Who has a mitigation plan and who is twiddling their thumbs or hoping the tariff issue will go away.
That's going to be the question, going forward, that professional investors will ask themselves as we approach the January lift in tariffs from 10% to 25%.
Until about a month ago, many companies' managements were believing that something had to give with China, that the Chinese would blink and come to the table with concessions, or that they would at least talk seriously about making changes to the way they do business.
We can hope that the G-20 meeting yields some results, but we also must accept that the president's increasingly erratic style may not make for such a deal. Remember his people, his own people, are split between wanting to contain China politically and economically -- that's Vice President Pence and Peter Navarro -- and to wanting to make a deal, that's Chief Economic Adviser Larry Kudlow and Treasury Secretary Steve Mnuchin.
CEOs imbued with happy talk from the latter camp are not prepared. Those who get that the former camp is really in charge are making the necessary provisions now.
For example, take a listen to the Home Depot (HD) , Zebra Technologies (ZBRA) and Estee Lauder (EL) conference calls. All three are busy assessing the tally the tariffs will bring to their bottom lines. Home Depot has calculated the impact on its customers and believes it's not that big, but it's a factor for certain. Zebra, which has a lot of bar code readers made in China, has a working group to figure out its next move and find sourcing away from China. Estee Lauder recognizes how minimal it actually might be to the bottom line, calls it out and builds it into the numbers. I would say that EL has the best grip on the tariffs -- and its call is a must read.
What are you looking for when it comes to 25%? You want an analysis of how much it will hurt and whether a client is willing to eat the cost. I will tell you that the tariff issue will most likely drive people back to domestic stocks without a lot of tariff impact, because I believe that most analysts won't believe the calculations that managements make. That's why I think EL's build in of the 25% is the most cogent, coherent way to look at 2019. If you don't think worst case, the analysts will think it for you.
We are about to go into the meat of the tariff order: the retailers. Pay attention to who says, like Home Depot, we have "this this and this" that could be hit and gives you the cost and the impact. If a company is in denial or overly confident, that stock will be sold. If it spells things out and it is palatable, it will still be bought. But the latter will be mighty hard to find if tensions escalate -- and I think that's the odds-on-favorite to happen.