The Hong Kong Bill and What It Means for the Sino-American Trade War: Just before the Thanksgiving holiday, the president signed the Hong Kong Human Rights and Democracy Act into law. This bill passed with relative ease and support in both chambers of Congress, but there has been much speculation over whether or not it would be signed into law given the controversial nature of the bill and the persistent trade war with China. The bill aims to generally provide support and recognition to the sovereign identity of Hong Kong by providing for annual reinspection of its favored trading status with the U.S. Beijing immediately issued some harshly worded press statements condemning the signing of the bill and threatening unspecified consequences if the terms of the bill are enforced. This has also provided additional fuel to the concerns over the yet-to-be-finalized partial phase one deal that has been in the works between the two countries for the last several weeks. So far, it appears that both countries are trying to progress with amicable talks despite this recent development, but many political commentators have been quick to point out that proceeding with trade negotiations while the Hong Kong law is in place would be a sign of weakness for the Chinese position.
Our Takeaways: While the protests in Hong Kong have been raging for months, their market impacts have been relatively minimal. However, as this bill has been working its way through Congress, there has been a lot of speculation over a) whether it would be passed, b) whether the president would sign the bill, if passed, and c) what the reaction from China would be and how it would relate to the ongoing trade discussions. What is odd is how long these talks are taking to finalize. The partial phase one deal was announced back in the beginning of October with many expecting the deal to be signed shortly after, perhaps mid-November at the latest. Yet, here we are (as of this writing at the end of November) with no further indication either side is any closer to finalizing what is, on its face, a fairly simple, and not at all significant, agreement between the two countries. If ironing out the economic differences between the two countries was not hard enough on its own, adding the extra philosophical/political dimension created by introducing this bill into the narrative further complicates matters for everyone. Moreover, pursuing the "separate track" mentality might not even be possible, especially given the more activist and socially responsible mentality that is gaining strength in the U.S. At the very least, it will be interesting to see how these two items are reconciled since this philosophical dimension has not been addressed before in any of our other recent trade agreements. The NBA's recent snafu related to the Hong Kong protests is a prime example of how this oil and water mixture comes together in the real world. The NBA, which is notable for the emphasis and support it provides to its players, coaches, etc. in regard to issues of free speech, faced an incredibly difficult decision when a tweet from a team general manager led to calls from the Chinese government for his firing and boycotts of NBA preseason games that were to be played in the following days in China. The league spent the next several weeks attempting to navigate the fallout ultimately sidestepping disaster at the expense of broad disappointment in the U.S. over how much perceived influence China had over what we consider a fundamental right in this country. Unfortunately, due to our publication schedule, we will have to wait another month to discuss how this development unfolds, but after weeks of no publicly stated progress in the trade talks, it is useful to remind ourselves there are forthcoming (albeit arbitrary) lines in the sand approaching.
Lower Heating Costs Could Be a Boon for U.S. Consumers: On the back of excess supply and lower than expected demand, prices for natural gas and other heating related commodities have fallen to multi-decade low prices. According to data from the U.S. Energy Information Administration (EIA), natural gas prices are 30% below where they traded a year ago, with the national average price for residential propane down 22% since last year and heating oil down 11%. Andrea Paltrinieri, a finance professor at Italy’s University of Udine, and analyst for NatGasWeather.com, told The Wall Street Journal that it is particularly telling that the main U.S. spot price for natural gas, set at the Henry Hub pipeline junction in Erath, Louisiana, has fallen more than 8% over the past week, leaving it down 34% from a year ago. That decline is despite surging demand to heat homes, record deliveries to liquefied natural gas export facilities, and supply disruptions in some drilling regions due to the freezing temperatures. Mr. Paltrinieri went further by saying, “People think there will not be any problem in terms of deliverability of gas. We need much colder than normal temperatures to avoid further collapse in prices.” However, recent data from the EIA is anticipating this winter to be warmer than last year’s, and thus, heating bills to be lower. Under the base model scenario, the agency expects winter fuel bills to be 1% lower than last winter for homes using natural gas or electricity, 4% lower for those warmed by heating oil and 16% lower for propane users. Although, if temperatures are 10% warmer than expected in the base case, those heating costs will plummet further, to 25% below last winter for propane-heated homes and 9% for those fueled by gas.
Our Takeaways: This could prove to be a potential boon to consumer spending as costs that otherwise would have been allocated to heating can be allocated to holiday spending. Total spending based on 2012 average household spending data was about $223.3 billion. Since natural gas and electricity power the heating in about 80% of U.S. homes, expected savings just from these sources is about $1.79 billion in the base case and about $16 billion in the more aggressive warming scenario. While, across the entire economy, this is not a tremendously large number, with how stretched things have become at the end stages of the current economic cycle, any marginal benefit that can help support consumers should be viewed as a positive.
4th Quarter GDP Projects Fall Below 1% on Weak Data: Mid-November brought about several concerning data points for the U.S. economy generally and the 4th quarter GDP reading specifically. Most notably, industrial and manufacturing production accelerated their monthly declines furthering the damage done last month. Both indices are now firmly negative on a year-over-year basis as well. There were a few bright spots such as upticks in new orders and hiring which could point to better data ahead. Furthermore, when estimating for some of the impacts directly attributable to the recent General Motors strike, the numbers were a little better. In tandem with the industrial and manufacturing numbers, we also got a look at retail sales. Sales ticked back up, but under the surface it appears as though much of the gains came from higher gas prices which are really a negative sign for consumers. The combination of these data points has caused both the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of New York to revise their Q4 estimates of GDP to below a 1% annualized rate.
Our Takeaways: While these numbers are still very preliminary and any extrapolations to how these translate into the final Q4 GDP number at this point is a bit difficult, it certainly does not bode well that we are getting off to such a slow start for the quarter. Particularly for retail, added emphasis will be put on the early holiday sales figures as final data for the 2019 holiday season won’t likely be available until the middle of the 1st quarter of 2020. Many market participants have been suggesting the continued weakening of economic data stems primarily from the impact of the trade war tariffs that are just now working their way through the U.S. economy. This is entirely possible, but if this is the case, then it is a bad sign of things to come.
Fascinating Stock Market News: Two interesting stock market stories came to light during the month of November. First, on November 12th, the Dow Jones Industrial Average closed unchanged for the first time in more than five years. While this may seem like a remarkable feat given the billions of transactions that can occur in any given day of trading activity, this has actually occurred 167 times, or a little over once a year on average over the index’s 123-year history. This used to occur more frequently when trading volumes were lower and prices were reported in 8ths of a dollar. In fact, since 2000 the index has been unchanged for a given day only 3 times. While there are no broader economic or market implications from such an occurrence, this statistical anomaly is nonetheless intriguing. The second noteworthy story were confirmed reports that one of the world’s largest hedge funds, Bridgewater, has built up a $1.5 billion “bet” that the market will experience a broad correction sometime in the first quarter. Digging into the story further, while it is seemingly corroborated by the firm, the specifics behind the transactions seem to cast the headlines that reverberated around the financial community in a “click-bait” light. Given the firm’s $150 billion in assets under management the $1.5 billion position amounts to little more than insurance, but it is interesting how members of the financial press chose to present it alongside recession/correction fears despite much of that having abated from the fervor that was so commonplace just a couple months ago.
Our Takeaways: These topics are a bit lighter than what we typically report on, but still an interesting reflection. For the first story of the Dow having an unchanged day, this is a useful reminder that when there are no material developments, markets can literally trade sideways. Often times market participants can get caught up in prognosticating on the day to day fluctuations in the stock market. This is frequently pointed to as a shortcoming of the public market system which structurally has a bias towards price changes due to near constant liquidity as compared to less liquid assets such as real estate and private company ownership. Many critics would point out that, in most cases, there is no factual rhyme or reason why the price of XYZ company would be x% higher or lower on any given day if there was no news from/about the company and no significant economic development that would affect the company's operating performance. Having quirky events in the market, such as unchanged days, is a useful reminder that, on a daily basis, price movements can do some very unlikely things. For the second story of the supposed outsized bets against the market placed by Bridgewater, it is interesting to hypothesize the potential meaning of such a move. While the headline sounds really exciting, once the trade itself is broken down it starts to sound like a very run-of-the-mill option insurance play on a net long position in the market. However, the structure of the transaction as reported is very peculiar. If the options they have put together are really just broad bets against indices, this would be counter to what has been reported as typical practice for a fund like Bridgewater. Large hedge funds (such as Bridgewater) typically have to deploy capital across hundreds or even thousands of relatively small positions in order to balance their desire for alpha with liquidity concerns. Placing bets on something as ubiquitous as say the S&P 500 would satisfy the liquidity concern parameter, but would not be any alpha. Conversely, a more opaque trading strategy involving complex derivatives may very well satisfy the need for alpha, but would likely bare significant liquidity risk since its unlikely such products would be easily transacted on a public market. To this end, it is interesting to note that if this trade is structured as reported, then it would be atypically blunt for a firm that is usually engaged in much more complicated portfolio construction.
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