The Trade War “Weighs Like A Big, Dark Cloud On The Global Economy”

Plus, last week’s trade discussions were constructive, the U.S. manufacturing sector hit a five-month high this month, WeWork’s CEO is facing pressure to step down, and Lululemon shares were just upgraded.

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Stocks traded down slightly Monday morning with the Dow down 43 points, or -0.2%. The S&P 500 and Nasdaq both slipped -0.1%.

The U.S. manufacturing sector hit a five-month high in September, according to IHS Markit. At the initial reading, the U.S. manufacturing Purchasing Managers’ Index reached 51.0 this month, the highest figure since April and up from a contraction in August. The final reading from Markit for September will be out on October 1. According to the firm, the sector has seen a boost this month from stronger new order growth and rates of output, but warned that export orders continue to weaken. “Although picking up slightly, the overall rate of growth in September remained among the weakest since 2016,” said Markit’s chief business economist, Chris Williamson. “Prospects also look gloomy, with inflows of new business down to the lowest since 2009 and firms’ expectations of growth over the coming year struck at one of the most subdued levels since 2012.”

The Chinese trade delegation’s cancellation of a planned visit to U.S. farms sparked a wave of investor pessimism on Friday. It turns out, the cancellation of the proposed visit wasn’t a sign of worsening relations between China and the U.S. after last week’s lower-level trade negotiations, but rather a request from U.S. Trade Representative Robert Lighthizer’s office not to go for domestic reasons. The news of the cancellation came about an hour after President Trump said he was not interested in a “partial deal” on trade. China’s Vice Agricultural Minister Han Jun, a member of the delegation, said this weekend that “Negotiations on the agriculture area went very well, and the two sides held thorough and candid communication.” Han also noted that China is willing to expand its agricultural trade with the U.S. and deepen cooperation “on the basis of equality and mutual respect.”

In other trade war news, incoming European Central Bank President Christine Lagarde told CNBC this morning that the biggest threat to the global economy is the U.S.-China trade war. The ex-French finance minister is replacing Mario Draghi as European Central Bank president in November, and said the trade dispute “weighs like a big, dark cloud on the global economy.” Lagarde said that the tariffs that the two countries have put on each other’s goods are set to shave 0.8% off global growth in 2020. “That’s a massive number,” she said. “It’s fewer jobs. It’s less business going on. It’s less investment. It’s more uncertainty. … The longer this lingers, the more uncertainty sinks in. And if you’re an investor, if you’re an enterprise, whether small, medium size or big, you’re not going to invest, you’re going to wait. You’re going to sit and wonder where the supply chains are going to be organized.”

Federal Reserve Bank of New York President John Williams said today that last week’s turmoil in the money markets brings up questions about the levels of bank reserves in the financial system. Williams said in a speech this morning that it is “important that we examine these recent market dynamics and their implications for the liquidity needs in relation to the overall amount of reserves held at the Federal Reserve.” Last week saw volatility in the money markets that hasn’t been seen since the financial crisis as rates in the overnight repo market surged to 10%, pushing the Fed’s own funds rate above the top end of its target range. Fed officials responded by injecting billions into capital markets last week, and the central bank announced on Friday that it would continue the cash injections through October 10. “We will continue to monitor and analyze developments closely,” Williams said, adding that officials “will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet.”

The WeWork saga continues this morning after reports that the We Co. board is meeting today to possibly discuss removing Adam Neumann as CEO as the startup tries to salvage its troubled IPO that was delayed again last week. Neumann has been at odds with WeWork’s largest investor, SoftBank, and it’s reported that Masayoshi Son—founder of the Japanese conglomerate—is among those pushing for Neumann’s resignation amid widespread criticism of the company’s spending and governance. “It’s Uber-scale mess,” said Kellie McElhaney, a professor at the University of California Berkeley’s Haas School of Business. McElhaney said that both Neumann and the company’s board are to blame for not learning from earlier mistakes. “He’s really taken a first-mover advantage that WeWork had in the space and blown it in a big way.”

Lululemon shares are up nearly 3% this morning after Piper Jaffray initiated the stock as Overweight. “We see the brand as a share gainer in a secularly growing category with accelerating opportunity in men’s and international. … Improving profitability in Europe, success in recently launched selfcare, and loyalty program adoption could be upside catalysts.” Shares of online pet supplies retailer Chewy are up 5% currently after shares were upgraded to Buy by Nomura Instinet. “The stock has traded off since reporting 2Q19 earnings last week driven, in part, by higher-than-expected SG&A. We feel these concerns are overblown; normalizing for certain new and/or non-recurring items (such as fulfillment center buildout and public company costs), the company’s SG&A as a percent of revenue was in line with 2Q18, while gross margins expanded 300bps year over year. Considering 2Q19 and 2Q18 were both quarters in which new FCs were launched, we remain confident that the core business continues to perform.”

Stocks We’re Watching

Burlington Stores (NYSE: BURL): Burlington shares 19% late last month after the off-price retailer reported an earnings beat. The company reported a strong 3.8% increase in comparable-store sales while total sales jumped 10.5% to $1.66 billion, beating analyst estimates of $1.63 billion. Last week, UBS analyst Jay Sole upgraded Burlington shares to Neutral from Sell. Sole said tariffs from the U.S.-China trade war are a net positive for Burlington, given the pain they have caused to other retailers and the fact that Burlington and its off-price peers have accelerated their market share gains at the expense of department stores in recent years.

Americold Realty Trust (NYSE: COLD): Shares of Americold are up 44% so far this year and nearly 5% over the last week. This temperature-controlled warehouses owner and operator is going ex-dividend later this week, and investors who purchase the stock before September 27 will receive a dividend payment of $0.20 per share on October 15. Americold is the second-largest owner of temperature-controlled locations, putting it in a great position to take advantage of the rise in demand from the rapid growth of e-commerce.

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