How about a rally based on good old-fashioned earnings? How about a day where we separated China winners from China losers and the results turn out to be pretty darned positive even if it means not every stock participates?
You see, we are beginning to get our arms around who will be blessed in a world where sourcing in China is getting mighty expensive and who will get hurt as the president ratchets up the pressure on China.
Who are the winners? Let's start with Cisco (CSCO) and Walmart (WMT) . Last night Cisco reported an amazing quarter showing tremendous acceleration in business when many were looking for the networking giant's earnings to falter.
This morning Walmart reported much better than expected earnings and a 3.4% increase in comparable sales, the best in nine years. Its e-commerce growth is on fire, a 37% increase, pulling itself away from the pack.
But I don't want to bury the lede. Both of these companies' stocks soared not just because of their better-than-expected earnings. They flew because both expressed a degree of immunity to the tariffs that shocked Wall Street. Yes, it is true that if the president takes the next step and hits another $300 billion in imports with a 25% tariff, Walmart acknowledges that prices will have to go higher. But after speaking to them I feel confident in saying that the consumer might never even be able to tell that the tariffs had any significant impact to what they buy. First, let's remember that Walmart is the world's largest grocer and those prices aren't going up at all. You don't import food from China, thank heavens. Second, Walmart can source better than any retailer in the world and given its commitment to everyday low pricing I expect that the consumers will still flock to its stores, maybe now more than ever because of its power to dictate terms to everyone.
As far as earnings? I am more worried about a strong dollar continuing to crimp sales because of a translation from overseas than I am about the president's tariffs. Again, it is not much ado about nothing, but it's pretty darned clear that this company's a winner versus its peers in a trade war.
Cisco's an even better story. Six months ago, Cisco's CEO Chuck Robbins adopted a "hope for the best prepare for the worst" strategy, simultaneously pleading its case in Washington and shifting sourcing with alacrity from China to all over the globe. That's how Robbins could say on the conference call "and so last week when we saw the indication that tariffs were going to move to 25% on Friday morning, the teams kicked in and we actually have executed completely on everything that we need to do to deal with the tariffs." Robbins chose not to be surprised by President Trump's resolve to get companies to make things better and cheaper in countries not being hit by tariffs. Robbins didn't bellyache that he can't get out of China and therefore numbers have to come down. Robbins saw the Chinese buying less and less of his own equipment -- don't worry it's only 3% of their overall business -- and started searching the world for other sources. Robbins went on to say, "Operationally all that we needed to do is now behind us and we see very minimal impact at this point based on all the great work the teams have done and it is absolutely baked into our guide going forward."
What a breath of fresh air these two companies are versus, say, Macy's (M) , which told investors the other day that it didn't see the next round of tariffs coming and it's already being impacted by the first round.
How about the losers? Any company that sells into one of the fastest-growing companies on earth, telco giant Huawei.
Today the president branded Huawei an outlaw and pretty much assured that companies that sell into the Chinese communications company will see their orders crimped or shut down entirely. That sent the stocks of Qualcomm (QCOM) , Skyworks Solutions (SWKS) , Broadcom (AVGO) , Micron (MU) and most important Xilinx (XLNX) , hurtling lower. What's behind this move? Simple: the president knows that Huawei has the lead in 5G but that lead will be effectively thwarted because you need those companies' components to make it all work.
This assault against Huawei is unprecedented because the president clearly no longer cares if his actions hurt American businesses. This action flies in the face of 40 years of letting our companies do business with the Chinese no matter what. It's unexpected and it is still one more sign that president believes his popularity increases every time he takes action against a Chinese company or the Chinese government. It's not enough to stop importing from China and stop making products in China, now you aren't even allowed to sell into key companies. It's an amazing escalation and I am sure the Chinese are astonished at how brazen Trump's being, especially versus any of his more pliant predecessors. I bet they are baffled about whether he even wants trade talks at this time.
What does Trump recognize that the Chinese may not have figured out? How about that the Chinese simply don't have as much ability to retaliate as so many thought. I have listened endlessly to economists tell us the Chinese could dump their trillion dollars in Treasuries. I say there is such a dearth of supply that the market could absorb them without much of a ripple.
How about cutting off our produce? We keep hearing that the Chinese are playing a longer game than us. I have bad news for the Chinese: We have a long history of just paying off farmers who get hurt. They can't hurt us, especially not in an election year that's so close you can now taste it.
How about boycotts? Who has really been able to penetrate China?
There's Starbucks (SBUX) , which seems embedded in the fabric of China hence why its stock hasn't skipped a beat. There's Yum China (YUMC) , which is KFC, Taco Bell and Pizza Hut. You could pull rank and substitute General Tso for Colonel Sanders, though, and tell me if anyone would really care.
Finally, there's tech. But Trump cut off business with the most important Chinese account there is when he branded Huawei a pirate so who cares at this point? Almost no one else has had much success in cracking China except Apple (AAPL) , and that's the other tech stock besides the semis that was noticeably weaker than the averages.
It's a tough moment for Apple because after the president's Huawei action, you don't know if Trump or Xi could hurt them. I still say own Apple don't trade it, but I can understand the tenterhooks.
It's ironic. Had the Chinese let Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) in, there could have been some massive retaliation for Huawei. But they never did. If the Chinese hadn't sanctioned so much intellectual property theft, then they could have taken action against the cloud kings. That won't happen, though, because as Shantanu Narayen, the CEO of Adobe (ADBE) pointed out to us, there's no sense doing a lot of business in China because they pirate everything anyway.
The bottom line? It's pretty simple, the president's now in charge of who does business in China. If you do too much, he will smote you. If you buy too much he will find you. If you rely on them, he will crush you. Or, to put it in Wall Street parlance, he's raising numbers on Walmart and Cisco and cutting them on Qualcomm, Broadcom and Micron. He's putting a strong buy on those who have left China but going buy to hold on all who stay.