Are we banking too much on a turn in China to drive this market? We will find out pretty darned quickly when the Chinese market finally reopens for business, but I can tell you that a lot is riding on better numbers out of that country. In fact, much of the strength of the market in the last few days comes from a belief that government actions are, at last, working to reboot the economy
We see the signs of hope everywhere. Let me tick them down.
First, Morgan Stanley (MS), after disliking the mining sector for ages, goes positive on two of the biggest, BHP Billiton (BHP) and Rio Tinto (RIO), and the market loves it, with both stocks roaring higher. Believe me, just a few weeks ago that call would have fallen on deaf ears. Instead, both stocks, total bellwethers of Chinese construction, are roaring up 3%. That's incredible as these stocks had been among the most heavily bet-against stocks in the third quarter.
Freeport McMoran (FCX), the American way to play the Chinese economy, given its heavy copper exposure, has fallen 44% for the year because of China weakness. Suddenly, it's the best-performing stock in the S&P 500, up 8% today and not just because noted investor Carl Icahn just won two board seats. It's because copper, long downtrodden, is at last putting together a win streak.
Similarly, Joy Global (JOY), down an astounding 63% for the year, has now jumped from 13 to 17 in just a few days. Joy makes mining equipment that China uses to extract coal. It's been a permanent short until now, when Chinese hope had returned.
Remember when Caterpillar (CAT) surprised Wall Street with a hideous preannouncement a couple of weeks ago, largely because of slowing Chinese sales? Do you know that yesterday its stock got back to where it was when it announced that hideous number?
Or how about Glencore (GLNCY)? Here's a huge copper miner with perhaps as much as $50 billion in debt that many think might be on the ropes. But the stock, after being crushed, is roaring back on the hopes of more copper demand from China, which consumes 40% of the red metal. I can't tell you how positive it would be to take Glencore off the critical list.
I think prospective Chinese growth could be behind another kind of rally, the gigantic climb in oil, which ran out of steam today when U.S. inventories showed an increasing glut. Until then, though, oil had become the commodity to own as it rallied from the high $30s to the high $40s, taking the whole group with it. Any increase in the price of oil is perceived as bullish by this stock market because the oil companies have so much debt that a total collapse could crush the high-yield bond market, which has basically been shut for business for a week now. Companies needs that financing, so it's a very big deal.
And speaking of big deals, a rally in oil is giving some breathing room to Petrobras (PBR), which I have repeatedly held to be the Achilles' heel of the global markets because the company owes about $170 billion and many investors in that market fear it could have to default if oil keeps going down. After hitting a lowly $3.72 last week, the stock's bounced to $5.40. I know, small potatoes, but bondholders have to be a little less nervous about the situation after the Chinese-precipitated run-up.
Same with Nordic American Tanker (NAT), which has had a 61% move off the bottom and has screamed to $16 on the strength of shipping day rates. Again, it's the sum total of hope as NAT customers ship a huge amount of oil to China.
Oh, and remember, the spectacular overnight run from $51 to $71 by Wynn Resorts (WYNN), a run that has continued today with the stock up more than $3, is directly related to data out of Macau, the Chinese gambling mecca, showing that the long-suffering casino business seems to have bottomed out. A lot of the pressure came directly from the government of the People's Republic of China, which seemed to have soured on the junkets gamblers take to the Macau tables. Could the Communist Party be relenting on its puritan standards and turned the excessive spending spigot back on?
The rallies we have seen in the stocks of all of these companies stem directly from a sense that this time the Chinese really mean business and that, while they may have screwed up trying to build wealth overnight by encouraging a reckless stock market, they could be on the verge of igniting the real economy in some lasting way.
We are even seeing some of the tech stocks associated with a return to growth for China, namely IBM (IBM), come back to life with a pretty powerful move that isn't all Watson publicity-related. IBM does a gigantic amount of business in China, and a return to strength in that economy could have really positive repercussions for the ailing giant hard- and software company. Many of our largest industrials, including General Electric (GE), Boeing (BA) and United Technologies (UTX), have been acting better. That's a hope for a return to the old pattern of aggressive Chinese order growth for everything from turbines and planes to elevators. (General Electric is part of TheStreet's Dividend Stock Advisor portfolio. Boeing and United Technologies are part of the Trifecta Stocks portfolio.)
OK, that's the positive story. That's what's been propping things up in some down-and-out sectors. Now let's talk about the other side. What happens if the Chinese market opens for business and it gets hammered? Sure, the Chinese have been propping that stock market up with tens of billions of dollars of bond sales, including our own Treasuries. That, however, is a fool's errand and I don't think it can last much longer. The Shanghai stock market's been holding the key 3000 level. But if it takes that floor out, who knows how low it can go? Maybe down by another 33% to get back to where it was before the insane rally began?
And if the data aren't immediately positive, or at least start showing a slowing of the pace of the decline? Then perhaps China has to devalue its currency some more. Don't forget the last devaluation was a precipitant of the big September swoon. And how about the Chinese consumer? We know that Apple (AAPL), Nike (NKE) and Starbucks (SBUX) have been saying the Chinese are spending. But then how do you explain the stunning decline in Yum (YUM), off 18% because of a dramatic dropoff in business at KFC, which had been the gigantic growth engine of the restaurant chain? Which one is the real indicator of consumer health? (Morgan Stanley, Apple and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
In short, there is a lot riding on China coming back, namely the entire rotation in to the once-hated cyclical companies.
But before we panic, let me give you the other side of the trade. This market abhors growth, whether it be from Pure Storage (PSTG), a flash storage company that came public today at $17 and then immediately went below that price, or the high-growth semiconductors that had been such a favorite, or the best of the best health care stocks, although they are putting on a better show today.
If China does falter, you are going to see a rotation out of every one of those minerals and mining and oil and heavy industry stocks right back into the highest of growth names. So, here's my take: China holds the key to figuring out where the next bull phase is coming and where the next bear phase might be. It's not the Fed, it's not the U.S. economy, it's China. So brace yourself, set your alarms for 3 a.m. to see how China's doing and get ready for a move that's got little to nothing to do with events in our own country.