Woke up early this morning. Earlier than usual. All of the usual adages ran through my head. "Buckle your chinstraps" ... "The Ugly Stick is out" ... The truth is that you are my people, and if you run net long portfolios (the vast majority of us), then you are going to get smacked around this morning. No way to sugarcoat this, and no -- it is not funny. Do we fear? No. We never fear.
We identify.
We adapt.
We overcome.
We carry on.
In that order. Know what you like, and what you don't. Know levels that draw your interest. Understand the intersection of risk/reward that fear (by others) and time will create in the options space. Can we win? We will win.
Rumble
Stocks trading in Hong Kong are nearly 3% lower. In Shanghai, it's even worse. That market is facing almost 4% declines. The smaller Shenzhen index was hit even harder. The largest smack-downs across Asia have been saved for big exporters. It's not just Asia. Globally, just about every significant equity index is being addled with sharp declines. U.S. equity index futures are behaving no differently.
Last night, President Donald Trump made his intentions clear, saying: "China apparently has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology." The president ordered his staff to draw up potential tariffs of 10% on an additional $200 billion worth of Chinese imports, if the regime in Beijing does not abandon its stated intention to retaliate in kind on the original $50 billion in tariffs. That's not it, gang. It gets worse. Much worse.
But Wait, There's More...
The U.S. Senate passed legislation last night that in effect reverses the punitive deal that the Trump administration had already struck that would lift the ban on the Chinese telecommunications firm ZTE. Shares of that firm were, at last glance, more than 20% lower in Asian trading. The president has also indicated that he is willing to go for another $200 billion in tariffs, on top of the additional $200 billion, if China still does not understand his seriousness.
If every tariff now threatened were enacted, the whole ball of wax would come to a total of $450 billion in Chinese exports to the U.S. that would face an increased cost of entry. Take a second now to put this in perspective. China's entire basket of exports to the U.S. last year only totaled a rough $505 billion in 2017. The result of such heavy import was a $337 billion trade deficit for the U.S. in goods and services traded with China. Bear in mind, to respond to a second or even third tranche of tariffs, the Chinese commerce ministry would have to focus on quality over quantity, as China only imported $130 billion worth of U.S. goods last year. It also means that President Trump holds a stronger hand than President Xi Jinping.
P.S. President Trump did bring up the idea of all nations dropping all tariffs at the G-7 meetings last week. That was met by resounding silence. Why would a group of "free-traders" be opposed to dropping all tariffs? Unless they had been winning so regularly for so long? Hmm.
Remember This
There is a little trick I learned a long time ago -- and it works. On days that I knew coming in that I would be trading in a hole, I place a blank post-it note over the spot on my screen where my P/L is visible. Why do I do this? Understandable question. If that number is awful, it attracts my eyeballs. I then over-trade. Out of sight, it becomes that much easier to make reasoned decisions. Trust me on this. I am old, and bear the scars of many beat-downs. I have been down this road a few times. On top of that, there are a few other tricks of the trade.
1) Understand that all victories and defeats are temporary. All obstacles can be overcome. All environments are adaptable.
2) You are reading this. Hence, you must be on this side of the dirt. That, my friends is how the story of every victory begins.
3) Visualize what you are trying to accomplish, and don't try to do to much at once. Multiple avenues of attack in your field of vision? Identify the most dangerous threat, and defeat that one item first. Then move on accordingly. Take a few minutes whenever you need to. Do some push-ups right next to your desk. By facing the demons in this way, you will raise your effective EQ. That gigantic IQ that you are so proud of will do you no good here. It is your smarts when under pressure that count in this sport. I'll take a two-fisted college dropout who worked multiple jobs to pay for tuition (who has an ounce of street-smarts) over the most accomplished career student in a crisis every time.
Potential Hide-Outs
We already know that increased tariffs are afoot. We know that the U.S. dollar is once again increasing in strength. That should also put the smack-down on large U.S. firms that do a lot of international business. This is why the Russell 2000 has been an out-performer of late, and will likely continue with that behavior today. The 2yr/10 yr yield spread has continued to flatten. That means that even with CCAR results due this week, the banks remain dicey plays.
Keep in mind that many of your favorite cloud names are not very dependent upon Chinese revenue. However, plenty of your favorite semiconductor names are. The passive nature of investment in the year 2018 will likely sink all boats, offering opportunity at a discount where it is warranted. Fool-proof strategy? Heck, we ain't got none of that today, kid. We're probably going to have to tape on the foil, and button down the jerseys. I think it obvious that the likes of Intel (INTC) , Micron (MU) , Skyworks (SWKS) , Texas Instruments (TXN) and Western Digital (WDC) will face some punishment. If this also puts undue pressure on names such as Adobe (ADBE) , Salesforce (CRM) , Splunk (SPLK) , or even Amazon (AMZN) , and Microsoft (MSFT) , well then I am likely to do a little shopping.
One More Thing
Even though the defense contractors have been under pressure, watch for news on naval maneuvers in the Pacific. In light of this trade news, such movement could be significant. In addition, yesterday, the president directed the Pentagon to create a sixth branch of the military -- the United States Space Force. If this proceeds, it will force others to compete. That's called an arms race, gang. That also means that to me, any sell-off in my favorite defense names from here is simply opportunity on sale. My favorites are Northrop Grumman (NOC) , and Raytheon (RTN) . I also have long positions in Lockheed Martin (LMT) , General Dynamics (GD) , and Kratos Defense (KTOS) . I am flat Boeing (BA) . I think it obvious that if the United States is to have a Space Force, then Boeing is going to have to be valued at more than the current 20x forward earnings. I also think BA deserves to be in my portfolio, despite any trade-related news.
Economics (All Times Eastern)
07:00 - Fed Speaker: St. Louis Fed Pres. James Bullard.
08:30 - Housing Starts (May): Expecting 1.313M, Last 1.287M SAAR.
08:30 - Building Permits (May): Expecting 1.35M, Last 1.364 SAAR.
08:55 - Redbook (Weekly): Last 4.3% y/y.
16:30 - API Oil Inventories (Weekly): Last -730K.
