It's the economy, stupid. Or it's Apple (AAPL) stupid. We don't know which to finger.
And that's why everything went down today. Because in an environment where one of the largest companies on Earth reports a dramatic shortfall you have to leave no stone unturned to find out what the heck is going on. The problem is that when we turn over stones we keep finding poisonous nematodes and that's not exactly what makes for a good environment to own stocks.
Let's start with Apple and try, for a moment to be dispassionate about it. Apple pre-announced in large part because of China. It's funny, Apple expects to set all-time revenue records in United States, Canada, Germany, Italy, Spain, the Netherlands and Korea. By the way, if anyone cares, Apple will have an all-time record revenue for the U.S.
But China was weak and there are now two camps out there about Apple. One is that it lacks innovation and its iPhones cost too much money. The other says that the issue is China itself, and we aren't sure why, everything from a weaker Chinese economy to, I surmise, the possibility that the Chinese want to buy Chinese just as there are now plenty of people in this country who want to buy American and NOT Chinese. It doesn't matter whether the Chinese are making the product here or not, our president has gotten the country turned against China after years of China pretty much abusing us across the board, especially with bogus joint ventures and intellectual property theft.
There has to be such a thing as China pride aided by a belief that the Communist dictatorship may be watching your every move. In that case I would select Huawei phones over Apple phones any day of the week, even though Apple is a huge employer in China. Today's long-knives-are-out for Apple narrative says that cheaper phones are in vogue and Apple can't charge as much as it does. I rebel and say it is much more complicated than that.
So let's parse all of this out. If there really is no innovation in Apple land why is Apple crushing it in so many countries, and I am not even talking about wearables which are up 50% with the watch being constrained. If the ecosystem is dying, another thought put out there, then how did Srvices do $10.8 billion?
So where do I come out?
I think that China's Apple sales are weak by both design and by circumstance. The circumstance being a country that was once thought to be invincible that is now slowing down and it is slowing down because we are fighting back by recognizing there is more to China than a market for some companies to sell goods while others, mostly domestic, get crushed by them.
Which brings me to the bigger issue. When you combine the weakness in China with the U.S. PMI that's showing the worst plunge since that benchmark of all bad, 2008, you get a picture of utter weakness across the board.
That's producing bond yields that are defying anything that I have ever seen -- 2.5% when full employment should be giving us 3.5% minimum on the 10-Year.
So what should happen right now? In an alternative universe the Fed should be meeting to discuss whether the U.S. economy needs to have one cut or two cuts in 2019 now that the economic cycle peaked at the beginning of October of 2018.
Yep, that's when it all started going down hill from commodities like oil to factory orders to high-end retail sales to housing data.
There's only one problem. At the exact moment we were getting peak data we hear from Fed Chairman Jay Powell that the economy was accelerating at such a clip that maybe three hikes are necessary after the December Fed Funds boost.
I was apoplectic when I heard that because the data I was looking at, and I have gone over the indicators endlessly, no need to do it again, showed that we were on the verge of a slowdown that would take us back to other stressful periods that knocked stocks down 20% or more, the fabled bear.
Now we have the weakness I was looking for and what's the policy response? The Fed has to put through two hikes not three.
So you know what that means? It means that the Fed for all of its alleged policies and models is really only targeting one thing: job losses. It needs unemployment to go back to 5% because its models show that you don't need to raise interest rates anymore.
I am going to repeat that. Despite what you hear, despite what people say about the sainted Fed, it ain't stopping until the unemployment rate jumps and people are losing jobs all over the place. That's the win. That's the big W. They get lots of people thrown out of work and then their work might be done.
I emphasize might because if they are bone-headed enough not to adopt my "one and wait" prudent philosophy maybe they need unemployment to rise to 5.5%. That might be an even bigger win for these rich people who probably know no poverty and can't figure out what's so bad about it.
You know what's a byproduct of the "real goal" as I like to call it? What happened to Apple today: earnings shortfalls. International companies could be felled by China, with only some spared, like Starbucks (SBUX) and Nike (NKE) , at least for now. I think if the Chinese made real good sneakers than Nike could have a crummy next quarter, too. Starbucks hasn't been targeted that I can tell. Who knows, though, what's next.
Domestically? It's a Fed field day. We have layoffs galore in the energy patch where there are crashes in oil, natural gas and natural gas liquids. We have a slowdown in construction because of higher interest rates even and the possibility that some community banks may not be able to raise capital because they would be paying too much interest to get it. We have hideous auto numbers and housing numbers but the Fed hasn't even considered those companies. And we now have what I think will be some very big retail layoffs, particularly at the mall.
They must be so happy at the Fed. Just a couple more tightenings and its nirvana on ice!
As a stock picker I have to say that they've made it more difficult to make money. You have a collapse in oil, so do you reach for the airlines? Nope because the slowdown has already cut into their earnings. American (AAL) and Delta (DAL) just hit 52-week lows for heaven's sake. Do you go with travel and leisure because of the lower price of gasoline. You kidding me? You don't buy those stocks when the economy is slowing. That's why Marriott (MAR) and Hilton (HLT) have seen their stocks get annihilated today,.
So what do you do? You buy the stocks that do well in a recession that are bolstered by lower raw costs. They are the safe stocks. That's what's worth owning. Clorox (CLX) . Pepsico (PEP) , Coca Cola (KO) . You get the picture. If you can drink it or wash with it, Jay Powell just gave you a winner.
Is there a way out of this box? I think a trade deal sure could help. I do believe one can be obtained.
But let's save that for a later date. What matters after today is earnings and how bad the shortfalls will be. From the looks of Apple? Pretty bad. And that's worth considering as we go into the season that's not so jolly anyway.
