Yes, the clock's ticking on China trade. Yes, every day there are links from the Kudlow-Mnuchin camp that things are going well and we are closing in on a deal... and then from the Lighthizer-Navarro camp that there can be no deal without fundamental change by the People's Republic of China that would be an about-face on the demanding of joint ventures that allow for routine intellectual property theft.
The leaks inspire tremendous euphoria and outright panic on the part of traders. They can't seem to understand that you could easily have two camps within the same White House. But then again, they have never served as a judge on The Apprentice and don't know how the president works. This is his style. One side versus the other. Sure, he had others helping him make decisions. But he loved to pit people against each other -- and the desired effect, good ratings, never failed to be true north.
In fact, I think the only real reason to be hopeful is that the Dow is the president's "overnights" -- meaning his instant ratings, and, while the overnights can't control the overall election, it's the signal to the president that he is headed in the right direction.
Stock owners, before you sniff, you have to admit that the previous president wasn't, ahem, all that focused on the markets -- and I often thought that if the Dow went up, it might mean to him that he was doing something wrong for the vast majority of Americans as the shrinkage of stocks as a repository of savings has, sadly, become the province of the rich.
But what if the quick traders have it wrong? What if they are using the "wrong" stocks to "play" China? Because, alas, they are playing for certain.
This earnings period has revealed some brutal truth about the China trade; namely that some companies that SHOULD be hurting in China are putting up some astonishing numbers while others are truly hurt, largely because of competition or a slowdown in the PRC.
Here's your cheat sheet for the coming leaks from the two camps, which apparently can't help themselves from leaking -- unlike say, Robert Mueller, the special counsel of the investigation into Russian interference in the 2016 elections.
First, when the tensions soared, the traders instinctively chose to short the stocks of famous consumer brands, capital goods companies and technology investments.
The first have been difficult, the second mixed, and the third, let's just say, until recently a home run.
Traders aren't idiots. They know how to segregate and sectorize anything, which is why they almost uniformly bet against Nike (NKE) , Starbucks (NKE) , Estee Lauder (EL) and Yum China (YUMC) , betting that the consumer would steer clear of these uniquely "American brands." It's been a mistake. Nike and Starbucks reported an acceleration in sales this last quarter. Nike had its biggest Singles Day ever, the made-up consumption day where the Communists let a bazillion presents bloom. Nike's sales roared up 40%, fueled by a combination of basketball fanaticism and a government partnership to encourage athletics. Their biggest problem is meeting demand.
Starbucks had a strong recovery, same-store sales acceleration to 3% from what looked like would be a negative comp, if you budgeted to trend coming into the quarter. Yum China, while not putting up terrific numbers, didn't see the collapse that many thought with a 3% growth figure down, but total sales were up strongly, which indicates tremendous health for the quintessential American brand.
Nike's stock got slammed from $80 when Pence spoke to $67 at the zenith of the bear -- and has now gone back to $82. Starbucks traveled from $60 when Pence signaled cold war to $56 at the December low -- and is now at $69.
Estee Lauder's story been astounding and outstanding, especially after last week's quarter, starting the Pence journey at $143, toppling to $122 and then ramping to $152. China has been one of its strongest markets.
Yum China never really got hit, going from $33 to $32 and then back to $40.
Let's just call them troublesome for the shorts and good bets for the longs. Keep that in mind when the Lighthizer-Navarro camp influences the debate in some way, shape or form.
Capital goods? Much tougher. Boeing (BA) came into the Pence collision flying high at $389, then really got decked at the Christmas eve lows, falling to $292 before a beautiful quarter and a soaring move to an all-time of $413 just last week.
But the same can't be said for Emerson's (EMR) stock, to pick a quintessentially excellent capital goods investment. Pence's talk pretty much signaled a top, $78 then a trip down to $55 before a rally to $66 and no further, in part because of China slowdown.
United Technologies (UTX) which, like Emerson, has a lot of its growth from China, has been similarly impacted: $141 at the time of Pence's cold war announcement, to $102 at the Christmas eve low-point and then back only to $122, DESPITE a beautiful decision to split into three divisions -- aerospace, climate controls and elevators.
Then there is 3M (MMM) , which has a lot of faltering markets on its hands, China being one of them, and its decline from $214 on Pence's saber-rattling to $178 on the Powell-low to $199 now, with China actually improving!
Caterpillar (CAT) ? Lot of moving parts here, too, but pre-Pence, the company's stock was in recovery mode from some negative forecasting, hanging at $156 before plummeting to $112 on a not-so-hot third quarter, before limping back up to $128. Curiously, it is worth noting that the December nadir never took out the October low, stopping at $116.
Finally, there's tech -- and, wow, the pain is tremendous here. I can go over a bunch of them, but the elephant in the room is Apple (AAPL) . The darned stock was at $226 before it ran into the Pence buzz saw. It fell down to $145 at the Christmas low and then again, dropping to $141 on the pre-announcement relate to a mid-20s drop in Chinese business that eviscerated any hope for many holders.
The comeback since then to $170, I believe, was linked to what Tim Cook told me at the time of the conference call, that January was better for the company. However, last week Toni Sacconaghi from Bernstein said things had gotten worse, which foretells more bad news. Fellow travelers Skyworks (SWKS) , Nvidia (NVDA) and Micron Technology (MU) got blasted. SWKS went from $91 to $60 -- at the time of the Apple preannouncement -- again taking out its $62 low from Christmas time. Nvidia, with a heavy China-related gaming business, fell from $279 to $127 at year end, and then, most noticeably failed to take out that low on its preannouncement, going down to $130 before a hope rebound to Friday's $147 close. Finally, Micron had been going down for some time before Pence's declaration, but it still got decked, plummeting from $44 to $28 and back to $38 again on hope that things have improved.
What can we learn from these blunders and victories?
First, the consumer stocks all share one major trait: no real competition of any sort. Many going into the recent Starbucks quarter thought that the Chinese competition was coming on strong. Didn't happen. I think the tie-up with Alibaba (BABA) helped mightily. KFC slowed, but not enough to benefit the shorts. Estee Lauder is without peer or competition.
Cap goods: I think they got dinged by an overall slowing from the Chinese slowdown. You just can't get traction if you are selling cap goods there, because the market has slowed. Plus the strong dollar has favored Japanese goods where possible.
Boeing? That's just a secular win. While Boeing sells one quarter of its planes to China, the Chinese need Boeing more than Boeing needs China. Tech's the real triumph of the Chinese -- and that's because the government has made it difficult for Apple to do as well as it would like because of, let's call it the "patriotism trade" of favoring cheaper Huawei phones. Nvidia's been crushed by a slowdown in Chinese gaming.
So, what's our conclusion? Pretty simple, if the fear trade engulfs later this week, then buy Nike, Starbucks, Estee Lauder and Yum China -- as well as Boeing, which you must always remember insists on all planes being bought in dollars. Be wary of all the cap-goods stocks and expect pain in Apple and its other cellphone analogues, as well as gaming.
So, remember which camp does suffer, which doesn't -- and wait for the bear to strike to take advantage of the chaos that the hard-line leaks ALWAYS produce.