By Geoffrey Smith
August 3, 2017

Good morning,

The Dow closed above 22,000 points for the first time last night.

To a large degree, that’s because the dollar’s retreat from multi-year highs has done wonders for the multinational companies that generate much of their earnings abroad. Apple and Boeing, the two workhorses that pulled the index past its latest milestone, are two cases in point. McDonald’s is another.

It’s not just a case of translating foreign currency earnings back into dollars. As the Bank for International Settlements points out, a strong dollar creates financial stress in many global markets that quickly feeds into economic slowdowns locally. The BIS now reckons that the dollar is now a purer measure of global market stress than the once-vaunted VIX index. As such, the dollar index’s drop of over 4.5% in the second quarter did the whole world good.

But the dollar has weakened, not least, because confidence in the administration’s ability to deliver an immediate, positive growth shock through tax reform has weakened. The idea of a Border Adjustment Tax, which analysts feared would have upended international trade and the foreign exchange market, has now been dropped. All that has muted the Federal Reserve’s eagerness to raise interest rates. Exuberance, despite regulatory roll-back in finance and high-profile wins such as the Foxconn investment in Wisconsin, has stayed largely rational, so wage growth and inflation are both still, for now, in their post-crisis rut.

Catch-22k, if you like.

There are, as always, pockets of weakness, notably in the auto sector (Tesla notwithstanding – see below). Incidents such as the NotPetya virus show that vulnerability to cyber-attacks is a material risk to a company’s market value. The fast-moving consumer goods sector suffered most from NotPetya, but it was far from alone. As for external risks, China’s financial system remains a black box, with standard metrics such as unsustainable credit growth showing little, if any, sign of improvement. The European Central Bank, meanwhile, is only now having to learn the art of avoiding ‘taper tantrums’ as it prepares to wind down quantitative easing.

There are always some warning that it can’t last (Bank of America Merrill Lynch, for example, predicts a top to ‘risk assets’ in the fall). But sufficient to the day is the evil thereof. This current earnings season has had more to cheer than to fear, both at home and further afield.

News below.

Geoffrey Smith


Top News

Trump Signs Sanctions Bill; Russia Pouts, EU Smirks

President Donald Trump signed into law the bill expanding sanctions on Russia, North Korea and Iran, but took the unorthodox step of panning it for crimping his executive power. Russia’s Prime Minister Dmitry Medvedev called the move a declaration of “full-scale trade war,” but any fears that it would immediately hit Russian energy exports were belied by EU Commission President Jean-Claude Juncker saying he was “satisfied” by last-minute tweaks to the wording that leave at least some room for discretion as regards building and maintaining key pipelines to Europe. Separately, the President endorsed a Senate bill that would halve the number of green cards issued every year. The bill prioritizes access for high-skilled workers and those who can already speak English.

Diesel Makers Breathe Again

Germany’s carmakers will recall 5 million diesel vehicles, including some of their newest models, for software tweaks to make them run more cleanly. They will also expand incentives for drivers to trade in older, dirtier models, but couldn’t persuade the government to subsidize a broader scrappage scheme. Shares in VW, Daimler and BMW rose after they escaped more expensive mandatory hardware upgrades. BMW, which was alone in installing more effective after-treatment systems, added to its gains Thursday by posting a 13% rise in net profit in the second quarter. The results of the summit are unlikely to stop local-level initiatives to ban diesels from city centers, let alone an EU antitrust investigation now in the works.
WSJ, subscription required

Hope Not Abandoned as Tesla Enters “Manufacturing Hell”

Tesla’s shares are slated to open over 6% higher Thursday, reflecting a narrower-than-expected second-quarter loss and an impressively full order book for the new Model 3. Deliveries to the general public are still on track to start in October. There are now 455,000 people waiting for a Model 3, each having provided a $1,000 deposit, plumping up a cash cushion that stood at $3 billion at the end of June. CEO Elon Musk still didn’t rule out coming back to the debt markets later in the year, but didn’t indicate he was planning to ask shareholders for even more equity capital.

When Can You Start?

Amazon threw open its warehouse (sorry, fulfillment center) doors with a one-day job fair blitz aimed at filling 50,000 vacancies. The company expects its U.S. payroll to grow by 100,000 in the 18 months to the middle of next year. It’s a staggering number that emphasizes just how rapidly the company is expanding. The NYT cited HR head John Olsen as saying the company received 20,000 applications in the course of the day. Amazon’s warehouse jobs typically pay between $12 and $15 an hour, and while that may not be much of a premium over many states’ minimum wages, the company is offering selective medical benefits and tuition pre-payment.



Around the Water Cooler

Qatar’s Soft Power Scattergun

Qatar Airways changed its mind about investing in American Airlines, after being given the cold shoulder by CEO Doug Parker. Instead, the beleaguered emirate has again chosen soccer as its preferred medium of winning friends and influencing people as it fights a lonely PR battle with its Gulf neighbors over its alleged sponsorship of terror. Paris Saint-Germain, ultimately owned by Qatar’s sovereign wealth fund, is paying Barcelona $260 million for its Brazilian star Neymar, more than doubling the existing world record transfer fee. He’ll be paid around $67 million a year before tax. Only a curmudgeon would point out that he isn’t even the best player on the Barcelona team.
Sports Illustrated

Temer Dodges Graft Bullet

Brazilian President Michel Temer will not face trial, after the lower house of Congress voted 263-227 to throw out a corruption charge. While the result was as expected, the margin was slimmer than had been predicted. That may raise some questions over how much support he can expect for proposed measures to cut the budget deficit and roll back other obstacles to growth left by the leftist Workers Party. Luckily for him, the spectacular demise of socialism in neighboring Venezuela should concentrate minds on the dangers of not reforming. Brazil’s currency and stock market have recovered most, but not all, of the ground they lost as the allegations against Temer surfaced earlier in the year.

Adidas Keeps up the Pressure

Adidas said it continues to take market share from both Nike and Under Armour, as it reported 26% revenue growth in North America in the second quarter. Revenue grew an even stronger 28% in China, a market where Nike is also making hay. Adidas has doubled its share of the U.S. sports footwear market to 12.7% this year, according to research house NPD. Under Armour’s shares fell to multi-year lows earlier this week after it announced extensive job cuts and an extensive restructuring to address faltering sales.

The Sun Also Rises on Europe’s Banks

Italy’s Unicredit, the largest bank in a worryingly weak system, reported a much better-than-expected second quarter profit of 945 million euros, as the turnaround strategy of its French CEO Jean Pierre Mustier started to bear fruit, helped by an increased willingness by U.S. funds to take a punt on such assets. Unicredit has now cut its exposure to non-performing loans by 30% over the last year. Its shares rose 5%. Intesa SanPaolo, Italy’s largest bank, had also reported solid earnings earlier in the week, while France’s banks have had a bumper quarter thanks to an election campaign that caused much short-term volatility but ended happily.


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