We've got a million reasons to sell and not a lot of reasons to buy, hence why the market's so choppy right now and, at times, so hideous.
And I say welcome to the end of October when a huge percentage of mutual funds like to dump their losers before having to show them to those who bother to look at their holdings. It's a terrific time to take profits, too, to match those loses and that's in play at the same time.
The losses are substantial if you own anything connected with housing or with China and both are related to man-made actions, the former being the Fed, more on that later, and the latter being from the president's policies designed to get China to change its predatory ways.
I believe the Fed will ultimately blink because there's so much damage being done by the surge in mortgage rates that it's perfectly reasonable at this point to believe we could be one and done, meaning the Fed raises in December and then says "let's wait and see."
But the Chinese situation? It seems to escalate by the week. We've gone from tiff to skirmish to outright economic warfare against the Chinese, with our own economic adviser, Larry Kudlow, stating to the Financial Times that the Chinese intransigence on trade is so harsh that he has "never seen anything like it."
Kudlow says, "the problem with the story is that they don't respond. Nothing. Nada." He went on to say that our detailed list of asks "basically hasn't changed for five or six months." The culprit? "It's really the president and the Chinese Communist Party, they have to make a decision and so far they have not or they have made a decision nothing."
Now, one could argue that this is just tough talk ahead of trade negotiations. Or you could say this is an emphatic end to the talks, if there were any, and we'd better get used to some serious collateral damage to the stock market. My ears always perk up when I hear the words "Chinese Communist Party" because it reminds me that President Trump is not a big fan of trading with Communists and, in the back of his mind, there is a strain that doesn't want more business with China, he wants a different, more free government entirely.
Yep, I think the president wants the economic equivalent of regime change, because that may be the only way to get them to change their ways. Yep, not an economic war but a cold war, Cold War number two with the Chinese once again playing the pre-Nixon role of nemesis.
So which stocks have been hammered and which have more to go?
First, the one I am most worried about it Rockwell Collins (COL) , a fantastic company that is being bought by an equally fantastic company, United Technologies (UTX) . A little more than a year ago Rockwell Collins, which makes sophisticated equipment for aircraft, agreed to sell to United Technologies for $30 billion. It's really the last stand-alone aircraft parts maker of any size and if it closes it could allow United Technologies to split into the companies, Otis Elevator, climate controls and aerospace, which includes the gem that is Pratt & Whitney.
But the operative term in that sentence is "if" because the Chinese have blocking rights to the deal as part of their antitrust examination that must be passed before the deal can close.
The acquirer had high hopes that the deal might close at the end of September and the stock traded up to $141, a nice premium to $106 last year when we first got wind that the company was for sale.
But China didn't approve it and the stock has now shed 10 points, indicated tremendous angst among the arbitrage community that this one might blocked. I get that. Remember that Qualcomm (QCOM) tried to buy NXP Semi (NXPI) for $127.50 a share earlier this year. The Chinese blocked the deal. Now NXP 's stock is at $76, down from a high of $126. I don't think that the stock of Rockwell Collins would fall as hard but it wouldn't be a picnic. One thing is for certain, the stock of United Technologies is taking it on the chin because the hold up on this transaction makes the unlocking of value into three companies less likely.
Now, if the Chinese decide to play ball, one of the ways that it can show that change is to approve this deal. Lots of smart people are betting they will because there really isn't any fundamental reason to block the darned thing. But it is four weeks later than we thought it would be closed so the consternation is legitimate.
How about Micron (MU) . Here's a jewel of a semiconductor company with about half of its sales to China. Micron's stock is a real anomaly trading at a little more than three times earnings. That's insanely low demonstrating how worried people are that the company won't make the numbers. Now it does have genuine weakness in its flash business but I think that a lot of the concern might be stemming from rocky relations with the Chinese.
Maybe the Chinese shut them down. Maybe they make it harder to do business. Whatever is happening it's causing this stock to be in free-fall and that's putting pressure on the entire chip cohort including Applied Materials (AMAT) , the semiconductor capital equipment company with a lot of business in China.
Some stocks just get clocked at the mere mention of China. V.F. (VFC) , the fabulous apparel maker coughed up that it sources 11% from China. I think that was a big part of the pasting the stock took after it reported. Kimberly-Clark (KMB) said this morning that its business in China was down high teens. Horrendous.
PVH (PVH) had been making huge progress in China. Given how strong U.S. sales are and how Europe's been very good I have to wonder if China's upside must be capped. I struggle to find another reason why the stock has fallen from $168 to $122.
Now we know that there are companies with such good relationships in China that we have to be confident that things can withstand the test of the moment. Apple's (AAPL) got tremendous ties in China and makes so much of it product there that China really would be cutting off its nose to spite its face. China's stock market rallied hard last night on talk of China advocating a "whatever means necessary" stance for its economy, presumably including its stock market. No market goes up 4% in a night unless it's sanctioned if not created by the PRC.
I think Starbucks (SBUX) , which had a sharp shortfall in China, has reversed that decline and that's why the stock has had such a good run. There's much to like about Starbucks overseas although I think the domestic business isn't quite there yet.
Still, you have to be cognizant that the stocks that were strongest today were the techs that have no exposure to speak of to China, namely Amazon (AMZN) , Alphabet (GOOGL) and Facebook (FB) . That's the stock market speaking and it's saying as mutual funds dump stocks of companies that trade with the enemy as part of their fiscal year selling, they have no problem deciding where to stash the money: in the highest growth stocks with no Chinese exposure and that's a whole lotta FANG going on.