Author: Dorian Holden

It looks like “phase one” is almost a done deal.

Chinese leader Xi Jinping just said the deal is beneficial to both the U.S. and China, seeking to sign off on it as soon as possible.  

“The first-phase economic and trade agreement reached between the U.S. and China is a good thing for the U.S., China, and the entire world,” he said. “Both the U.S. and Chinese markets and the world have responded very positively to this. The U.S. is willing to maintain close communication with China and strive to sign and implement it as soon as possible.”

President Trump seems pleased with the progress, as well.

“Had a very good talk with President Xi of China concerning our giant Trade Deal. China has already started large scale [purchases] of agricultural product [and] more. Formal signing being arranged. Also talked about North Korea, where we are working with China [and] Hong Kong (progress!),” as tweeted by the President.

Treasury Secretary Steve Mnuchin said the two countries could sign the deal by January 2020.  “It’s just going through what I would consider to be a technical, legal scrub, and we’ll be releasing the document and signing it in the beginning of January,” Mnuchin said.

Farmers are Skeptical of $50 Billion Promise

At the moment, Trump has said China will buy $50 billion worth of farm products, as part of the trade deal. However, farmers are skeptical. 

“Those numbers are almost unfathomable,” said Mary Kay Thatcher, a fifth-generation Iowa farmer who advocated for the American Farm Bureau, as quoted by CNN.  “I’m not really sure we can actually produce that much product to send. But I’m sure the agriculture industry would be more than happy to try.”

President Trump was impeached – and markets shrugged.

Just yesterday, the House voted to impeach Trump, forcing a trial in the U.S. Senate, where the issue will more than likely die.

However, in arguing for a fair trial, Speaker Pelosi has threatened to delay the Senate trial until Senate Majority Leader Mitch McConnell provides details of the trial.  

“We can’t name managers until we see what the process is on the Senate side and I would hope that would be soon. So far, we haven’t seen anything that looks fair to us,” Pelosi said, as quoted by CNBC.  

By doing so, she may be attempting the Senate from holding a short trial.  Plus, “Democrats favor a more thorough, longer trial, which could be damaging to the president, despite the low likelihood of his removal from office,” says Business Insider.

Then again, none of this is rattling the Street, especially with the Senate unlikely to remove him from office at any time.  In fact, Senate Majority Leader Mitch McConnell, already noted there is “no chance” Trump will be removed from office, as noted by MarketWatch.  

Plus, as noted by McConnell, “I’m in no hurry.”

The best part — investors don’t care about impeachment. Markets are hitting higher highs.

With the Senate poised to acquit, “there looks almost certain to be no political payoff for markets to worry about from this epic impeachment saga — except perhaps to enthuse U.S. Republican voters and make Trump 2020 more, not less likely,” said Michael Every, a strategist at Rabobank, as quoted by MarketWatch.

The U.S. Senate just passed a $738 billion defense bill that sets up a Space Force, and will provide parental leave for federal workers.

According to Military.com, the bill, which includes an earmarked $5.3 billion for emergency disaster recovery, “charts out a three-year ‘phase repeal’ of the policy that requires VA payments to survivors of fallen troops to be deducted from Defense Department survivor payments.”

The bill will also authorize $635 billion in base discretionary funds for the Pentagon, $71.5 billion in overseas contingency operations funds and $23.1 billion for nuclear programs at the Energy Department, as noted by Defense News.

It also creates the U.S. Space Force.  

“We’ve done a good job on our space activity. One of the problems we’re faced with our allies is that both Russia and China had a space force, but we didn’t have one, because we had the Navy and the Air Force,” said Senate Armed Services Chairman Jim Inhofe, as quoted by CNN.  “They were working very well together, but there could be better coordination.”

On the heels of this news, some of the biggest beneficiaries are defense stocks and ETFs.

That’s why investors are flocking to related names, such as:

SPDR S&P Aerospace & Defense ETF (XAR)

The SPDR S&P Aerospace & Defense ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index.  

iShares U.S. Aerospace & Defense ETF (ITA)

The iShares US Aerospace & Defense ETF invests in stocks in the domestic aerospace and defense sector. These stocks can include companies that manufacture both commercial and military aircraft as well as other types of defense-related equipment. 

Power Shares Aerospace & Defense ETF (PPA)

The Invesco Aerospace & Defense ETF tracks a market-cap-weighted index of US-listed stocks involved in the defense, military, homeland security and space industries.  

FedEx (FDX) made quite a mess.

Shares are down more than $15 to $147 a share on horrendous earnings, and a forecast that’s not sitting well with investors.  Its second quarter net income of $560 million, or $2.13 a share fell from the $935 million, or $3.51 a share posted a year earlier.

Revenue fell to $17.3 billion from $17.8 billion year over year.

Analysts were looking for $2.78 EPS on revenue of $17.6 billion.

“Fiscal 2020 is a year of continued significant challenges and changes for FedEx, particularly in the quarter just ended due to the compressed shipping season,” said Frederick Smith, FedEx chairman and chief executive, as quoted by MarketWatch.

But wait, there’s more good news – well, for FDX shorts.

The company then turned around and forecast fiscal 2020 EPS of $9.10 to $10.35, which is below analyst expectations for $12.09.  

“Our revised guidance reflects lower-than-expected revenue at each of our transportation segments and higher-than-expected expenses driven by continued mix shift to residential delivery services,” said Alan Graf, FedEx’s chief financial officer.

At the moment, FDX is down $15, which took about 95 points off the Dow Transports.

Technically, FDX is now a falling knife.  It just plunged below triple bottom support dating back to late October 2019.  From here, we could see a near-term test of support around $137.80. From that level, we may be able to make arguments for a dead cat bounce.

At the moment, FDX is a disaster, which is pitiful during the holiday season.

Apparently, fears of a recession are off the table.

As we noted just yesterday — “Some of the obstacles to growth, including the Fed and trade uncertainties, are being removed, and that will have a powerful positive impact on the economy,” said Larry Kudow, as quoted by The Washington Post.  

Now, according to a Bank of America fund manager survey, global growth expectations are up 22 percentage points over two months to a net 29% of those surveyed saying the world economy will accelerate next year, as noted by MarketWatch.  Even better, expectations are for the S&P 500 to 3,322, according to the survey.  

That’s up 10% year over year, and is the highest number from the survey since June 2018.

All thanks again to negotiations between the U.S. and China, and the removal of tariffs from both sides, which could have walloped the global economy.  

The survey also finds that 68% say a recession is unlikely in the New Year, as noted by CNBC.  The survey “confirms the bulls are back and are buying equities,” wrote Michael Hartnett, BofA Global Research’s chief investment strategist.

Those surveyed also say they’re ditching bonds for stocks and commodities, too.

“We may have reached the point of ‘peak tariffs’ and this deal could be the start of a series of phased rollbacks,” said Mark Haefele, chief investment officer at UBS Global Wealth Management said, as quoted by MarketWatch. “This could unlock further upside for equity markets, driven by an improvement in business confidence and a recovery in investment.”

There is Just One Tiny Uncertainty

While there’s plenty to cheer, there’s just one tiny uncertainty.

There’s no trade deal on the table. It hasn’t been written, or signed.  Until that happens, the trade war is on. Plus, there may be disagreements over Chinese purchases on agricultural products.

Granted, Trump said China would buy $50 billion worth of agricultural products “very soon.”  However, China has been reluctant to mention any of this so far.  

“That scale of purchases seems implausible and Chinese officials were reluctant to mention any specific target during their press conference,” Nomura analysts, including chief China economist Ting Lu, said, as quoted by CNBC.

Boeing (BA) is a slow motion train wreck.

Just weeks ago, the stock came under pressure after revealing 2016 e-mails that called into question the safety of the 737 Max jet’s flight control system.  

The FAA said it found the messages to be “concerning” and “is reviewing this information to determine what action is appropriate.”  In addition, FAA Chief Steve Dickson told Boeing’s CEO, “I expect your explanation immediately regarding the content of this document and Boeing’s delay in disclosing the document to its safety regulator,” as quoted by NBC News. 

All after two fatal crashes in the Java Sea, and the Ethiopian plane downed in March.

After a slight recovery, the stock again fizzled and died.  

While there’s hope the BA stock can hold triple bottom support dating back to August 2019, we’re not so sure.  At the moment, it’s down another $5 a share on news the company plans to suspend production of the 737 Max starting in January 2020.

Things got a bit worse for the company after FAA Administrator Stephen Dickson just there was no way the FAA would approve the plane to fly again this year.  

In fact, Dickson said, he could not provide a time frame for when the plane will get approval, adding there are 10 or 11 different steps in the certification process that are yet to be completed. “If you do the math, it’s going to extend into 2020,” as quoted by CNN.

At the moment, the stock is being hit with massive turbulence, with no signs of a safe landing.

Recession?  What recession?

Months ago, analysts forecast a 50% chance of a recession by 2020.  

Now, many aren’t so sure, as markets explode on a series of interest rate cuts, a possible phase one deal with China, and a new trade deal with Mexico and Canada that would keep goods between us and them tariff-free.  

“Some of the obstacles to growth, including the Fed and trade uncertainties, are being removed, and that will have a powerful positive impact on the economy,” said Larry Kudow, as quoted by The Washington Post.  

Plus, “The risk of a trade-war-induced recession – which we never thought was high – has been materially reduced,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, as quoted by The Washington Post.  

The White House also believes the trade deals could push growth up a half a percentage point in 2020, up from about 2.3% this year.

All of that shelves fears of a potential recession in the New Year.

Better, homebuilder sentiment hit a 20- year high

Thanks to a stronger economy and housing shortage, homebuilders are the most confident they’ve been in 20 years.  In fact, the National Association of Homebuilders / Wells Fargo Housing Market Index, as noted by Business Insider rocketed to 76 this month.

That’s the highest it’s been since June 1999.  Anything over 50 a strong sign of confidence.

“Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” said NAHB Chairman Greg Ugalde, as quoted by CNBC.

We’re waiting to see what happens next with the trade war.

“We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more,” tweeted President Trump.

“The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder.  The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!”

While that’s certainly something to cheer, nothing is in writing just yet.  Nothing has been signed. There’s also a sizable unknown with the deal regarding agricultural purchases.  

Granted, Trump said China would buy $50 billion worth of agricultural products “very soon.”  Reuters even reported that U.S. Trade Representative Robert Lighthizer said China would buy at least $16 billion more agricultural goods in each of the next two years, bring total purchases to near $50 billion in 2020 and 2021.

However, China has been reluctant to mention any of this so far.  

“That scale of purchases seems implausible and Chinese officials were reluctant to mention any specific target during their press conference,” Nomura analysts, including chief China economist Ting Lu, said, as quoted by CNBC.

If the two sides can’t agree on this point, there’s fear there won’t be any deal at all.

What’s Currently in the Phase One Deal

So far, we don’t know much about what’s actually in the deal.

Neither side has provided many details.  What we do know is that planned 15% U.S. tariffs on $160 billion worth of Chinese goods has been taken off the table.  China also canceled its retaliatory tariffs, which included a 25% tariff on U.S. autos, as noted by Reuters.

The U.S. also said China has agreed to increase its purchases on products and services by up to $200 billion over the next two years.  While making no mentions of hard targets, China said it would import more wheat, rice, corn, energy, and pharmaceuticals. 

In addition, there is allegedly a deal for stronger Chinese legal protections for patents, trademarks, and copyrights.  “The deal contains commitments by China to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers,” as also noted by Reuters.

While this all sounds like great news, it’ll be even better once on paper – and signed.

The U.S. and China just agreed on a trade deal that will lead to more purchases of U.S. agricultural goods, and see December15 tariffs scrapped.

“We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more,” tweeted President Trump.

“The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder.  The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!”

Now, all they have to do is put it all in writing, run it past attorneys, and sign it.

From our understanding, the U.S. will remove tariffs on Chinese goods in phases.  However, China is not sure when the U.S. will begin rolling those back. In addition, the White House will cancel tariffs that were set to hit China on Sunday. 

In addition, China will significantly increase its agricultural purchases, but did not specify by how much.  China also noted the deal will include intellectual property, technology transfers, and expansion of trade, as also noted by CNBC.

However, at this time, none of this is enforceable.  All we have is the word of China and the U.S. that there is progress.  It must still be put on paper. It must still be agreed upon, and then signed.  Without any of that, all we have is a great story.

Moving forward, the two countries will now also begin on a second phase of the deal.  

Stay tuned for more on this developing story.

Investor heads are spinning – again.

As we near potential 15% tariffs on Chinese goods this Sunday, December 15, no one is quite sure what may happen.

One day, President Trump says it may be best to wait until after the 2020 elections to strike a deal.  Then, White House economic adviser Larry Kudlow downplays reports of a tariff delay, noting, “The reality is those tariffs are still on the table, the Dec. 15 tariffs, and the president has indicated if the short strokes remaining in negotiations do not pan out to his liking that those tariffs could go back into place,” as quoted by CNBC.

Then, the South China Morning Post said a trade deal was unlikely before the Sunday deadline.

Then, just this morning President Trump sent markets soaring after tweeting, “Getting VERY close to a BIG DEAL with China.  They want it, and so do we!”

While it’s still a wait-and-see, we may see even better news this afternoon.

According to Reuters, Trump is expected to meet with top trade advisers to discuss the December 15 tariffs on $160 billion in Chinese goods.  

Again, it’s all up in the air.  “When they get in the room, Peter’s going to say: ‘Hit ‘em.’ Larry [Kudlow] and Mnuchin are going to say: ‘Don’t do it.’ And I think Bob [Lighthizer] … is hoping he has enough to go on to justify not doing it,” reported Reuters.

However, China may have guaranteed a tariff delay

All after removing some tariffs on U.S. agricultural goods, including soybeans and pork.  

“The goal (of this move) is to expand purchases and reassure the United States,” said a Chinese source who advises Beijing, as quoted by CNBC. “It should be interpreted as a positive signal. Despite the many political difficulties, the two sides face, economic and trade cooperation and moves to stop the escalation of the trade war are in the interest of both parties.”

China has also said it hopes to make a trade deal with the U.S. as soon as possible.