August 13, 2018

Stocks opened higher this morning but quickly faded on Turkey fears. The Dow and SPX are currently down 100 pts & .23%, respectively. Retailers, semiconductors and some FAANG stocks are clinging to small gains, but most everything else is in the red. The VIX Index  is trading up around 14, the highest in two weeks but still considered very low. Exchange trade volume is 11% below normal levels for this time of year, according to Bloomberg. European markets are down .5% and most of Asia was down more than 1% last night. The dollar appreciated about 1.2% over the last week as emerging markets currencies are losing ground. Not surprisingly, commodities are falling in value. WTI crude oil is down 1% to trade around $66.60/barrel. Remember, oil was over $70/barrel a month ago. Bonds are slightly lower in today’s trade. The 5-year Treasury yield is hovering around 2.74% and the 10-year is trading at 2.87%. 

Bloomberg characterizes Turkish President Recep Erdogan’s idiocy as, “defiance toward…financial market orthodoxy.” In other words, he is mis-managing his country’s economy. Make no mistake, the political row over the US pastor held hostage in Turkey has very little to do with the economic crisis. It has everything to do with financial mis-management. The big worry with Turkey, of course, is contagion. Could the damage spill over to other emerging markets, and are there hedge funds out there that will take huge losses if it does? This morning on CNBC, Jim Cramer said, “There’s definitely some clown fund out there that’s on the wrong side of the trade.” That matters for traders and short-term investors because hedge funds sometimes invest as a herd and when things go wrong they all need to sell quality assets to meet margin calls. Remember what happened in late January? Still, the fears expressed in the financial news media seem overdone. Mr. Cramer reminds us that the aggregate market cap of all Turkish stocks doesn’t even equal the market cap of Johnson & Johnson (JNJ). And it’s unlikely that this could transition to a full-blown currency crisis like we saw in 1997. That said, real investors are concerned about the currency impact on earnings for US multi-national companies like Nike (NKE) or 3M (MMM) or Procter & Gamble (PG). As we know, second quarter US corporate earnings growth eclipsed 20% and Wall Street is wondering whether strong profit growth can be sustained in the second half of the year. 

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