Getting Perspective on China's Crisis

 | Jan 23, 2014 | 1:52 PM EST
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We have our first crisis of the year, and we are handling it as terribly as can be expected, given that fact that it is unexpected.

I am talking about the Chinese credit collapse and how we have all collectively decided that this is one that can reverberate into every company that has any exposure to China, as far ranging as Ford (F) and Coach (COH) and Boeing (BA) and Goldman Sachs (GS).

All crises are pretty much the same in the post-Great Recession world. There's the initial shock -- holy cow, there are problems in the Chinese banks! -- which shouldn't be much of a shock at all. However, until the last 24 hours, no one was really focused on the Credit Equals Gold No. 1 Collective Trust and the aches and pains of the China Credit Trust. We have all had endless assurances not to worry about China because the government has it all under control.

But when we have some bank potentially being allowed to go under or a bond being allowed to default, there are implications that aren't instantly patched up, especially when you have a declining Baltic Freight Index and a flash merchandise index report that are definitive downticks.

Hand in hand with that initial shock is the broad panic. The panic is immediately translated into stocks via the S&P 500 futures, and therefore everything goes down with it. All 500, hence the red on your screen.

Now, there's no use fighting the initial tidal wave. Especially given the fact that the strongest areas of this market so far this year have been industrials, techs and banks, and all of these areas are suspect, because so many do have ties to China. Do you want to buy Caterpillar (CAT) now, knowing that it has moved up and there's a giant Chinese component? Do you want to be the first to come in on top of the big moves in 3M (MMM) and United Technologies (UTX) and call the bottom?

I sure don't.

But there's also no need to panic. In fact, you want others to panic to give you the prices you want, not the ones you have had to take for some time now. It's always so easy to say, "I am cutting and running because of China," when perhaps we should be thinking, you know what, there are some bargains being created here, because while China is important to the world's economy, it isn't the U.S., which remains strong and on course for growth this year. One look at the strong existing-home sales and the very good employment claims we got this morning will prove that claim. Neither should be hurt by the potential collapse -- not the collapse but the potential collapse -- of a Chinese bank that might still be saved by the Communists.  

Nevertheless, that doesn't mean you need to be a hero and buy something on day one. That strategy can be as hurtful as panicking itself, and it's usually fraught, given the tidal wave of futures selling, almost assuredly making you have to take another bite of the apple lower and later. It's still early enough for the most nimble to sell, as we are barely down for the year, and we were up 32% last year.

But day two, tomorrow, that's when it will already be too late to sell some stocks, even as others will most surely fall.

Day two is when you figure out what shouldn't have been taken down with the futures, what isn't really affected but has gotten hammered as surely as if its chief earnings stream came directly from Beijing. I spend an immense amount of time in Get Rich Carefully addressing just this kind of broad-futures-led panic and how to handle it, so I feel that the perspective I have can really help here, as so many people presume it is "game over" exactly when it might be "game on."

My suggestion for today is that unless you have a specific company that just reported an amazing quarter, just sit on your hands and do some work on the stocks that are being brought low by the futures, particularly the drugs, the foods, the domestic banks and other healthcare names.

Ideas? How about Unilever (UL), which just reported a terrific quarter earlier in the week? How about Mondelez International (MDLZ), where activist Nelson Peltz just joined the board? How about a troika of companies that never seems to come down: McKesson (MCK), AmerisourceBergen (ABC) and Cardinal Health (CAH)? Or consider some of the charmed big pharmas here, such as Merck (MRK) or Bristol-Myers Squibb (BMY).

I would normally say domestic retailers, but the Achilles heel here is that there are earnings difficulties that can't yet be said to be discounted enough by this market. Same with restaurants, although the staying power of McDonald's (MCD) after still one more disappointing quarter is pretty amazing. Wendy's (WEN) did deliver better numbers, and it has no exposure to China. I would be more aggressive, but we need to see what Starbucks (SBUX), which has China exposure, has to say tonight. Notice, however, that Brinker International (EAT) is up nicely, owing to its excellent report.

You can also pick at your favorite bond-market-equivalent stocks -- the always out-of-favor by the analysts but in-favor by the regular guy stocks, such as Clorox (CLX) and Kimberly-Clark (KMB), come to mind. But so do the real estate investment trusts and master limited partnerships that are not connected to retail, such as Ventas (VTR), the nursing home company, or Linn Energy (LINE).

Some real gunslingers might be tempted to buy Netflix (NFLX) even up here, or Tesla Motors (TSLA) or (AMZN), the cult stocks that spring back first, although I still think they are better day-three material. And of course, the natural gas stocks should spring back quickly, too, owing to the cold weather.  

I would normally recommend that you revert to some of the themes I trace out in Get Rich Carefully for tomorrow's purchasing, namely the holy trinity of tech, social mobile and the cloud, and the biotechs and health and wellness stocks. Unfortunately, they were all on a roll coming into this crisis, so they might be more of a day-three or day-four consideration.

But the biotech stocks, namely Gilead (GILD), Regeneron (REGN), Biogen Idec (BIIB) and Celgene (CELG) have been too hot, and holy trinity names like (CRM) or Facebook (FB) or Twitter (TWTR) have also been too steaming to pick up today.

Day three will be the day to pick up the unaffected banks, the regionals, which have been terrific to date and which have nothing to do with China but have been brought down by the ETFs that handle the financials. I also like many of the special-situation plays, Dow Chemical (DOW) and perhaps eBay (EBAY), which are under activist pressure.

Only on day four will it be safe to buy industrials, because they are all guilty until proven innocent, and the terrifically performing techs, notably the telecom-equipment stocks. You could normally be more aggressive and shift those to day three, except that there's so much direct and indirect exposure. Not coincidentally, the day-four stocks are still going to be regarded as sales today and the beginning of tomorrow as longs and shorts anticipate further declines.

You might ask, why do anything? Why not let everything come down? Here's the issue: You are being given some entry points that would be wiped out if the Chinese suddenly ease to take care of the situation. Do you want to avoid picking at Alcoa (AA) if it comes down to $10 after this selloff? Don't you want to buy an already-vetted United Technologies (UTX) or a Union Pacific (UNP)? I know I do.

Again, no need to rush into anything. Today is the first day most have heard of the China Credit Trust or the Credit Equals Gold No. 1 Collective Trust, and obviously, it won't be the last. China is the second-largest economy in the world. It never pays to be too sanguine in the face of any crisis. I also want to keep one eye on the debt-ceiling negotiations that seem to be kicking off now. The pundits are reassuring us not to worry. That's precisely why you do need to be worried.

Just remember that things are better here than they have been in ages and that China has a habit of surprising us to the upside when you think that you are about to cliff-jump without a net. 

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