Nuts and bolts matter. What companies say matters. How companies do matters.
And on a day like today it can make all the difference in the world.
Let me give the context of conventional wisdom and then let me give you the overlay of how companies are doing versus that conventional wisdom.
This morning I had the great privilege of interviewing my old television partner Larry Kudlow, who is now the president's chief economic adviser, at our Delivering Alpha conference. It was chilling.
No matter what you think of the stock market, world trade is top of mind and China is at the tippy top. If you listened to Larry you don't want to own a share of any company that does a lot of business in China because China hasn't given an inch on trade. As he said "as far as we know, President Xi does not wish to make a deal. I'd love to be wrong on that, we are waiting for him. Ball is in his court. Tit for tat biz. Nobody's favorite path. They can end that this afternoon by providing a more satisfactory approach."
After that, though, he made it clear that even as others around XI might want a deal without Xi there won't be one. That's a direct contrast to those in the administration, including Treasury Secretary Steve Mnuchin, that things could go better. My jaw dropped when I heard this news because I had thought that the Chinese might be taking a more conciliatory tone in order not to wreck their own economy which, I believe, is already being hurt by a slowdown in cross border trade with us. We buy $500 billion of their goods and we are putting tariffs on about half of that. I thought that would have brought XI to his senses. Obviously now that's not the case and Larry, a free trader from way back, is obviously a true believer that we are in a trade war and we need to be fighting back as we are, if not harder. So much for distance between him and his old friend but Chinese antagonist Peter Navarro, whom I regard as the president's chief adviser on China matters.
I took solace that Larry told us to stay tuned about other trading news including a potential break in trading negotiations with the EU that will begin in earnest next week. Any escalation to where there's a tariff war over autos, for example, could really disrupt world trade. And Larry said that the talks with Mexico are going quite well.
Still, though, anyone who watched my old pal Larry go off on China knows that if you are owning companies that we call the "China companies," as in Boeing (BA) or Caterpillar (CAT) or United Technologies (UTX) and Emerson (EMR) and so many others, you need to be quaking in your wingtips. China's gotten a lot worse, not better and could get worse still.
When I used to work with Larry on Kudlow & Cramer, Larry would give you the broad macro and I would then weigh in with the micro, what the companies are saying, and right now the companies are very much at odds with the China trading narrative BUT very much in synch with Larry's other comments about the economy. I postulated that the economy this quarter past may have grown by as much as 4%, something that Bank of America (BAC) CEO Brian Moynihan said is possible. He agreed and said that, because of the tax cuts and the pro-deregulation policies, we could be in the "four-ish" camp, even higher than the 3% thesis that he propounded that so many laughed at.
It's that part of his talk, not the China trade war, that controlled today's session and that the Chinese culprit is going to be minimized by the earnings we are going to get from our companies. The earnings from the companies and the growth in employment will even allow us to deal with a deficit that he regards as manageable. He's a terrific historian of exactly this kind of issue, and I don't like going against him.
Who is going to do this? What makes me so confident. I have three cases in point, airline company United Continental (UAL) , CSX (CSX) , the railroad giant, and Alphabet (GOOGL) , formerly the G in FANG.
First, one of the biggest dampers on this market has been the transports. I have always been a devotee of the transports. They are about commerce. If commerce is weak, then the stock market is going to get weak. We got some real downer numbers from Delta (DAL) and American (AAL) of late and they were beginning to make me question how much we should be paying for stocks.
Then United Continental lights it up with a big boost to its full year forecast -- $7.25 to $8.75 when the street was looking for $7.00 to $8.50 -- and a terrific upside surprise for the quarter, despite the huge boost in the price of oil. Plus, the company shaded down the capacity growth which is key to future numbers for all. My conclusion? Don't despair about the transports, just question how American and Delta are doing versus the share grabbing UAL.
How about CSX? The railroad always lists how each cargo is doing, how well it is performing versus last year and the results were staggering. First, overall revenues were up 6%. Now listen to the cargo growth: Chemicals up 7%, Autos plus 7%, Agriculture and Food up 2%, Minerals advanced 7%, Forest Products up 11%, Metals and Equipment plus 11%, Coal up 7% and Intermodal up 9%.
I typically would not go over those numbers except every one of them is pretty fabulous as a read for the economy. They do sound fourish, as Larry Kudlow says. These numbers suggest a boom in housing, autos, mining and manufacturing in Southeast America.
I have been saying for some time that I am seeing a manufacturing renaissance in this country, a sustained comeback at much higher levels than most think possible if you unshackle the economy and harness all of our bountiful natural resources.
These CSX numbers tell you it's happening.
Finally, there's Alphabet. Last night the EU slapped a $5 billion fine on its Google business for alleged monopolist behavior. I was up when the news came down shortly before 5 a.m. and Alphabet's stock got dinged for more than 15 points.
But as the morning progress Alphabet's stock started roaring. I think it's because when you have more than $100 billion in cash it doesn't matter what the EU does when it comes to fines. Yes, business is so good for Alphabet, which has its fingers in so many tech pies, from search to online video to cellphones to cloud storage, that people will not part with its stock even after a $5 billion fine.
Why does this matter to the overall micro mosaic? Because it dovetails with Larry's sanguine view despite the China spat. And if we get that 4% we are going to find out that the stock market is, ultimately, undervalued.