Hello Again,

The Dow Jones Industrial Average has dropped 328.09 points, or 1.3%, to 24,252.8 after President Donald Trump ratcheted up the trade-war talk with warnings to U.S. trading partners, and on reports that the administration would put restrictions on Chinese investments in U.S tech companies.  The S&P 500 fell 1.4% to 2717.07, and the Nasdaq Composite slumped 2.1% to 7532.01. But that might only be the beginning, claims Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet," he writes. "Instead, what we are experiencing is how the Trump administration is applying pressure to the Chinese so that they will eventually agree to some type of compromise (e.g. this is part of the negotiation)." I'm not sure I want to hear that word–"negotiation"–in this context again. We've been hearing it since Trump first started ratcheting up the trade talk, and through each iteration of the process. At some point, however, the negotiations, if that's what they are, will start to take their toll on the economy. And that point might be here. JPMorgan's David Hensley notes that June's flash manufacturing PMI points toward an "unusual sharp drop in expectations versus current conditions," and that the results, which were released last Friday, "hinted that manufacturers are getting worried, especially in the U.S."(Ben Levisohn, Real Time Analysis, 6/25/18).

The yield curve, the spread between the 10-year and two-year Treasury yields, is the flattest it has been since August 2007. It may even invert at some point. What are good ways to play the flat yield curve? Chief investment officer, Stone Investment Partners. “Inversion has an amazing record of forecasting recession…but stocks have typically continued to rise (sometimes sharply) after the inversion with a median gain of 13.1%.…Bottom line: the flattening yield curve is not a reason to flee stocks.”. Analyst, Canaccord Genuity, “Although many fear [financials] may underperform…the history of the past two cycles suggests otherwise. We would add to our overweight sectors of financials, info tech and industrials with an intermediate-term time horizon.” Chief economist & market strategist, MKM Partners, “Contrarian investors should take a look at interest-rate sensitive defensive sectors like utilities, stables and real-estate investment trusts, which may gain their footing as growth momentum peaks.…” Equity Strategist, Morgan Stanley, “We still think it is too early to go full-on defensive, but it probably is not too early to start shifting out of some of the extreme cyclicals and picking up a few more defensively oriented names.” (Barron’s Review, 6/22/18)

Oil prices look set to temporarily hit $90 a barrel during the first half of next year, if not sooner, and risk spiking to as much as $100 a barrel, depending on geopolitical events and other factors, say Bank of America Merrill Lynch analysts. But they do not see an immediate major jump in prices. For this year, they forecast an average price of $70 a barrel for Brent crude, the international benchmark. They forecast $75 for next year. Their previous forecast was $60. Prices could climb significantly next year, however. The analysts have a target of $90 a barrel during the second quarter of 2019, with a risk it could go to $100 a barrel. Futures on Brent were trading as high as $78 Thursday. "Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices," they wrote.(Patti Domm, Market Insider, 5/10/18).

The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens.

GE- The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens. General Electric’s sweeping restructuring plan announced this morning drew cheers on Wall Street despite the likelihood that the company’s dividend will be lower after the company spins off its large health-care business in the next 12 to 18 months. GE shares (ticker: GE) are up 97 cents, or 7.6%, to $13.72 after the stock recently hit a new 52-week low of $12.61. Investors are pleased about the combination of actions that GE announced today, notably the health-care spinoff, a plan to reduce net debt at the core industrial company, and continued asset and debt reduction at GE Capital. The dividend, now an annualized 48 cents, is expected to decline by an unspecified amount after the health-care split to reflect what the company called “health-care industry practices” and “industrial peers.” This means the combined dividend of the new GE and the health-care division will be lower than the current payout. The stock now trades for about 14.5 times projected 2018 earnings of 94 cents a share and yields 3.5%.The remaining part of GE will be dominated by three divisions—the now-troubled power-generation unit, a maker of utility-scale natural-gas turbines; aviation, GE’s crown jewel; and GE Capital, a financial-services unit. GE Aviation is the leading maker of commercial jet engines in the world, operating in an effective duopoly in both the narrow-body and wide-body aircraft markets. GE put forth some ambitious goals, notably to make up all the lost earnings from the health-care division, a leading producer of imaging equipment like CT and MRI scans. The unit generated over $3 billion in operating income last year and is expected to produce more than $4 billion in earnings before interest, taxes, depreciation, and amortization, or Ebidta, in 2018. GE aims to offset the lost profits with cost reductions and earnings gains at the remaining businesses—notably power generation and aviation—by 2020. That lofty goal seemed to catch some analysts by surprise on the company’s earnings conference call this morning.(Andrew Bary, Feature,6/25/18)

IBM-The US patent and trademark office just issued its 10th million patent since 1836. You might think patents are important enough to drive stock prices; you would be wrong. The US patent leader isn’t Apple, Alphabet (Google) or Amazon. It has long been IBM, which scored a record 9,043 patents in 2017.and has held the patent crown for 25 years straight. Number 2 on the list is Intel, with a third of IBM’s patents but a market cap of almost double. Given the Big Blue’s stock price has hardly changed over the past decade, patents don’t appear to predict stock prices. (Nicholas Colas of Data Trek, Market Week, 6/22/18)

Have a great month!

Fernando