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Submitted by Michael Every of Rabobank

What’s the Deal

After a signing ceremony by US President Trump and Chinese Vice Premier Liu at the White House the much-awaited details of the ‘Phase 1’ trade deal were finally released. While the S&P500 rose prior to the White House event, there were no major new aspects to the deal, so stock prices fell back again.

According to the document (Chapter 6) China shall ensure the purchase of an additional – on top of the 2017 baseline – $200bn worth of US goods and services over a two year period, from 1 January 2020 through 31 December 2021. This package consists of $77.7 bn in manufactured goods, $32.0 bn in agricultural products, $52.4 bn in energy, and $37.9 bn in services (see Annex 6.1 of the document). Moreover, China pledges to respect intellectual property rights, will open its financial services sector to the US, and refrain from currency manipulation.

In exchange for these Chinese concessions, the US did not carry out its plan for additional tariffs on $156 bn of Chinese goods on 15 December 2019, and will halve the 15% tariffs on $120 bn of Chinese consumer goods (such as cell phones, toys and laptops) implemented on 1 September 2019. However, the earlier 35% tariffs on $360bn of Chinese industrial goods and components remain in place. Moreover, the US Treasury department decided recently to no longer call China a currency manipulator.

What to make of this deal?

First let’s look at what is in the deal, and second at what is not. The Chinese purchases of goods are beneficial to US companies, but at the cost of other countries, and the agreement is only for two years. According to the document “the parties project that the trajectory of increases … will continue in calendar years 2020 through 2025.” Well, ‘to project’ does not sound as firm as ‘shall ensure.’ So are we going to see a repetition of the 2019 turmoil caused by the phase 1 trade negotiations after those two years? Or is this supposed to be solved in the phase 2 deal that is very unlikely to be made? What’s more, while the remaining tariffs provide leverage for US trade negotiators, they are still a tax on US importers and US consumers of Chinese goods.

What’s not in the deal is a credible implementation of China respecting US intellectual property rights. Keep in mind, they made promises before. Of course, the document (Chapter 1) is full of pledges. However, the most concrete step is that China will within 30 working days make an Action Plan to strengthen intellectual property protection (Article 1.35). What is also lacking from the deal is the end of China subsidizing its state owned enterprises. So on one key trade issue, China has made promises again and on the other it did not even have to.

In terms of overall enforcement of the deal, Chapter 7 describes the creation of a Trade Framework Group to discuss the implementation of the trade agreement every six months, which shall be led by the US Trade Representative and a designated Vice Premier of China. Each party shall establish a Bilateral Evaluation and Dispute Resolution Office, headed by the USTR (US) and the Vice Premier (China). If one party believes that the other party is not sticking to the agreement, the complaining party may submit an appeal to the Bilateral Evaluation and Dispute Resolution Office of the other party. The dispute procedures are actually a highway to the exit: ‘if the party complained against considers that the action of the complaining party was taken in bad faith, the remedy is to withdraw from this agreement by providing written notice of withdrawal to the complaining party.’ This means that if one party is not satisfied with the implementation of one aspect of the deal, the whole deal collapses. So while the Phase 1 deal is a temporary equilibrium, it is an unstable one.

After all the turmoil we have been through last year, this deal has failed to address the key conflicts between the US and China. Basically, the Chinese are going to buy more stuff from the US, but only in the next two years, in exchange for lower tariffs. Meanwhile, the Chinese business model that is characterized by violations of intellectual property rights and government subsidies of state-owned enterprises is likely to remain intact.

 

The meltup accelerates.

VIX 11 handle…

Dow up 200 points (over 29,200)…

…and S&P over 3,300.

On the back of a huge short-squeeze…

Year-to-date, stocks have overtaken bonds and bullion…

And don’t forget, The Dow is soaring on fun-durr-mentals…

Germany’s Bundesverband der Deutschen Industrie (BDI) warned Thursday that economic growth in Europe’s largest economy was “stuck in a recession,” with little hope of an economic rebound.

BDI said economic growth in Germany would continue to decelerate in 2020 as there are no signs of improvement in the struggling manufacturing sector. 

“Industry remains stuck in recession, and there are no signs for the sector bottoming out,” BDI President Dieter Kempf said Thursday. 

BDI forecasted economic growth at 0.5% in 2020, adding that adjusted growth will print around 0.1%. 

Kempf said the government needs to increase public investment in infrastructure as a countercyclical buffer against the slowdown. He also said tax cuts are needed for corporations. 

The warning from BDI comes as Germany’s economic growth rebounded slightly in the fourth quarter but slowed last year to its weakest level in six years as trade tensions escalated, exports plunged, and a steep downturn in the automotive industry was seen. 

Official government statics show Wednesday morning that GDP growth rate in the last three months of 2019 was 0.6%, the lowest since 2013’s 0.4% expansion.

Germany narrowly avoided a recession late last year as GDP contracted in the second quarter and expanded by 0.1% in the third.

Industrials and exports power the economy, and with a global manufacturing recession still underway with a declining China – the hopes of a massive rebound in Europe’s largest economy are limited this year.

At the center of the global industrial slowdown is the auto manufacturing industry. Germany has yet to diversify from building cars and is still heavily exposed to global crosscurrents that persist.

Nearly 400,000 jobs could be cut from the German automotive industry in the next ten years as the slowdown in the economy is likely to continue.

BDI’s warning of a deepening manufacturing recession is bad news for everyone who bought stocks with the hopes of an economic rebound in early 2020. 

Well the cat’s out of the bag…

As Bloomberg’s Richard Breslow details in today’s note, the worst kept secret in the financial world is now not only accepted orthodoxy, but finally being discussed openly by, at least some, authorities.

Central bank policies are directly driving asset prices and the bubbles therein. It’s what they do. It has been so stunningly obvious that, at this point, it makes a mockery of things to deny it as an ongoing, and essential, part of how their strategy is implemented. Oddly enough, however, it’s a revelation that is, apparently, coming late to many people with a lot of savings and nothing to show for it. And it is an undeniable factor in this January’s price action.

• Alan Greenspan knew it to be the case.

• Ben Bernanke had no problem with it. His strategy required it.

• Jerome Powell, was probably initially not enamored about it but saw no way around it. It fell on ardent loyalists to take his insistence that it was “not QE” with any seriousness. Otherwise, they would have had to admit to knowing little about financial markets.

In some ways it was refreshing that Dallas Fed President Robert Kaplan openly talked about it in an interview Wednesday. Although he did couch it in terms that implied it was a matter of some concern to him. But, of course, he went on to say, “we’ve done what what we need to do up until now.”

“My own view is it’s having some effect on risk assets,” Kaplan said.

“It’s a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it.”

He doth protest, just not so much. Their ability to drive investor behavior is so well established that what is going on in the markets can’t remotely be seen as an unintended, or even unwanted, consequence.

At this point, is it a bad thing to admit something that is so patently evident to everyone?

The answer is probably yes.

They have always been responsive to financial conditions. In many ways they’ve been transfixed by them. Now they are openly acknowledging that they own them. And once you do so, it becomes harder than ever, if even at all possible, to give them back. Kaplan said they need to “come up with a plan and communicate a plan for winding this (balance sheet) down.”

That would be nice. And good luck with that.

A long-time and favorite parlor game has been debating when, and if, the Fed “put” would kick in on any market upsets. It was even acceptable to try to argue whether one existed or not. Although that might have just been an attempt at being provocative. Now the presumption among investors, institutional and retail alike, is that it is fully in force. Maybe more so than ever. Fully enhanced by policies that are not changing anytime soon.

At this point, you have to wonder if it even matters whether it is true or not. We are back in the mode of just wanting to find something to buy. Stocks act as if they are bullet-proof. Stock buy-backs look like they are front-running the inevitable rather than being the cause of it. Reports of new all-time highs, need to include the word “again.”

Calls to exercise caution by limiting duration are once again being dismissed as just leaving yield on the table. Italy sold 30-year debt this week. A 7 billion euro offering saw bids of some 45 billion euros. And this hasn’t been an isolated case. Other European countries have been enjoying the opportunity. Bond issues from Japan and Australia flew off the shelves earlier this week. Five-year JGB yields at negative 9.5- basis points were seen as oozing value.

We, quite properly, worry that central banks are running low on ammunition to fight any future recession. This translates into what looks like a “risk-on” environment. But it is just the opposite. Yield remains the primary game in town. With an expectation that it will be in dwindling supply.

This is not to say that investors are at all acting irrationally. And central banks feel they have no choice in the absence of broader policy prescriptions. It’s merely an attempt to describe what we all see. Most worryingly, I keep hearing from people who are sure that it’s obvious where we go from here.

If you thought yesterday’s 90-minute press conference bukkake – where President Trump demanded that a senior JPM executive thank him for the bank’s record profits – would be the extent of the administration’s trade war ‘victory lap’, then you clearly underestimated this president’s commitment to winning.

In a tweet published Thursday morning, President Trump gloated that he had just struck “one of the greatest trade deals ever made!”

He added that the teal is “good for China, and out long term relationship,” before adding that “250 Billion Dollars” will be returning to the US thanks to Beijing’s promise to scale up imports.

The US is now “in a great position” to kick off negotiations for Phase 2, and advised that passing USMCA is “NEXT!”

One of the greatest trade deals ever made! Also good for China and our long term relationship. 250 Billion Dollars will be coming back to our Country, and we are now in a great position for a Phase Two start. There has never been anything like this in U.S. history! USMCA NEXT!

— Donald J. Trump (@realDonaldTrump) January 16, 2020

Earlier this week, Mitch McConnell said the Republican dominated senate might pass USCMA by the end of the week, making it extremely likely that the deal will make it to the president’s desk in the coming days.

Meanwhile, Dems are doing everything they can to redirect news coverage away from Trump’s trade triumph (even if the ‘fragile’ deal does nothing to resolve the US’s biggest gripes about Beijing) and toward their impeachment circus.

In a second tweet sent 20 minutes later, Trump took a shot at “Cryin Chuck” Schumer, whom Trump insisted “is saying privately that the new China Trade Deal is unbelievable” even though he “publicly knocks it whenever possible.”

“That’s politics, but so bad for our country,” Trump added.

Cryin’ Chuck Schumer is saying privately that the new China Trade Deal is unbelievable, which it is, but publicly he knocks it whenever possible. That’s politics, but so bad for our great Country!

— Donald J. Trump (@realDonaldTrump) January 16, 2020

Free-trade Dems including Schumer persistently discouraged Trump from mixing it up with the Chinese. So it’s only fitting that they’re trying to distance themselves from Trump’s trade agenda.

Against expectations of a modest rebound, Philly Fed Business Outlook survey spiked from a revised 2.4 to 17.0 (crushing expectations of 3.8).

The 17.0 print is more than double the highest analyst estimate of 8.0.

This explosion in the Philly Fed survey reverses the recent trend of regional Fed survey collapse…

Source: Bloomberg

Under the hood:

• Jan. prices paid rose to 22.1 vs 15.9

• New orders rose to 18.2 vs 11.1

• Employment rose to 19.3 vs 16.8

• Shipments rose to 23.4 vs 15.7

• Delivery time fell to -0.4 vs 12.5

• Inventories fell to -2.3 vs 5.0

• Prices received rose to 14.7 vs 11.0

• Unfilled orders fell to -3.7 vs 8.6

• Average workweek fell to 5.2 vs 8.5

Additionally, hope has resurged…

• Six-month outlook rose to 38.4 vs 34.8

• Six-month outlook for capex rose to 32.9 vs 26.0

Outlier or new (asset-bubble-driven) normal?

With annual growth in core retail sales having slumped into November, analysts were cautiously optimistic that December would prompt a rebound in the much-watched indicator of consumer strength (despite signals from Target, among others, that all was not well).

However, while headline retail sales rose 0.3% as expected, ex-autos saw a significant 0.7% MoM surge in December (better than the expected 0.5% rise), best since July.

Source: Bloomberg

And thanks to the volatility of last December, YoY retail sales exploded higher…

Source: Bloomberg

But amid all this exuberance, auto sales slipped as did department stores…

But, online sales were up just 0.2%…

The control group – which is used for GDP calculation purposes – rose 0.5% MoM, better than expected.

It seemed like it was just yesterday that Morgan Stanley was enlightening us with their $10 to $500 price target range for Tesla. Yet here we stand, just weeks later and on the back end of a massive Tesla short squeeze that has seen shares run from the mid $300 level to as high as $537 in just a month. And at this nearly $100 billion valuation, which almost made Tesla bigger than the world’s biggest autocompany, Volkswagen, even MS’ Adam Jonas has seen enough.

In a note on Thursday morning, the Morgan Stanley auto analyst downgraded Tesla to “Sell” based on valuation, unfavorable risk-reward and risks to the long-term Chinese business that may not be “fully appreciated by the market”. Ironically, he hiked his price target from $250 to $360, and in the new note, he updated his $490 spread “valuation cone” to show his new target of $360. The spread of potential valuations has widened from a laughable $490 to an outright ridiculous $535 ($115-$650). Which, probably, is why analysts get paid the big bucks.

As a result of the new probability cone, Tesla is now the “3rd least attractive company in its entire coverage”

Jonas commented in his note: “Near-term momentum and sentiment around the stock is admittedly very strong, but we ultimately question the sustainability of the momentum. We believe the current share price discounts a fully ramped up China, Berlin and Model Y.”

Jonas says that at $520, Tesla stock is “very close to pricing in our bull case assumptions”. He claims that “investors will be presented with more attractive opportunities to own the stock in the future”. 

He also claims an unfavorable risk-reward, offering a reality check that is years overdue, and decreasing his expectations for the company’s mobility business, which had acted as the foundation for many a absurd price targets of days past. It’s almost as though Jonas recognizes that Tesla is a car business and not a SaaS business. 

He attributes the increase in auto volume to China, but then notes that the risks overseas are “not fully appreciated”. Jonas reminds the world of the ongoing recession in the auto market and compares Tesla to GM China, which it values with a mid single digit PE. 

There was the obligatory “this has to be a typo” chart…

And so on. It will be curious to see what happens when Jonas figures out that the rest of the business should also be valued at a mid-single digit PE. It’s car company, Adam – they make, and sell, cars.

Today’s downgrade comes after a report stating that Tesla once again is likely the most shorted stock on the U.S. stock market. Investors have bet $14.5 billion against Tesla shares, according to S3 Partners.

And a second ray of hope for all those shorts, a report from Dominion Cross-Sell, , which collates data from state motor vehicle records, found that Tesla’s overall vehicle registrations dropped by almost 50% in the U.S. state of California during the fourth quarter.

The report released on Wednesday showed registrations in California, a bellwether market for the electric-car maker, plummeted 46.5% to 13,584 in the quarter ended December 2019, from 25,402 in the same period a year earlier. Model 3 registrations, which accounted for about three-fourth of the total, halved to 10,694.

The massive drop comes as tax credit for Tesla buyers ended in 2019. It had fallen to $3,750 at the start of the year and had halved to $1,875 in July. An existing $7,500 U.S. tax credit for electric vehicles (EVs), which allows taxpayers to deduct a part of the cost of buying an electric car, phases out over 15 months once an automaker hits 200,000 cumulative EV sales, which Tesla hit in July 2018.

“One can assume that Tesla has hit peak performance in the U.S. because they have not exceeded their 2018 results for five months now,” said Shane Marcum, vice-president of Cross-Sell.

The first domino in the House Dems’ plan to push moderate Republicans to support a decision to call witnesses during President Trump’s impeachment trial has just fallen.

As we reported earlier this week, House Dems released a cache of notes and texts from former Rudy Giuliani associate Lev Parnas, who has been accused of funneling foreign money to the Trump campaign.

Text messages released from March 2019 between Parnas and Robert Hyde, a Connecticut resident who is planning a Congressional run on the Republican ticket, appear to shed light on a plot to try and oust former US ambassador to Ukraine Marie Yovanovich. In the conversation, the two discussed rumors that Yovanovich was being protected by the Kremlin (how’s that for Russian influence?). They also allegedly discussed the ambassador’s whereabouts, and how they had a person on the “inside” to keep tabs on her.

Yovanovich was eventually pushed out, and now Ukraine has opened a criminal case into the possibility of illegal surveillance of Yovanovitch during her time as ambassador, according to a release from the Ukrainian Interior Ministry. Yovanovitch, who provided evidence to the House, claimed she was spied on before being fired by President Trump, according to the Independent.

Keep in mind: many of the handwritten notes released yesterday were unverified and undated, though Dems allege they were written by Parnas.

But that didn’t stop Yovanovitch’s lawyer from calling for an investigation after the notes and texts allegedly suggested that she was being watched.

However, to many people, the behavior being described is no different from having an office mole who feeds information about employees to the boss. That being said, we’re sure the Dems will use this as an excuse to revive the Russian interference narrative.

Of course, when the Dems inevitably push to call Parnas as a witness, Republicans can counter with a totally legitimate political quid pro quo: Calling Parnas as a witness in exchange for calling Hunter Biden.