Strong Earnings Rescue Wall Street (Again)

In a familiar pattern, strong earnings Monday came to the stock market’s rescue, offsetting a flare-up in tensions between the U.S. and China over tariffs.

The main indices started the trading session under water, but corporate profits played the role of financial lifeguard (once again) and pulled stocks to higher ground.

Bellwether Berkshire Hathaway (NYSE: BRK.B) provided a big helping hand, rising by 2.95%. Facebook (NSDQ: FB) also surged today with a gain of 4.45%, lifting the tech-heavy Nasdaq into positive territory.

Of the more than 400 S&P companies that have reported second-quarter operating results so far, 78.6% have exceeded estimates.

But Monday’s stock market gains were kept in check by trade war jitters. The Dow Jones Industrial Average seesawed in afternoon trading to close well off its session high of nearly 70 points.

Do you think the trade war will just fade away? Think again.

China’s state media asserted Saturday that U.S. tariffs constituted “blackmail.” And today, in an extraordinary personal attack, China said President Donald Trump was engaged in a “street fighter-style deceitful drama of extortion and intimidation.”

Yikes. I haven’t heard bombastic rhetoric like this since the Cold War.

China last Friday announced the imposition of new tariffs worth $60 billion on U.S imports, in retaliation for the Trump administration’s escalation of trade sanctions. And so the tit-for-tat tariffs continue, increasingly accompanied by personal insults.

The Buffett boost…

Warren Buffett’s holding company Berkshire Hathaway often moves markets with its quarterly earnings results. This time around it gave stocks a boost, on a day when they needed it.

Berkshire Hathaway reported a whopping 67% rise in quarterly operating profit, as Berkshire’s myriad business units benefited from economic growth. Second-quarter net income nearly tripled.

Berkshire’s impressive quarterly results also stemmed from a decline in its income tax rate to 20% from 28.9%, as a result of the tax cut bill signed by Trump in December.

Those tax cuts are stoking economic growth. The latest figures from the U.S. Commerce Department show that U.S. gross domestic product (GDP) grew by 4.1% in the second quarter of 2018.

The following chart depicts U.S. GDP change by percentage, compiled with data from the Bureau of Economic Analysis:

But beneath the data, I detect several caveats.

As you can see from the chart, GDP growth in the second quarter was healthy but hardly unprecedented. Also keep in mind that much of the growth was fueled by artificial stimulus. Overseas buyers hurriedly stockpiled U.S. goods, notably soybeans, before tariffs could take effect.

Tax cuts and federal deficits played a disproportionate role in second-quarter growth; the eventual consequence will be hotter inflation. The positive effects of the tax cuts will soon dissipate as ballooning budget deficits crowd out private sector investment.

Reading the entrails…

Most politicians in Washington are too self-serving (or economically illiterate) to acknowledge these nuances. But the rate-setters at the Federal Reserve are acutely aware of them.

At a two-day meeting that ended last Wednesday, the Fed’s policy-making Federal Open Market Committee (FOMC) announced that it would hold interest rates steady for the time being. In a statement, the FOMC noted that employment gains and economic growth have been “strong.”

Analysts such as myself are reduced to reading the Delphic utterances of the Fed the way the superstitious ancient Romans would read entrails. The word “strong” or its derivation was used four times in the first paragraph of the Fed’s press release, probably the portent of hawkish policy to come.

The latest inflation numbers show price growth approaching the Fed’s target of 2%. The central bank worries that the longer it delays raising rates, the greater the pain down the road. You can expect another rate hike in September; we’ll see how financial markets handle the news.

The economic recovery is getting long in the tooth and we’re overdue for a recession. Add rising rates and the imbalances caused by deficits and tariffs and you have a recipe for stock market swoons.

Can the economic momentum last, or do we face a “bear trap?” Key economic data on the docket for the coming week will provide clues:

Tuesday: job openings; Thursday: weekly jobless claims, producer price index, wholesale inventories; Friday: consumer price index.

Just as a body builder gets bulging muscles but lasting health problems by shooting steroids, so too will the U.S. economy eventually suffer from its own version of steroids.

The markets ended in the green today but August and September are historically bad months for stocks. Don’t get too comfortable in that beach chair; storm clouds are gathering.

Monday Market Wrap

  • DJIA: 25,502.18 +39.60 (0.16%)
  • S&P 500: 28,850.40 +10.05 (0.35%)
  • Nasdaq: 7,859.68 +47.66 (0.61%)

Monday’s Big Gainers

  • SeaWorld Entertainment (NYSE: SEAS) +16.75%

Theme park reports increased attendance and revenue.

  • Skyline Champion (NYSE: SKY) +8.17%

Mobile home maker announces secondary offering.

  • Navigant Consulting (NYSE: NCI) +6.63%

Analysts turn bullish on management consultant.

Monday’s Big Decliners

  • Westmoreland Resource Partners (NYSE: WMLP) -49.88%

Coal producer warns of cash shortage amid high debt.

  • Pain Therapeutics (NSDQ: PTIE) -47.03%

FDA rejects biotech’s non-opioid drug.

  • Ovid Therapeutics (NSDQ: OVID) -36.13%

Biotech’s lead drug shows questionable efficacy.

Letters to the Editor

Is cannabis the next great investment opportunity?” — Ken F.

ArcView Market Research predicts marijuana for medicinal and recreational use will burgeon into a $22 billion-a-year industry by 2020. That spells investment opportunities. But be careful. The pot industry is rife with risky penny stocks; these companies will go belly-up in the inevitable shake out. Look for quality marijuana companies with low debt loads, healthy cash flow, and viable products.

Questions about breakthrough industries? Send me an email:

John Persinos is the managing editor of Investing Daily.