Quarterly Earnings and Tariffs

The on-going earnings season is 80% over. Mostly, as predicted by analysts, it has been good. Trump's tax relief has been a big part to the bottom line. Profits are up. This is reflected in the stock market as the short correction in February is far behind the rear view mirror. A new high was set on the S & P 500, the transports and small caps. It should be noted that the S & P did not hold price. This is one aspect that points out that the market does not have full conviction. This is why the January's high in the Dow has not been breached.

Not Happy...

Trump won't admit it in public, but he is unhappy that producers have not returned to America. The idea behind the tax break was to give manufacturers incentive to reopen plants and factories here in the US. This, so far, is not happening. He instituted plan B: Tariffs. This is why it is in the title.

Tariffs will either have to be considered until they become part of the economic picture for producers and consumers or they are dropped. The market thought that they were a bluff. Sebastian saw them as reality. He is correct. Now, outsourced contracts are being adjusted for price increases. In some instances the producers will adsorb the tax. In other cases they will raise prices and pass the cost to the consumer. The Fed will be watching closely. Who knows? In the future articles could include interest rates by the Fed designed to halt inflation. The Feds actions could be to slow the economy at the same time. You know if you drive to slow, you can get a ticket. If the Fed drives up rates too high, the economy slows. Workers get pink slips(tickets). I believe Trump is right. We must force producers home and then, our workers will make a living wage. They will be able to afford a car or a starter home and get out of debt. Then, our standard of living will begin to rise again. If his gambit loses, we all lose.

With that said there is other concerns that the gang here at Evolution of Democracy see as obstacles in the earnings report. We don't feature individual stocks so much, but we look at the sectors to give a complete market view and insight to our economy.

Drugs...

had a different meaning back in the 70s. Today, it needs a better adjective. We are talking earnings.  Merck had a bad quarter and it is trending down. Pfizer had good earnings, however they mentioned the strong dollar hurting profits. Big Pharma is under pressure from the opioids epidemic. Overall, earnings are good for drug dealers.

Nevertheless, the strong dollar is being mentioned more and more. It broke out above its trading range and it could test its highs, especially since the Fed is expected to raise rates again in September. Retail giant, P&G said costs are rising and the strong dollar is hurting them. Maybe they should bring their outsourced products home? Hanes is in the same boat. They outsourced and now, they complain about the dollar. However, Sebastian noted that Hanes lost a contract and that will hurt future earnings.

Automotive

Earnings are up, but sales won't reach 17m like in 2017. A report stated that the average price for a used car is at a record $20,000. Ouch! Another report on the big three American truck sales stated that in the near-term future, trucks will have a price tag over $50k. Double ouch!!…I love my 2002 Buick. Hang in there, baby because I can't afford those prices. In other news, Tesla could be in hot water with the SEC. The stock was halted due to a tweet by Musk(CEO). He mused that he is considering to take the company private. Just moments before this media outlet, someone purchased a huge amount of option calls. This is why I like charting. Someone always knows something. The stock reopened up $29 bucks. If you or I was that someone and we bought the .25 option call, it jumped to $9 dollars after the stock reopened. This will be news for awhile and Musk could be in trouble. I see Tesla hitting $261 before it stabilizes. JP Morgan sees $195.

Tech

There is two categories in tech. They are led by the FAANG stocks and the other is the chips. All the faang stocks did well except Netflix. During this quarter Apple hit an historic milestone. They became the first company to be valued at $one trillion dollars. Congrats to them. By the way here is a short litany of other evaluations of stocks from the past.
*1st company to be worth $one billion=US Steel.
*1st company to be worth $10 billion=G.M.
*1st company to be worth $100 billion=IBM.
Keep in mind that one-fourth of Apple's income comes from China and tariffs will cause pain. I'd sell at these prices and use the tax break to keep most of the profits.

The other half, the chip sector had mixed earnings. There are some clouds and analysts are coming out to warn that the dollar along with tariffs will hurt the next quarter. Chips led the market up and they could lead the market down.

Financials

Analysts love this sector. They always push these stocks. Bank of America had a good quarter, but Wells Fargo keeps shooting their own foot. Overall, this group is in a sideways trend. In a related issue Goldman Sacks(GS) CEO says buybacks will exceed $one trillion this year. This does not necessarily mean stock prices will rise because many go to options that the executives receive. These people are buying at market highs for their retirement fund. This is so wrong.
In a related aspect, GS, BAC and MS all expressed some doubts about the current bull market. They see too much rising debt, fear of trade wars, high evaluations and Fed rate hikes any of which could derail the market.

Retail

Had a strong quarter and with back to school and Christmas on the horizon, things are looking better for this industry that employs many, many people. The margins are thin in retail and the strong dollar could surprise to the downside, but confidence is high. Overall, this sector appears okay until January 2019. There are however casualties in the field. J. C. Penny is following Sears which is following Radio Shack into business oblivion. Other signs of future worries can be reflected in Home Depot(HD). They posted good numbers, but the market sold off the stock. The company announced that it will buyback $6B in shares. Nothing like buying at highs with shareholder money to keep the stock up. This is a lack of leadership or at least that is how we see this maneuver.

Housing

This is the most important segment because it stands for not only the American dream, but it is the most expensive purchase by a consumer. Toll Brothers had a strong quarter, but don't let a high end builder fool you about the market. They stated that California is slowing and they blame the tax limit deduction as the cause. There are many other ominous cracks developing in housing. Sebastian has reminded you that the housing model that begins with a starter home is no longer working. Builders are only constructing new homes for the upper middle class and higher. Rents consume too much of a paycheck for consumers. They cannot save to make a purchase. Student debt is also a burden to housing. Younger people are living with their parents, relatives or friends. This is a formidable obstacle. In addition, sales declined in three of the last four months. The busiest season is turning out to be a bust. Even high end homes are lowering prices to lure sales. A report shows 14% of listed homes gave a price reduction in July which is the heart of the selling season.
If the Fed continues to raise rates, housing will continue to decline. Already builders are crying about the price and cost to develop land. The lack of workers. The rise in the cost of materials. The clouds are building. After all this is hurricane season. In the back recesses of the market's mind, this is a worry.

Restaurants and Leisure

Eating out is at record levels and the restaurant industry had a strong quarter. There is ominous signs in the leisure business. Airlines were dropping in value due to fuel costs, however they recovered by raising fares. Ticket prices are rising, but the Fed ignores this sign of inflation. In addition, the leader in bookings posted poor numbers. Priceline, now Bookings Holdings(BKNG) dropped like a rock in water. Could you sleep at night after seeing your stock fall 5%? This stock was over $2,000 a share. It fell to $1942. It is now around $1840. Charts say $1700 is possible. In the first paragraph about the rally in the market, I stated that the market is not totally convinced. This is one example.

Food

I see rising prices all the time. The Fed says they don't. Profits were mixed. Many producers cited rising prices and concerns over tariffs. Campbell says the extra cost in aluminum for canning comes to $1.1B or one cent per can. This effects soda, beer and any metal users. Earnings in equipment makers like John Deere had a good quarter and gave a strong guidance going forward. Tariffs have not stopped farmers from buying equipment.

One can include staples in this category. Generally, the quarter was mixed. Producers cited rising costs, the dollar and trade worries. Kimberly-Clark will raise prices among others.

Energy

The industry had a strong quarter with the rising price of crude. However, recent consumer usage is down and a glut is building in the market. A consolidation at lower levels is on the horizon.

Mining

All mining companies are in decline as prices for all commodities suffered with the strong dollar and Dr. Copper demonstrated the fear of tariffs. The price is at multi year lows. Caterpillar was not effected. They posted record numbers. Miners still need equipment and infrastructure projects are looming to paint a bright picture.

All in all the quarter appears very strong and this should have given the market the push to pass the January's high. It didn't. It has tried and failed repeatedly. This says to me you can never go wrong taking profits. With September looming, I'd be very careful.