Happy US Thanksgiving! The US stock markets were closed Thursday with a 1pm early close on Friday. This week was light on economic data but not light on market moves. Oil fell 7.7% Friday which was its biggest one day drop since July 2015. We look through the distractions and focus on the facts.

Distractions:

US Vice President Mike Pence said that the US has put $250B of tariffs on China and could double that. There is also the risk of increasing existing tariffs from 10% to 25% on some products.

President Trump has essentially dismissed the CIA report that the Saudi Crown Prince was directly related to the authorization of a journalist. Trump has indicated that he doesn’t want trade ties ruined between the countries and Saudi Arabia also acts as a balance of power in the Middle East against Iran which is beneficial to the US.

Apple’s stock continues to sell off as parts suppliers said that their major buyers are not expected to have as many orders. This was related back to Apple as less demand for their new iPhone XR.

The Facts:

Tuesday:

  • US: Housing Starts at 1.228 million from 1.201 million in October. Expected at 1.23 million.
  • Germany: Producer Price Index YoY 3.3% from 3.2% previously and 0.3% from 0.5% on a MoM basis

Wednesday:

  • Target and other companies reported earnings. Target was down over 10% at times as analysts questioned the costs on the digital sales and other expenses. The company largely said it was due to transportation costs which was because they were moving a lot of product. The market didn’t like the answer.
  • US Mortgage Applications -0.1% from -3.2% previously
  • US Initial Jobless Claims 224k from 221k
  • US Existing Home Sales 1.4% from -3.4% previously
  • UK Public Sector Net Borrowing GBP-7.956B from GBP-1.981B
  • Canadian Federal Fiscal Update announced greater acceleration of certain expenses rather than amortizing them over a longer period of time. This is seen as stimulative in nature but was already largely priced into the market.

Conclusion:

This week showed that housing improved a bit while jobless claims worsened a little. My fear is that without resolution of trade deals that the tight labor market and rising inflation will ultimately be a drag on corporate earnings and that there is little fiscal stimulus to be added in as the US 1.0 tax breaks were already passed and US tax breaks 2.0 that would include more consumers rather than companies is not as likely. Monetary stimulus is being steadily withdrawn as interest rates are increasing by an expected 1% over the next 12 months. One expected in December and three in 2019.

This ultimately will be a drag on consumer and housing behavior unless.

On a positive note, copper seems to be improving with the recent lows failing to reach the previous lows and well up from the August low. They call it Dr. Copper because it is used in many industrial applications and can be a good measure on economic activity.

While the TSX is down 8%, the US S&P 500 is down 4.2% year to date. Even though the TSX is down more and may have better value we still see the US as a stronger economy with more room to grow. Further, in a down turn we feel it will be more resilient and bounce back faster relative to other countries.

Catalysts we look for to see a positive move up in the market are reconciliation of US/China trade relations, an easing on rate increase rhetoric from the US Fed and a strong Black Friday and Cyber Monday sales in the near term. As of Friday November 23, Mastercard is expecting a 9% year over year increase in sales for the day after Thanksgiving in the US and a 5% increase from November 1 to Christmas Eve year over year. Not bad and shows a strong economy in our opinion.

November 26 to December 1 holds the G20 meetings in Argentina and may provide an opportunity for China and the US to either mend fences or go fencing together. Our hopes are for resolution as a further drag on trade talks causes pain for everyone however this may be the opportunity that the markets are hoping for. In the meantime rumors and news circulate at every comment about trade. We feel that market reactions are strong with these headlines. We expect a big positive bounce if a trade deal is reached.

Portfolio wise we are holding steady and any new money we see will be put cautiously to work on pull backs when opportunities present themselves. Should the outlook worsen we will look to reduce slightly on strength as we are already fairly defensively positioned in general for most portfolios.

Weekly Wealth Tip:

There are great differences between mortgages these days. Many people receive a renewal letter from their bank and sign it back without realizing that those rates can easily be negotiated and lowered. There can be significant differences and cost savings between what the banks’ first offer is and a final offer.

At TK Dale Wealth Management we have the ability to shop around for rates whether it is a bank, credit union or monoline lender. Many people end up moving before 5 years or choose to refinance or do upgrades to their house which may bring penalties to break the terms of the mortgage.

There are many different lenders and each has their own unique way of calculating prepayment penalties. We are in touch with many lenders and can find the most flexible lender at the best rate for you.

It’s worth asking around as many Canadians have very monogamous relationships with their financial institutions and are often very good at preventing wandering eyes to a more attractive lender. While it is good to stick with long term human relationships, as the president of your family’s business you have a duty to do what is fiscally responsible for your family: To maximize returns and minimize expenses.

If you have a mortgage coming due in the next two years, contact us know and let us know the maturity date so we can do the heavy lifting for you prior to maturity.

Until next week.

Trevor Dale, CFA

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