merger with Fox’s entertainment business. The Fox deal will still be an issue in Q3 and Q4.

Disney’s CEO Bob Iger said he thought the results from Fox, particularly the studio, were “disappointing.” The movie “Dark Phoenix” was a bomb at the box office. Iger said that he’s not worried about the merger. They knew it was a big deal, and it will have setbacks.

Disney has lots of big plans for the future. The company is ramping up investments in its streaming services. These could be big winners soon. In November, Disney will launch its bundled streaming package for $12.99.

Income at Disney’s U.S. parks fell due to investments for their new Star Wars expansion. Despite the earnings miss, there’s nothing to suggest that Disney’s current business strategy isn’t working. The latest Avengers movie is the highest-grossing film in movie history.

Shares of Disney fell nearly 5% on Wednesday but gained close to half of that back on Thursday. To be cautious, I’m lowering my Buy Below on Disney to $148 per share.

On our Buy List, we have three stocks with quarters than ended in July: Ross Stores (ROST), Hormel Foods (HRL) and JM Smucker (SJM). Ross and Hormel will report earnings on August 22. Smucker will report on August 27.

That’s all for now. Next week should be fairly quiet for economic news. I’ll be on the lookout for Tuesday’s CPI report. The market fears deflation, but I’m curious what the facts have to say. On Thursday, we’ll get reports on retail sales and industrial production. The last report on retail sales was pretty good. Let’s see if this trend continues. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on August 9th, 2019 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.