How will we know when the pain is over? How will we be able to spot a real bottom and not this endless torture where we go down, down, down and then have a short sharp rally like today from a murky bottom only to go down again a few days later?
That's really the conundrum this market presents us. Remember my view. Most stocks are in a bear market. Notice I didn't say all stocks. Just most stocks.
For example, if you are in recession-proof stocks and they deliver upside surprises -- and they must do so -- then the stocks go up and up and up each time someone bumps a price target or raises a forecast. I can't believe how well Johnson & Johnson J (NJ) is doing. Clorox (CLX) is a sensational company with a sensational stock. Like JNJ it is incredibly well run. It hit an all-time high today. Pepsico's (PEP) stock got hammered when the company reported, but as we sorted through the earnings period the same news that brought it down caused it to roar. The stocks of Procter & Gamble (PG) and Coca Cola (KO) won't quit.
And then there's the greatest story of all time: Verizon (VZ) . What's Verizon got? How about a decent balance sheet, a 3.99% yield and no exposure to international business or tariffs or anything else other than the possibility that the government allows Sprint (S) to merge with T-Mobile (TMUS) allowing for prices to rise for all of us. Can you imagine? If you are at Verizon and someone from the government knocks on the door and says "we're here to help," they actually mean it!
Those stocks are the chosen ones. You can bank on them rising on bad days and good. Sometimes I think that David Blaine's levitating them. It's a David Blaine bull market for these very few anointed stocks. They are as close to bulletproof I have ever seen and no one seems to care at all that they are expensive and that their valuations are massively stretched versus their growth rates.
How can that be? Because big money is bearish but doesn't want to leave the table. So they build up cash or buy puts on stocks or sell futures and they pick up those stocks, and literally almost no others because those stocks do well in a recession and that's all they can think about.
Big money knows two things: when they buy stocks they are fighting the Fed and they are fighting the president and that's too much for them to fathom.
Now, let's talk about the other side of the trade. Let's talk about how you can recognize when the bear market in the rest of the stocks is over.
Let's talk Apple (AAPL) . This is the company and the stock that is front and center in the tortured market that none dare call bear except for, well, me.
I want you to listen to how this stock fell from grace, falling 20% in the last three months, $200 billion gone. Vanished. I can't find it.
Apple's stock came into October with a full head of steam. In fact, it hit a high of $233 on October 3. The slide began the next day, not coincidentally, the day that Vice President Mike Pence changed our policy toward China from one of trading partner to one of economic foe. Pence's speech meant many things to many people but the most important takeaway for us when we think about stocks is that the White House no longer cared about how much trade we did with China. Worse, Pence made it clear that those who do a lot of business in China that could be done in the United States are making a mistake not to do so.
What company employs the most people in China who make exports from China? Hmm, let's see, according to the Apple Chinese website , when translated into English, Apple has created and supported 4.8 million jobs in China, more than double the number of people Apple directly and indirectly supports in the U.S.
Pence was adamant that we, our companies, are at fault for providing money to the Communist Chinese so they could take advantage of our country and become the premier world power. If we cut down their exports and cut off their capital, Pence believes we can topple them. That's right, not trading partner but a regime that needs to be changed.
Now we know that the president is ostensibly trying to get our companies and our consumers not to do business with China. A tariff on tens of billions of dollars that goes from 10% to 25% will alter both consumer behavior and corporate behavior. If you are a consumer you will want to buy something similar that's cheaper. If you are a manufacturer you are going to want to move your plants out of China to another, as inexpensive place, so you can avoid the tariff. The president wants those jobs back in the United States. Most companies would argue they can't afford the American worker. Maybe some can come back. Most can't. As Greg Hayes, the CEO of the soon to be broken up United Technologies (UTX) told us, you can't make Otis elevators here and sell them there. That kind of product has to be made there.
But if you are this president and you are looking at Apple, you may say, "you know what? I don't care what Apple's done in this country to create jobs. I don't care if Apple is going to put $30 billion in repatriated funds toward capital equipment over the next five years.. I don't care if Apple contributes $350 billion to the U.S. economy during that period or that it creates 20,000 jobs new jobs. I don't even care that Apple started a billion dollar fund to create advanced manufacturing jobs. They should make all of those iPhones in the United States."
Ever since that Pence speech this stock's been going down. Then on November 1 the company reported a quarter with revenue up 20%, earnings up 41% and service revenue hitting $10 billion. But it didn't matter. The company announced that it would no longer break out the number of phones it sold because it was no longer representative of what the company does.
That line, that one line, hijacked everything good and ever since then we have heard endless reports of supplier cutbacks to Apple that have led pretty much every analyst to suspect that Apple's having trouble selling phones.
These two issues, China and a belief that phones aren't selling well, have been behind the 50 points that Apple has shed since the Pence speech. Every time an analyst cuts his price target or makes a minute cut in numbers, the stock goes down. Every time we are worried about China and tariffs, the stock goes down.
Then last night the president in a rambling relatively incoherent interview with the Wall Street Journal, said that perhaps he would put a 10% tariff on the now tariff-free iPhones that are made in China. He said the American consumer could handle it. So glad he knows that. Suddenly the reality of the tariffs hit home. Do numbers have to come down if the president puts tariffs on iPhones? I presume so.
If the president takes this action, Apple, arguably America's greatest company, will be put in an untenable position. If it decides to pull some manufacturing from China to please the president it runs the risk of the Chinese putting tariffs on its goods. If the Chinese want to play really tough they may subtly call for a boycott on Apple phones if it cuts down any manufacturing in the PRC.
To me this is ridiculous. Apple shouldn't be punished -- it should be celebrated. Apple's shareholders have become pinatas as analysts fight to cut numbers and spread fear. I will not play that game. I think Apple's stock at 12 times earnings is a bargain. It can go to 11, it can go to 10 and it will be an even bigger bargain. If we get anything from the G020 that's at all positive this stock could be a coiled spring, especially given that I suspect Apple's been buying its own stock back every step of the way. .
But that misses my point. Here's what you need to know. In a bear market the same pieces of news, perhaps weaker sales and perhaps tariffs, keep taking it down and down and down. Apple' s stock is the opposite of the stocks of Clorox or Pepsico or Verizon. I think it's wrong. But in this tough, tough market as long as we do not know if there is a real iPhone sales slowdown, and until the president takes Apple's iPhone off the trade table, you can't expect an end to the pain. I think it is worth it to hold the stock, even buy it, but at this very moment I feel very alone. Maybe, just maybe that's exactly what it feels like to be near a bottom, and surely not the top.