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US–China trade war optimism? Big companies are not buying it

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If you follow the markets, there’s been recent reason for optimism about a U.S.-China trade deal. Some investors are buying it — literally — with recent gains in stocks attributed to positive signals from the U.S. and China after a volatile August. But there’s one group of market insiders not buying the talk: corporate executives. In other words, the people who run the companies whose publicly traded shares have been rebounding.

Top executives in the U.S. and around the world are not placing bets that the U.S.-China trade war will be resolved anytime soon. In fact, corporations say they expect to feel the pain of trade tensions over the next six months, according to the third-quarter CNBC Global CFO Council survey. The quarterly survey finds CFOs around the world increasingly are worried about U.S. trade policy as a business risk factor.

Chief financial officers also downgraded their view of the U.S. economy, from “improving” to “stable.”

If a trade deal remains elusive, even that stability may not last long. “With this level of uncertainty between the U.S. and China, I would think ‘stable’ might actually be a win a couple of quarters from now,” said Jack McCullough, president and founder of the CFO Leadership Council, an executive networking group. “I cannot recall when CFOs were as jittery about a change in policy as they are today.”

The CNBC Global CFO Council represents some of the largest public and private companies in the world, collectively managing more than $5 trillion in market value across a wide variety of sectors. The Q3 2019 survey was conducted between Aug. 21 and Sept. 3 among 62 global members of the council.

Trade is the biggest risk factor

Thirty-five percent of CFOs cited U.S. trade policy as the “biggest external risk factor,” which was more than double the second biggest risk highlighted: “consumer demand.” Fears about trade were up from 22% in the second quarter. There was an important split between U.S. CFOs and those based around the world. Thirty-five percent of U.S. CFOs cited consumer demand as the top external risk factor, which can be explained by the fact that the resilience of the U.S. economy, in spite of slowdowns in Europe and China, has been based on consumer strength.

What is the biggest external risk factor currently facing your business? — CNBC Global CFO Survey Q3

U.S. CFOs taking the survey did reveal significant concerns about the trade war in other responses. About sixty-five percent said trade policy will be a negative for their business over the next six months. In Q2 that had dropped to 40% — possibly due to a prevailing and false sense of security that a deal would be easier to achieve than has proven to be the case — but it is now back up to a level consistent with the Q3 2018 through Q1 2019 surveys.

“The surprise may be that only about 65% of CFOs view that trade policy will be a negative for their organizations,” McCullough said. “While at a macro level it’s easy to understand the motivation behind the recent policy changes, I can’t find a single CFO who has told me it would be a positive for his or her business. … It is uniformly negative for their business, at least in the eyes of finance chiefs.”

While at a macro level it’s easy to understand the motivation behind the recent policy changes, I can’t find a single CFO who has told me it would be a positive for his or her business.

Jack McCullough

president and founder, CFO Leadership Council

McCullough noted that his networking group offers an online forum for more than 1,100 chief financial officers to discuss issues of importance to their business. He said there never has been a question that he can recall about government policy that has dominated discussion as much as the trade policy has recently. That discussion has included whether manufacturing is moving and strategies for dealing with tariffs. “It is top of mind, and they are not confident they will emerge from this unscathed,” he said.

Nearly half of North American CFOs surveyed by CNBC said they are facing higher input costs, and more than one-quarter said they have increased prices to offset those costs. They were more likely than European or Asian counterparts to say they have experienced higher costs and passed on those costs to customers. And more likely to say they have moved operations to minimize the impact of tariffs, though that was less than 20% of CFO respondents. While U.S. CFOs indicated in the survey that they were not confident about increasing their capital spend, less than 10% said they had delayed or canceled projects because of trade policy.

Impact of trade tensions new new U.S. tariffs—CNBC Global CFO Survey Q3

The daily headlines can be tougher to measure. On Thursday alone, news broke that the U.S. and China were considering an interim trade deal, but a few minutes later a senior White House official told CNBC no such deal was in the works. President Donald Trump did agree to delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a “gesture of goodwill,” and that move was matched by China, which said it would restart purchase of some U.S. agricultural products. Then later in the day, President Trump told reporters he would be open to an interim trade deal with China but would prefer a lasting deal. “It’s something we would consider, I guess,” Trump said.

The U.S. and China have agreed to meet again at the negotiating table in October, a plan that was reported after an early September phone call between Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.

CFOs view of the trade war is not yet influencing their thinking about President Trump’s reelection chances. The survey found the majority of CFOs of the belief that Trump will be reelected in 2020 and the U.S. economy will not slip into a recession next year.

Trade weighing on business investment

Meanwhile, the trade uncertainty may be weighing on business investment, which declined in recent months to a three-year low, and has been cited by business trade groups as a reason trade deals need to be completed.

Fed chair Jerome Powell said on last Friday, “I think it is the case that uncertainty around trade policy is causing some companies to hold back now on investment. … So for businesses, to particularly make longer-term investments in plants or equipment or software, they want some certainty that the demand will be there.”

U.S. CFO responses to the third-quarter CNBC survey show they are hesitant to approve capital spending and hiring plans. The U.S. was the only of the three global regions surveyed — Europe and Asia are the other two — in which CFOs said it was more likely that both spending and headcount remain at the same level, rather than increasing, in the next year. Asia-Pacific was the only region where as many CFOs said they would decrease as increase spending.

“If the CFOs are correct — and on matters of their own company they usually are — this is really unfortunate,” McCullough said. “We’ve witnessed several years of increased hiring and capital spending.”

Capital spending over next 12 months—CNBC Global CFO Council Survey Q3

Hiring over the next 12 months—CNBC Global CFO Council Survey Q3



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Roku could fall another 30% before finding a bottom, chart suggests

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The streaming wars may have claimed a new victim.

Roku shares plummeted nearly 30% last week, its worst weekly performance stretching to its 2017 IPO.

The streaming platform stock was pummeled Friday after Pivotal Research slapped a sell rating and $60 price target on it, fearing a rush of competition in the space. It was crushed days earlier after CNBC owner Comcast announced it would offer a free streaming box to its internet customers.

It could get even worse, according to Craig Johnson, chief market technician at Piper Jaffray.

Roku has “violated the uptrend support line off those April lows of this year. You’ve got some support that comes in at $113. But purely based upon the charts, your best support comes in all the way back down at the 200-day moving average. So you can see the stock trade back down to $81, maybe even $75,” Johnson said Friday on CNBC’s “Trading Nation.”

A move down to $75 marks 30% downside from current levels. It has not traded at that price since May.

“The risk/reward isn’t favorable. Even though the stock is up, it has sold off quite a bit in here recently. I still think you got about 30% downside and maybe a relief rally of 7% upside, so I’d be selling into this move,” said Johnson.

Quint Tatro, founder of Joule Financial, does not see Pivotal’s note on Roku as the stock’s death knell.

“Obviously, the stock got way overheated, trading 25 times sales, but [Pivotal’s] rationale regarding losing market share I don’t agree with. You have to understand, this is a cord-cutting product so their whole rationale is that the cable companies are going to offer their own device for free in order to compete. I’m a Roku user. I own six of them in our home and office. I have not had cable for years so I would not switch to a cable device,” Tatro said on the show.

Tatro says a pullback in Roku’s share price to 14 to 15 times sales, around $100, would make him a buyer. Roku would need to fall 7% from Friday’s close to get to that level.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.

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The market rotation this month may have been driven by a technicality

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A trader works at the New York Stock Exchange in New York.

Wang Ying | Xinhua News Agency | Getty Images

What exactly happened during the “once in a decade” stock market rotation earlier this month that rocked investors? It might’ve just been a one-off technical move and not based on fundamentals.

A huge rotation out of momentum into value names took place suddenly last week. Many read the phenomenon as a warning sign as stocks with superior growth have led the market’s bull run in recent years and said a rebound in interest rates was the catalyst. However, the reversal in momentum, which seemed to abate this week, could be explained by a sudden stop in tax loss harvesting, some on Wall Street said.

The idea is that investors often sell losing stocks to lower their tax bill from the capital increases, a technical move that’s quintessential of a momentum trade — chasing winners and dumping losers. The amount of such activity might have decreased significantly last week due to speculations the Trump administration would pass a bill to reduce capital-gain taxes, therefore reducing the incentive to sell their losers.

“It’s quite possible some of the dominant robo advisors could have assumed that the U.S. administration would indeed follow through with its proposal on Sept. 9, and decided to change their optimization to take this into account,” Barclay’s head of equity derivatives strategy Maneesh Deshpande said in a note on Wednesday.

President Donald Trump earlier this month floated a proposal to tie capital gains taxes to the inflation rate, which could lower the taxes investors pay on profits from selling assets. He eventually ruled out such a plan on Sept. 11. But the discussion around the proposal last week coincided with the change in stock leadership that shocked many investors.

Tax loss harvesters might have stopped selling losers and adding winners on the prospect that capital-gains taxes would go down, which could make tax loss selling less beneficial. Such a change could have caused the downturn in momentum due to less selling of falling stocks and less buying of rising names.

The amount of active tax loss harvesting has ballooned over the years as robo-advisers, which automatically allocate assets in a tax efficient way, gained popularity on Main Street. Robo-advisers now manage about $1 trillion assets, up from $240 billion in 2007, according to Barclays.

“Of course, it is also entirely possible that some other investors would have put on the trade in anticipation of such a proposal,” Deshpande said.

The iShares S&P 500 Value ETF hit its highest level since January 2018 on Sept. 11 as the rotation hit its pinnacle.

Value, cyclical companies with low prices relative to earnings and book values tend to be sensitive to economic growth. However, embracing the group without a material change in the economy doesn’t make a lot of sense, analysts warned.

“Absent an improvement in underlying economics, we believe that the recent shift in leadership is unlikely to persist,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse said in a note Monday.



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‘Game of Thrones’ ends run with best drama award, 59 total Emmy Awards

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D. B. Weiss (C, speaking), David Benioff (3rd L) and cast and crew of ‘Game of Thrones’ accept the Outstanding Drama Series award onstage during the 71st Emmy Awards at Microsoft Theater on September 22, 2019 in Los Angeles, California.

Kevin Winter | Getty Images Entertainment | Getty Images

Despite mixed fan and critic reactions to the final season of “Game of Thrones,” the eight-season epic took home the top prize in the drama category at the Emmy Awards on Sunday.

Closing out the 71st annual television awards ceremony, David Benioff and D.B. Weiss thanked creator George R. R. Martin for entrusting his book series to the young producers more than a decade ago and praised the cast and crew for their work on the program.

Since 2011, HBO’s “Game of Thrones” has garnered 160 Emmy nominations and taken home 59 prizes for everything from acting and editing to special effects and sound mixing.

On Sunday, the program earned two Emmys, one for outstanding supporting actor, which went to Peter Dinklage for his portrayal of Tyrion Lannister, and one for outstanding drama.

Earlier in the month, “Game of Thrones” won 10 additional awards during the Creative Arts Emmy ceremony.

“Game of Thrones” final award tally falls short of the 67 Emmys that “Saturday Night Live” has accrued over its 44 seasons. “SNL” earned two statues on Sunday, one for outstanding variety sketch series and one for outstanding directing.

The final season was widely criticized by fans who felt the pacing and its treatment of previous character developments were not up to par. Still, the show continued to have record-breaking viewership.

Each episode, save for one, topped viewer counts from the season seven finale, which was the series high prior to season eight’s release.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.



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