Gaming the gamers.
That's what you have to do to figure out the market's reaction to the G-20 outcome -- and I have to tell you, I think that it's hard to play the game.
First, you have to presume something will happen.
Here are some possible outcomes:
First, Xi comes with a plan because, as President Trump says, he wants a deal and needs a deal, in part because his economy is slowing and in part because his stock market is down.
Both precepts are true about the weaknesses in China. They do mean something. But Xi is about hegemony and humiliation, getting the first, crushing the second.
So I am giving this a 10% chance, but it would cause a 10% rally.
Second, Trump extends 10% and says he will delay 25%. I think this is also a long shot, because he is bringing cold warrior Peter Navarro to the conference -- and he will sit at the table with the President and Xi: 10% chance. This action moves the market up 5%.
Third, Trump says, sorry, we are going to 25% and $200 billion, and we will wait to impose any tariff on the rest, thought to be between $250 billion and $300 billion. This is the most likely outcome: I am giving it 75% chance. Let's hold off the market's reaction for one second.
Fourth, he takes 10% to 25% and adds a 10% tariff on the other $280 billion starting immediately, and it goes to 25%, say, six months from now. That's about a 25% chance. Market goes down roughly 4%.
Fifth, the unthinkable nuclear option: A bad Argentine steak dinner, 25% on everything, worst outcome for the stock market, 10% chance and down 10%.
Okay, it looks like the most probable outcome is 10% to 25% and hold off next tariffs.
The more important question is how many people are "set up" for that outcome? How many people will think that's a harder line than they thought and they expect immediate retaliation? How many companies are like Dollar Tree (DLTR) last night, which, amazingly since they source a huge amount of product in China, are ready for it? How many are ready to switch, but haven't yet?
There are a lot of variables.
I have to think that there are still plenty of money managers who aren't ready for this outcome. There are plenty of algo players who have a model that says sell if we get this outcome.
That's a not-so-hot clash.
I think the answer is that if we get it, the algos are set to buy the recession stocks with little exposure to Chinese boycotts: Pepsico (PEP) , Coca Cola (KO) , Procter & Gamble (PG) and, most important, McDonald's (MCD) and Clorox (CLX) .
Against that is any industrial or tech company that is perceive to rely on the Chinese market: think 3M (MMM) , Emerson Electric (EMR) , United Technologies (UTX) and Apple (AAPL) .
The result of this analysis? You want to be long the former and short the latter, if you are trying to game the gamers.
Is this game worth it at all? To investors, perhaps. To traders, absolutely.
Unfortunately, everything will be down on Monday if this option gets put in place, which means you will have a hard time shorting because they will all be down. It's probably still worth it, though, again if you are a trader. So the real gameplan? Queue up the recessionistas and be ready on Monday to buy them, and buy puts on an industrial or tech basket to be ready for Monday.
