The checklist gets longer, the buys fewer by the day. I am talking about why it is so difficult to find stocks you can buy and so easy to find stocks you can sell in this environment -- and it weighs on the tape every day. No make that every hour.
What do I mean by checklist? It hasn't been explicitly fleshed out, but let me give you the schematic of the brains of all the big portfolio managers who are coming in to work each day to make decisions about what to buy and what to sell. For the record, it is really more of the latter because they have so little spare cash as investors keep pulling money out of active manager funds and putting them in passive vehicles or not investing at all but staying in short-term instruments.
You can thank the Fed for keeping those short rates higher than they should be, as it makes them very enticing versus, say, the 3% consumer packaged goods stocks that we have so often run to in these guarded situations. Plus, you have the plethora of IPOs -- both good and bad, but mostly bad -- that have chewed into cash and will continue to do so.
Just think, does this market really want a share of Slack? Do you actually want some We Work with that balance sheet. Are they still going to bring AirBnB, which, heaven forbid, might have peaked a la Uber and come to market too late, as seems to be the case with so many of the unicorns. Memo to bankers: Shut down the pipe. Wait for better times.
I know that trading has been awful, I know that the quarters are being wrecked, but there is way too much supply being pumped out. From here, it looks like most of it is undrinkable, yet is coming fire-hose-like to the active funds, as individual investor appetite dried up after Uber's (UBER) fiasco of a deal.
With that preamble, what's the gauntlet of checks that fund managers are running through to buy or sell?
1. How much China?
Remember this trade issue is now a double-edged sword. If the company sources in China, it's going to get a haircut NOW on margins because it can't get the Chinese to eat all 25% of the new tariffs that started May 10. No way. Those are now being absorbed both by the Chinese suppliers and the U.S. consumer unless the company has been able to source away, as is the case with Cisco Systems (CSCO) . Most companies have not had the same level of foresight. That's why numbers have to come down no matter what.
Worse, if it sells into China or needs Chinese approval for whatever it is doing, it going to be on the rapidly weaponized list -- like what we are doing to Huawei. Remember, the Chinese look at Huawei as a $100 billion sales jewel, not an outlaw.
You want a double whammy? Companies that both source in China and sell into China. They are the most troubled. Who does that?
Apple (AAPL) .
Apple is probably, at this moment, the most problematic of all equities, because its stock is so cheap but its estimates are now too high because of the tariffs and the possibility of subtle Chinese boycotts.
Triple whammy? The next round of tariffs -- the $300 billion. That's everything else. Totally not-eatable, totally passable sinking revenue.
2. Is it levered to the U.S. consumer?
I have always felt that the most reliable indicator of the U.S. consumer is PVH (PVH) , because it cuts into such a huge percentage of the retail picture, especially brick and mortar. We know now that there is a powerful punch to the consumer's face that happened when the second round of tariffs were boosted.
It's just true. We can no longer deny it. I sure won't. Too much evidence. These stocks will now be sold, if they haven't been already.
3. Are profits related to the yield curve?
If they are, then estimates have to be cut. That's all financial except for fintech, which will continue to be bought but is expensive as all get out. All banks will be sold even though the regulators will, I believe, soon bless even bigger buybacks and dividends.
4. Are stocks levered to, or will they be impacted by, the adoption of a single-payor health care system?
All Democrats save Joe Biden favor that. If Trump's economy goes into recession and Biden falters, the estimates for these companies are slashed beyond all recognition. So these must be sold today. If not yesterday.
5. Are companies' earnings at all related to May weather?
The weather has been terrible. The answer to this includes not just retail but housing, too. Sell.
6. Do millennials have an aversion?
That's plastic, that's canned and processed. That's not sustainable. Think think think of these before you buy.7. Can it have a zeitgeist-like negativity?
Today, we got a 79% tariff on Chinese-made kegs and 1,731% on mattresses. You own a restaurant that rents beer with these kegs? Cut numbers. You are a company that imports some of the $436 million in Chinese mattresses? Cut numbers -- as Leggett & Platt (LEG) and Simmons and Tempur Sealy (TPX) won this war and can now raise price.
It's a real gauntlet. It will lead to real estimate cuts. Get used to seeing these stocks going down until something gives in trade. And always remember that it will get worse before it gets better -- think darkest before more dark and prepare accordingly.
