It's bad enough that we act as if China's all that matters. When we do try to hide from China, we get whacked upside the head and the pain is tremendous.
First, there is no escaping China for some stocks. Even though the Chinese market rallied last night, we got some news out of BMW that was quite upsetting. To quote a Reuters headline: "BMW says worsening Chinese Market could hit forecast." The article goes on to say that BMW, which happens to be the world's largest luxury-car maker, "warned that on Tuesday that its financial forecasts could for this year could be at risk from any further deterioration in the Chinese market, where its sales have begun to fall for the first time in a decade."
It's not just BMW that's squawking negatively. Audi said the same thing not long ago. Ford (F) and General Motors (GM) are struggling, too, with recent sales just hitting a wall. All of these companies made big bets in China and were rewarded until the second week of June, when the Chinese stock market started its vicious downward spiral.
Which brings us to the elephant in the room: Apple (AAPL). The Cupertino giant recently reported a quarter where it sold 3 million phones fewer than the analyst community thought it would. There is a broad consensus that has developed ¿ rightly or wrongly ¿ that the sales miss was almost entirely because the quarter encompassed the period from June 12 until June 30 when the Shanghai market peaked and started to roll over. So every time we get bad news out of China (like that of BMW last night), it reminds us that if the most recent quarter had included July, the numbers would have been far worse.
I totally understand this logic. China's been on fire for Apple. It's seen 122% year-over-year growth and accounts for 26.7% of Apple's sales, up from about 15% a year ago. Even as CEO Tim Cook said sales were strong in China in the quarter, the presumption is that they weren't strong for the last 18 days in June and they were weak for all the days in July. Because, after all, they were weak for Audi and weak for BMW, and the stabilization we saw in the Chinese stock market last night has to be ephemeral because it is a gigantic prop-up by the government.
I have no idea how weak or strong Apple's Chinese sales really are. I do know that Apple stock is caught up in the vortex of a real ugly chart. And while I am not doing an off-the-charts segment for Mad Money tonight, if I did, you would see a nasty pictograph and lots of disparaging commentary. It is a fact of life.
Apple is not for the squeamish, and it is over-owned and overloved ¿ meaning that too many analysts are recommending it and too many institutions are overweighted in it and feel trapped.
I was at a dinner last night where all I heard were people shorting the stock or bailing from it. When I asked them: 'What if you took a long-term view and accepted there might be some Chinese weakness, but it could be reflected if the stock fell about the same percentage as China is of its sales?' ¿ they had no understanding of what the heck I was talking about. They just wanted out ahead of others.
I continue to hold the stock for my charitable trust and I would be looking to add not subtract to my holdings. But no one's listening to me on this one, that's for certain.
Of course, Apple's not an island. The companies that supply into Apple's iPhone ¿ the coattail plays ¿ have been pounded relentlessly. Skyworks Solutions (SWKS), NXPI Semiconductors (NXPI), Qorvo (QRVO) and Avago Technologies (AVGO) are shared nightmares. Investors are fleeing from these once-huge winners like mad. It's headlong. It's a freight train. And it's all China-related.
Now, that Apple/China nexus may be news to you, but it is not new to those who have taken their cue from the Shanghai stock market's gyrations and the big auto companies' sales.
What you are seeing on days like today is the scarcity of solid hiding places from China. First, there's the overall fear of the Fed that was spread today when CNBC's Steve Liesman reported that Atlanta Fed Reserve President Dennis Lockhart thinks the Fed should tighten in September.
Now,I have multiple problems with this kind of thinking. First the Fed is supposed to be data dependent. Can we at least wait to see what the data say, as we just heard from the Fed last weekend? Lockhart's comments immediately caused the dollar to surge, oil to turn down and interest rates to spike higher, reversing what looked to be a pretty decent rally.
Now, I get that it's not Lockhart's job to try to prop up the stock market. He's not a Chinese Communist Party member. Still, one day after the eighth anniversary of my rant about how the Fed knew nothing, it isn't lost on me that this same Lockhart poked fun at me for my rant and dismissed it with laughter ¿ at least according to the minutes released two years ago that covered the Fed meeting that occurred after my pessimistic views were heard.
He wanted the market to save itself back in those dark days. It couldn't, and he was wrong. I think if we had left things to Lockhart the way he spoke at that Fed meeting, we could have had a Great Depression, not a Great Recession. So I am sorry if I disagree with his assumptions now that it is time to tighten. He'll probably be wrong again about his timing.
But at least his comments did give us a dry run about what will happen on a tightening: more dollar strength, higher rates and then, instantly, a lower stock market. Stocks follow Lockhart in Lock Step.
But it isn't just Lockhart's comments that make it hard to hide safely. Lots of people have been hiding in the insurance stocks, betting that they will go higher as interests go higher ¿ the Lockhart plan!
When people think of insurance they think they are in Good Hands with Allstate, as plain vanilla as it gets. But Allstate (ALL) reported last night, and it turns out that the results were anything but plain vanilla. How about Rocky Road, as Allstate said an increase in hours driven caused auto accidents to spike and they weren't ready for it? I wonder whether text-happy drivers didn't play a role in this, too.
We got the worst of both worlds out of this report ¿ too much driving for Allstate but not enough driving for the oil companies, as they were whacked after an early rally because of the spike in the dollar off of Lockhart's comments.
It's not just insurance that people were seeking cover in. How about drug stores? What a streak they have put on. Which is why it seemed so natural to buy CVS (CVS) right into this morning's quarterly earnings report. Oops ¿ the pharmacy portion of the company rocked, but people didn't like the rest of the numbers (including ones that could have benefitted if tobacco hadn't been pulled out their stores). So, CVS stock got tarred and feathered ¿ falling 6 points at one moment before rallying a bit as the day went on.
In fact, what makes days like today so unnerving is that the places to hide turn out to be the highest-risk stocks, not the lowest-risk ones. In today's case, that means biotechs led by Regeneron (REGN) and Biogen Idec (BIIB), and special-situation stocks like Tesla (TSLA) and Netflix (NFLX) ¿ the latter rising almost 9 bucks. Hey, I get the relative strength, and I think the world of Regeneron and Netflix. But last I looked, they were not the epitome of safety.
Or, you could choose to hide in the incredibly extended packaged-goods stocks. Well actually, one packaged-goods stock ¿ Clorox (CLX) ¿ which rallied for a second time after its good quarter. Clorox now sells for a biotech-like 24x earnings ¿ quite a feat for a 1% grower, although it would have been 3% or 4% if the dollar weren't so super-freaking strong. The rest of the group's getting pummeled.
Still, in the end, today makes me feel like being in the ring with the great Joe Lewis, who coined the phrase: "You can run, but you can't hide." Unless you want to hide in places that aren't particularly free of risk given how far they have run and how little safety they offer.