Everything's changed. That's how it feels. And I have a theory why. You know how we are starting to hear that we could come to some agreement with the Chinese?
I am not sure that will happen, but one thing is certain. I think the Chinese want to talk because they are concerned that business in China has gotten weaker. They can't afford that to happen.
Throughout this confrontation with China, the dialogue has all been one way: We can't outlast the Chinese.
Now I have no doubt that long term, the Chinese can win out: That's a totalitarian regime that tolerates no dissent and would crush those who say they need the U.S. market.
But short term, we are getting hefty evidence that China's economy is becoming a looming problem -- and that could bring them to some sort of concessionary attitude at the upcoming G-20 meeting.
There's only one problem. It might be too late to save the earnings of American companies that are reliant on China to make their numbers.
Let's look at the evidence that we have to indicate the slowdown.
First, the Baltic Freight Index, a good proxy for the volume of commerce with the PRC, is down 17% for the year and has been falling like a rock.
Second, oil has entered a bear market with some very big oil-related stocks signaling that the $58 level may not hold. I think supply -- namely from the U.S. via tanker -- is overwhelming demand -- mainly from China. We shouldn't be having such a plummet with Iran offline, but the U.S. finally has enough pipe to bring a lot of the Permian oil to market. That's helping to sink the price. But the other factor, the one that had kept oil demand elevated, was the growth of China. That growth is slowing.
Third, we have seen a collapse in demand for lots of cellphone components -- and I think that's because demand for phones in China has weakened. We know that Apple (AAPL) orders are down: we gathered that from Lumentum Holdings (LITE) and from Skyworks (SWKS) . The latter, though, also has a lot of China and that's weakening, too. I believe the same can be said about Micron Technology (MU) and Qualcomm (QCOM) .
Fourth, hardly a day goes by without hearing a company saying it is doing its best to remove any manufacturing from China. The retailers and apparel companies are furiously trying to shift production. Meanwhile, I understand that the Chinese manufacturers are offering concessions to those who stay. That's hurting profitability.
Fifth, our steel sanctions are really starting to cut into the dumping of Chinese steel, which is depressing the world price and having a real impact on an industry the Chinese have dominated forever.
Sixth, Europe, the biggest market for Chinese goods, is, once again, teetering on the brink of recession. That makes it hard for the Chines to export in that market, given the tariffs that are going up here. If there is no agreement at the G-20, then the 25% tariffs are going to go into effect.
So, what's the impact of these issues? I think it makes it untenable to have too much exposure to China. Yesterday, we recommended to Action Alerts Plus club members to sell a long-standing position in Emerson (EMR) . We think the world of the company. But if you go to their website, you can see the huge section about their "in China for China" page. I think it is one thing to be hurt by potential tariffs. But if China itself is slowing, an in China for China strategy becomes a risky bet.
The charitable trust has cut a huge amount of exposure to China, including that of 3M (MMM) , which has always had a presence there. We are holding on to Honeywell (HON) but that's really about it when it comes to in China for China.
So, when I say that "everything's changed," the most important change is the slowing of China. It means that you have to be more cognizant of what you own that's doing business in China. Last night, I confirmed from Kevin Johnson, the CEO of Starbucks (SBUX) , that business is robust in China. That makes sense. But industrial demand is weak. Typically, you could revert to owning just U.S. -- but you then default to what Jerome Powell wants to do in the U.S.: Break the economy to brake the economy, meaning crush the economy to slow it.
Yep, everything has changed. And the hiding places? They are getting harder and harder to find, which is why the G-20 has become the fulcrum of hope. But this isn't sports: Hope should not be part of the investing equation.
