(What would buffet do)
A trade deal done? Phase One underway and stated as very substantial. Wait, China would like additional talks before signing it. Markets surged, then gave back some and settled down. Details have been slowly coming out as have comments and tweets.
The deal described as Phase One, includes China buying 40-50 billion dollars of US agriculture products and their willingness to address intellectual property concerns raised by the United States. In return, the United States agrees to hold off on tariff hikes scheduled this week. It seems Phase One will go into effect over the next three (3) months. Wall Street is not sure of this agreement though.
Doubt has emerged on Wall Street around the tentative agreement with China. It seems that while comments from around the US were triumphant, the Chinese remarks were far more muted. The deal, while substantive is still subject to documentation. If an agreement is not cemented by the tariff date in December, then an increase in tariffs will go into effect. UBS’ Art Cashin doesn’t think this gets us to Christmas.
What is clear is that delisting Chinese companies has gained traction. A congressional action to force foreign accounting and audit firms to provide transparency is the catalyst for this. The United States allows many foreign companies to list on the US stock exchanges, but they have to meet all the same rules and regulations as do the American firms. There have been a few bad actors who have refused to provide transparency behind the audits and accounting, the Chinese on of them. Many believe there is Chinese government involvement and control with these firms, which is the reason they hide this information. There has been no clear progress with regulators.
While excitement around the deal is being tampered, the third-quarter earning season has kicked off, and there is some optimism for this. Many investors hope this is not the third recession in as many quarters.
According to FactSet, at 4.6%, earnings decline is in order compared to last year at this time. The clock is ticking on BREXIT also. Prime Minister Johnson is determined to exit one way or the other. Recent news shows a new possibility of an agreement being formed, a path forward that didn’t exist before. The end of the month will also bring Federal Reserves Chairman Powell’s announcement to lower rates again or stand pat.
How do you play this and the other events this month? I haven’t changed my position on this market. The data shows a slowdown and the leading indicators continue to point down.
We thus far have eight (8) months of data for the year. Yes, the consumer sentiment is strong and I believe they will stay strong, resulting in a minimal recession: touch and go. I have to follow the data on this. The good news is that Warren Buffet and Berkshire Hathaway sold more investments than they purchased this year and are sitting on $122 billion in cash.
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Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management LLC
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