Strong Earnings

Banks to Insurers delivered robust results for the latest quarter. Stocks began the week with scattered losses but quickly turned higher after results were released. Economic data also helped reassure investors about the ‘growth outlook.’ Data released on Friday showed retail sales rose significantly in September, despite economists’ worries about the ever-present Delta-Variant of Covid-19, and the upcoming end of ‘enhanced unemployment benefits.’ Investors had been bracing for a dip but not because anything is wrong with the economy. Demand is solid, employment and wages are rising. “The timing just felt right,” says Frank Cappelleri, Instinet Strategist. “As August ended, it was difficult to identify more bullish (stock) patterns.” He notes, “The S&P 500 is up more than 100% from March 2020 lows.” Six weeks of directionless trading might have been as bad as it was going to get. For the week the S&P 500 added 33 points to 4471, posting its best weekly performance since July. The Dow Jones Industrial Average gained 382 points or 1.6% to 35294, its largest gain since June. The technology-focused Nasdaq Composite ticked up 74 points, closing at 14897.

Decade High Cotton Prices Reign, as China turns to the U.S. for Supply… Cotton futures are trading at their highest price in nearly a decade, with Chinese demand being met in part by rising U.S. exports to China. Active U.S. cotton futures trading on the Intercontinental Exchange closed Tuesday up 3,8% at $1.09 a pound, keeping prices at their highest level since September 2011. Prices have risen 22% over the past 11 sessions. Higher clothing prices could eventually follow. Beware, cotton wearers. Prices for other raw materials, such as lumber, have surged this year, because of high demand and supply-chain ‘kinks’ that have kept goods from getting to market. Prices for other U.S. crops, such as corn and wheat have jumped this year amid drought conditions in the U.S. and abroad. Last year President Trump banned U.S. imports of clothing and other products made from the Xinjiang region, China’s largest cotton-producing area. The administration said at the time that there was evidence that the products were made with forced labor by the Uyghur ethnic group. U.S. companies still can import cotton products made in China if the cotton itself is from somewhere else. China is importing cotton, much of it from the U.S.–to make goods and ship them back. China’s thirst for cotton imports is massive, now with the U.S. satisfying their demand. According to the U.S. Department of Agriculture, the pace of U.S. export sales of cotton to China since the start of the new marketing year on August 1 is 83% higher than this time last year. “If you cannot use Xinjiang cotton, you have to import a lot more cotton and yarn,” said Peter Egli, the director of risk management for Plexus Cotton Ltd. He added that China was filling its cotton needs from other significant exporting countries, such as India, a major exporter. As U.S. farmers begin to harvest their crops, the USDA reports that the cotton crop nationwide is 13% complete and the crops being harvested are looking good–with 62% of them in good-to-excellent condition, versus 40% at this time last year. A beautiful time for U.S. growers, and looking positive for years to come.

Coal-Supply Shortages are Pushing Prices for the Fuel to Record Highs…and pressuring the challenges of ‘weaning the global economy from one of the most important–and polluting–energy sources.’ Reducing carbon emissions, the pollutant (Coal) is a worldwide concern. Australia’s Newcastle thermal coal, a global benchmark, is trading at $202 a metric ton, three times the price at end of 2019. Global production of coal, which generates around 40% of the world’s electricity, is about 5% below pre-pandemic levels. China, the world’s second-largest economy and its biggest coal consumer is ‘at the heart of the current ‘crunch.’ As Beijing has sought to meet climate targets and initiate shifting to renewable energy, it allowed its coal inventories to dwindle. On top of that, China has halted coal imports from Australia amid serious diplomatic disagreements. As a result, China has ventured to Africa, South America, and Europe in search of suppliers. “When economic growth gets crunched coal demand slows and everyone thinks we’re transitioning away from coal, but as soon as growth comes back, coal use accelerates again,” said Rory Simington, an analyst at energy researcher Wood Mackenzie. “There’s a difference between what people perceive happening in energy transition, and what’s actually happening,” he said. Part of the coal supply crunch has resulted from production halts as countries try to hit emissions targets. Spain, for instance, shut half its coal production last year and promised to phase out all coal-fired power plants by 2030. As most countries’ take seriously the ‘shift’ to renewable energy, serious problems in the transition ‘loom ahead.’ Fortunately those ‘on board’ are bracing for ‘big bumps’ in the road ahead.


James Gorman, CEO, Morgan Stanley, spoke after the firm’s earnings release. Barron’s “You’ve got to prick this bubble a little bit. Money is a bit too free and available right now.”

Lisa Calvasina, head of U.S. equity strategy at RBC Capital Markets. Barron’s “Things are looking better. Shipping costs have started to fall,” she says, pointing out that costs started to drop as Covid-19 infections began to fall again. She likes “Energy and Financial sectors as being insulated from supply-chain problems.”

Robert Phipps, director at Per Sterling Capital Management in Austin Texas. Barron’s “This economy has been riding around with training wheels for quite some time now, and (policymakers) are about to take the training wheels off,” says Mr. Phipps, “We’re still in a bull market, but it’s going to be a tougher slog from here.”

Richard McGuire, head of rates strategy at Rabobank, WSJ “We’ve seen an ebb and flow this week,” he said. Mr. McGuire expects the inflation burst to fade, as “high prices will sow the seed of their own downfall,” with consumers starting to spend less.