Don't ever get comfortable with the best of our industrials because they are precisely the companies that might need to sacrifice some earnings on the altar of beating China.
That's your takeaway on a day like today, a day which is the opposite of yesterday because at the beginning of Tuesday's session we got word of back talks with Treasury Secretary Steve Mnuchin and China but at the end, after the market closed, we learned that we might be upping the stakes on the trade war.
That plus the almost zero-sum nature of Apple's (AAPL) success and its romp to the elusive trillion-dollar milestone, define today's mixed session.
First, let's do some stipulating. While there are globalists in the administration, and I would include Larry Kudlow and Steve Mnuchin, the globalist rhetoric does not extend to China. When you hear China you should be thinking one thing: as the statistics get more grim for China and they are getting grim, the president wants to accelerate the process and truly alter the way China does business with us.
The president has two advisers, Mr. Outside, Robert Lighthizer, the U.S. Trade Representative and Mr. Inside, Peter Navarro, an assistant to the president, Director of Trade and Industrial Policy and they are fair traders not free traders. They don't like globalism and they think the Chinese have totally taken advantage of us and that it's all zero sum with China rather than something where we both do well. Just to be sure, winning the trade war does not mean China must heel. It means that there is no give without a get. No more joint ventures with bogus Chinese companies that just steal our technology and take half of our companies' profits. No more targeting our industries to wipe our jobs out and create their own jobs. No more dumping, either.
Just to be sure, neither Navarro nor Lighthizer want our companies that have great growth in China to be pancaked by the policies they are pushing toward the president, policies that the president is eager and willing to adopt.
Ultimately when an American Express (AXP) gets approved to do business in China it shouldn't have to do it in a joint venture. When a Qualcomm tries to merge with NXP Semi (NXPI) the Chinese government can't block it. When our industrials want to do business in China they no longer want to give away their trade secrets. They want China to be like any other country to do business with.
Ultimately, I think one of the reasons why the stock market is doing so well, and we had such a fabulous July with the Dow Jones Industrials up 4.7%, is because of a budding perception that the Chinese have so much more to lose than we do. There's dissent among Chinese academics about the direction of the government. There's a recognition that the decline in exports and the layoffs that come with them are not tolerable.
Because of that stance it's real hard for the president to say "you know what? We have to start worrying about Boeing (BA) sales. We need to see if they will buy more Caterpillar (CAT) engines. Let's get more 3M (MMM) surgical masks sold." That's not the agenda.
I joked this morning that we came up with FANG. Now maybe we need a Navarro basket, and it would be an inverse ETF a group of stocks that go down when Navarro presses the jackboot to the PRC's jugular. You see the Chinese stocks rally off of Steve Mnuchin you slap on a Navarro, a basket made up of Boeing, Cummins (CMI) , Honeywell (HON) , United Technologies (UTX) and 3M and a bunch of others. Then when the boom gets lowered on the Chinese you sell your Navarro and kaching, kaching.
Of course, though, the other story line, Apple's stock, is also a zero-sum game. When Apple does well, it is so powerful that unless you have an app in the app store, you may not benefit nearly as much as you think. A supplier to Apple has a tough time because Apple is so important that it has gross margin clout, meaning it can appropriate your gross margins.
First, in the trade war, Apple is a form of Switzerland. It's a dominant company in so many markets, even as it is only the third biggest cellphone maker in the world--dominant because it owns the premium market, the most lucrative portion of the entire mosaic. It kicks butt in Greater China and put up some fabulous numbers for the quarter. But it is in employment that Apple has the real edge. If the Chinese want to keep people working, it needs to appease Apple and not just vice versa. Yep, Apple has so many people who assemble in China that it has real clout.
More important, the stock market, right now, is beginning to bifurcate Apple from, say, FANG, because Apple's got this tremendous service revenue stream that could be worth the entire enterprise value of Facebook (FB) right now-about $500 billion-if it continues at this current trajectory. Because of its incredible ecosystem and its fantastic brand loyalty, Apple's starting to be talked about as a consumer product stock. I just wish some major Wall Street house would transfer coverage from tech to consumer products so we could see how much cheaper Apple's stock is versus Clorox (CLX) , Procter & Gamble (PG) or Coca Cola (KO) and so many others in the group.
What's more important, though, is the gaping hole that is Facebook. As I said last night Facebook's stock has more tech fire power than Apple. There's much more pin action from the wounded social media king than there is Apple. So when Facebook's flying all the pins go flying. When Facebook's dying, the group gutters.
I get it. Facebook represents advertising, cloud, privacy issues and bad press. Apple stands for consumer products that are loved and a business predicated on NOT selling your name to anybody.
Apple's just enmeshed with those companies that are tied to the social media giant.
One other thought. This market gives you endless buying opportunities. We saw the banks get slaughtered when rates were going lower. Now that they are going higher-and the Fed signaled today that the direction's the right one-the banks are superb investments.
Drug stocks got slammed off of Presidential announcements. But their earnings were so strong that they became too cheap. They then got real love.
Today's hated group? Retailers. Many of them just got crushed on rumors that business isn't that strong. I am not buying it. I think that the last three months are the least important of the year and that back-to-school will be quite robust. That means you a lot places to win as I think so many are doing so well and almost all of them got crushed. I know there are concerns that the new tariffs, if put in place will hurt retailers. I think otherwise and suggest you use weakness to buy them.
Now I know that the moves down in the industrials are more stark and vicious than the ramp ups and that's created a level of fear that shatters confidence. All I can say is that you should not own these industrials unless you think that we will win the trade war. I think we will, as long as people remember that winning does not mean that China has to lose, it just means that we get to win as much as they do.
So my bottom line is if you can't deal with the volatility, if you can't use the panic attacks to buy, go all index funds that because the moves will only be exacerbated until the Chinese blink, and then you will catch a move that could be extraordinarily bullish. But until that happens, the forecast remains delicious pleasure and then max pain.