Day two?
Who wants to think about Day Two on Day One?
Most don't.
But if you don't, then you end up holding the bag for something that will ultimately go back down if the talks fail.
Now we all know if the United States and China actually have good talks in 90 days -- and the non-negotiables, basically the things that the Chinese don't even acknowledge they are doing, like stealing intellectual property and demanding phony joint ventures, are actually resolved -- then everything you may sell today will come back and bite you.
You will wish you sold nothing.
But isn't that too Pollyanna? I think that the vast majority of hedge funds will say that's too rosy an outcome. But are they talking their own book? After all, you had to be about 200% long to really benefit from today's trading. It's hard to imagine a scenario where you have back-to-back days with the Dow up 500 points, especially with Wednesday's market being closed in remembrance of President George Bush.
So let's do some categorizing and perhaps that will help us figure out what needs to be trimmed and what can actually still be bought.
First, we know that the S&P 500 is up because of futures buying. Oddly, other than Apple (AAPL) , the dominant pieces of paper in the S&P 500 aren't really Chinese-related stocks: You sell them if you think there's something wrong with them. It's tough to find flies on the biggest one, Microsoft (MSFT) . It's doing fantastically. The problem is that it has become very expensive at 25x earnings, which is good for a cloud stock but not so hot for an enterprise software company with an emphasis on personal computers, even as the Surface is doing quite well. Amazon (AMZN) , Alphabet (GOOGL) ? Neither quarter was liked; you sell them into this unless you believe they have long-term higher intrinsic value, as I do.
But how about Apple? This is one of the most difficult stocks to deal with at this moment, because if the talks are fruitful, you are going to wish that you owned it and if the talks aren't fruitful, the long knives will be back in full force because analysts are in total "cutting price target" mode.
Given, though, that there were plenty of hedge funds betting that the talks would go awry, you have to expect some short-covering. Apple was, in many ways, ground zero of these talks. If they ended badly, you would have seen a tariff slapped on its goods from China by our President and a potential boycott of Apple products by a vindictive long-game-playing President Xi.
No matter, if we want to be realistic, there's no reason to raise numbers or price targets and more of an opportunity to cut price targets, which is what I expect Tuesday's plan will be for some of the more itchy analysts. They are in total denial that anything good could happen here, and many feel that no matter how low the stock has come from its high, it is still too expensive.
I am not one of those people. I told Katherine Ross in our fun morning videos that, at $172, Apple's stock sold at 12x earnings -- which is a little ridiculous when you think about the two billion ios ecosystem. Although candidly, I think Apple has to start figuring out more sticky products to run through that system.
Other stocks that are now off the boycott list that will have more of a rally? I would go with Starbucks (SBUX) and Nike (NKE) , both of which are doing exceedingly well. I think these have momentum and those who love them will pay up for more than one day. I think it's silly: I never expected a boycott, but in this market, when you get the kind of pin action, you realize there's always somebody out there who did -- and that person's a buyer not a seller on days one and two.
Now we know the stocks that historically trade with China -- Boeing (BA) , Emerson (EMR) , Honeywell (HON) , United Technologies (UTX) , 3M (MMM) , Cummins (CMI) -- deserve to trade higher, but for how long? Again, no numbers will be boosted and this may amount to nothing but a stay of execution for China earnings. Still, again, a heavy short position has shrouded these stocks, one that wasn't even lifted by the Federal Reserve's blinking.
I think Boeing can be held because of earnings -- and I like Honeywell for a similar reason. The others? Tougher. We have suffered mightily through the extended break-up of DowDuPont (DWDP) , which makes United Technologies a real tough own. Caterpillar's (CAT) numbers saw a peak two quarters ago. 3M is despised, perhaps too despised, but that's the way people see it.
Everyone wants ag. I like ag. So Deere & Co (DE) does work beyond one day, as it benefits from the immediate psychological impact of the Chinese being clever and buying some of our products. I could argue that DowDuPont fits, too, I just hope that it is sourcing natural gas at lower than the posted price.
So far, inconclusive.
The most fertile area?
It might be retail.
Think of it like this. Who has the most to gain from 90 days without higher tariffs? The companies that have been given a chance to move away from Chinese manufacturing and come up with a better supply chain.
Who's been hung on this issue? Walmart (WMT) , Costco (COST) , Kohl's (KSS) , Target (TGT) . Of these, I like Kohl's -- which has been beaten down ridiculously even as it has been having a strong Christmas. I like Costco, but so does everyone else. I still can't figure out what the market didn't like from Walmart; it was darned good. Target was a legitimate miss. But Target has a history of coming back from a legitimate miss with a legitimate hit.
Still, if you keep plumbing, you come up with three ideas, two with some real short-term earnings risk -- meaning we don't know what will happen -- and one with no earnings risk because it just reported: Five Below (FIVE) , which reports Wednesday, Dollar General (DG) which is tomorrow's business and Dollar Tree (DLTR) , which reported last week.
Five had some price target cuts lately, but I think they were really based on fear, as the long-term trajectory is pretty good here as it goes regional to national. We can't really tell how much is sourced from China. It is fluid. Same with Dollar General.
But we know from Dollar Tree that anything that gives these companies more time to switch supply chains is a huge win -- and they have already built in a migration from 10% to 25% tariffs. What they got is more than a stay of execution. They got three more months to source elsewhere, which is huge for these companies.
They, therefore, are the ones to buy -- especially Dollar Tree because it was de-risked by its positive report last week, based on the, finally, improvement of the Family Dollar stores, a very big deal.
One other thing, you want genuine reach? You go with the analogues to NXP Semiconductor (NXPI) , which was perhaps the most stupid part of the "communique," as Qualcomm (QCOM) walked away -- and paid $2 billion to do so -- from NXP Semi ages ago. You think someone else wants NXP? Maybe, but its stock will be punished pretty severely because it is so auto-related. I would rather buy the stock of Tesla (TSLA) , which may actually benefit from a lowering of Chinese tariffs. Heck, I would rather buy GM (GM) !
But if you think China's trying to make nice on mergers, then that means Broadcom (AVGO) can go buy something else, which would help immensely, and, perhaps you can make a case to own Micron Technology (MU) down here given its contentious battle with Chinese authorities. I don't know where the instinct to buy Advanced Micro Devices (AMD) or Nvidia (NVDA) comes from today; I would buy them simply because they have come down too far.
However, here goes, any sign that the bogus joint venture will end means that Visa (V) , Mastercard (MA) and American Express (AXP) can crack into China unimpeded. All three had great quarters, anyway. All three are fintech, so they aren't hurt by the Fed's actions or potential rising defaults. They make sense to buy, either way.
So, there's your cheat sheet. Go to work!
