Are some people beginning to bet against a trade deal with China? Is there a vanguard of funds trying to get short some China names and go long stocks that have nothing to do China and can work on a total breakdown in talks with the PRC?
The intent's not clear but I can see the reason for it: the breakdown in the Chinese economy. It's getting pretty palpable, something that you see when the conventional press, like the Washington Post prints this headline: "China's Communist Party is Battening Down the Hatches as the Economy Slows." The article talked about how the 70th anniversary of the founding PRC is not a sanguine time with a palpably slowing economy and GDP growth decelerating from 6.6% to 6% to 6.50%. The article implies that President Xi's mismanagement of the economy might be to blame.
That jives perfectly with a Wall Street Journal article that talks about how the once all-powerful president for life Xi might be in a more perilous position than the mainstream memo might be willing to accept. I put it like that because I would say that the press has largely been in the camp that President Trump doesn't have a handle on his own government, especially with the Democrats taking control of the House, whereas Xi runs a dictatorship that wants for nothing. The narrative: Xi will be there long after a hobbled Trump leaves office.
Now, though, we are hearing a different tune. President for Life Xi has been frantically trying to stimulate with little or no avail. The stock market, which seemed propped up by the government at the 2500 level finally burst to 3000 not because the government's been able to get the economy going, but because of hopes that Xi will make a deal with Trump that allows so much of the manufacturing for the U.S. to continue as it is or even better with lower tariffs.
Right now, as an opinion article in the Wall Street Journal pointed out, the power of the regime can no longer be assured and President Xi may not be as invincible as people in the West believe. The article, entitled "Behind China's Desire for a Trade Deal with Trump," contends that "President Xi's nationalism is running into the reality of slower growth and a fear of political instability."
The writer, Jonathan Kolatch, states: "If the Chinese economy teeters further, Mr. Xi will have to address his abiding worry: instability." He goes on: "with the Chinese dream flickering and less money in Chinese pockets, Mr. Xi will need to work very hard to continue to ingratiate his subjects."
Huh? What does a President for Life have to worry about? Can't he crush all opposition? Does he really have to worry about, ah hem, his constituents?
So, let's see, we have one president who pretty much acts as if he is going to be president for life and another out there kissing babies and shaking hands to stay in power?
What's all of this have to do with the setup where some fund managers are positioning themselves for deal fatigue and deal failure?
Simple: If President Trump reads the papers -- there's no assurances there -- then he may say, wait a second, "I've got Xi on the run. I've got American manufacturing might pouring out of China with some going to the U.S., to heck with this guy. Let's walk away until we get a total repudiation of any of the grand 2025 Made in China ambitions. Let's make a series of impossible demands including a commitment to purchase Apple (AAPL) iPhones and Caterpillar (CAT) tractors as well as a pledge to build the biggest factory in the world in Detroit to make Volvos, a Chinese brand. Why not throw in an order to buy any planes that Boeing BA makes with a $100 billion escrow payment. Oh, and let's throw in a ban on any intellectual property stealing and an insistence that American Express (AXP) , Visa (V) and Mastercard (MA) can start issuing credit cards without joint ventures and the government has to guarantee that it will stop selling Huawei equipment for the next five years."
Yes, a series of impossible requests that set too-high a bar that, when rejected, will allow Trump to walk away to push a weakened Xi to give in far more than when this process started. Remember, anything that delays talks allows more U.S. manufacturing to leave, just making negotiations even tougher for Xi.
Now I have no idea if this is going to play out in this negative way for those who want a quick deal but I see footprints out there that say the bet's being made.
First, I see the stock of Micron Technology (MU) trending down, a stock that is totally caught up in trade and could stand to lose a great deal if its parts get excluded from Chinese goods and Chinese manufacturers in favor of Korean chips.
I see the semiconductor capital equipment stocks getting hammered and they are truly part of the chain that could be hurt the most if China decides to ban their products for others from other countries. The stocks of 3M (MMM) , Caterpillar and Boeing, all linked with China, have gotten weak and Apple's stock seems to have run into a wall.
These are all signs that the talks may not be going as well as thought, or at least that some believe that Trump thinks he has the upper hand and has a lot more to gain from walking away from negotiations than Xi does. Don't forget that Trump's about the Art of the Deal and to me the art says that he's going to take a rain check.
As obvious as those sales and shorts are, the real standouts are the stocks that have no exposure to China, namely Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) . They are all flying.
As we hear about all of the tremendous retail reports lately we keep learning about how so much money is going toward Instagram and to influencing, well, the influencers. That's all Facebook. Alphabet is showing some leg these days, even letting Salesforce.com (CRM) talk about how it's become a super-important client. It's got so much going for it right now and it's not getting credit but perhaps the most powerful thing it's got going for it is that it does nothing in China.
Amazon's far-flung but its latest initiatives include its tie-up with Kohl's (KSS) , basically making that strip mall powerhouse into a wholesaler for Amazon products and returns to Amazon. When I think of Kohl's I don't think of China. I think of Kohl's cash and bargains.
Netflix and Alphabet have nothing to do with China so they are the perfect growth stocks for the moment. Trump could walk away from the talks and those would fly. Oh, I know that the FANGS seems like a logical extension, so why not take notice of how Spotify's (SPOT) not a China play and its stock is roaring.
It's not just those visible techs. Now you are finally seeing the bedraggled health insurance stocks catching a bid.
Now all of these winners and losers may be logical hedges based on the president's awareness of his power base versus Xi. The president thinks he's given business enough of a kiss that he can afford to alienate them with a little tough love.
The wild card? The president may not want the stock market to go down because the averages are his Nielsen ratings, which he cares about tremendously.
That's why I don't think these shorts and longs are being put on with great convictions. But if the president reads enough of these stories, you have to believe that The Dealer Maker in Chief will walk away and see if Xi's stays all powerful if Trump does so.
(Apple, Salesforce, Amazon, Facebook, Alphabet and Kohl's are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)