Some days there's so much good news that it's a little overwhelming, and it just drives stocks beyond where we thought they were able to go. This is one of those days.
First, we need to take a step back and talk about how much the tariffs on China may have accomplished in a very short time. Wednesday the United States and China will sign a historic agreement in which the Chinese have promised to buy up to $200 billion in goods and services in return for our government basically agreeing to not raise tariffs on some imports and cutting in half a small 15% levy on others. The U.S. has also taken back its charge that China is a currency manipulator. But we are still keeping tariffs on $360 billion in goods and the Chinese have let their currency get much stronger, something that only makes their goods more difficult to purchase, causing our importers to scramble even more to get away from Chinese manufacturers. In a new wrinkle, apparently the tariffs will stay on until election day.
I know that we keep hearing the Chinese are playing the long game, but I have bad news for those who have endlessly insisted that we would get nothing out of the Chinese if we try to play tough with them.
I don't call $80 billion in manufacturing orders over a couple of years nothing. I don't call $50 billion in energy supplies, or $35 billion in services or $32 billion in agriculture nothing -- and that's above the current multi-billion dollar agriculture spend.
If you, a year ago, had told me that we would get all of these concessions plus a pledge to open the nation's markets to our financial companies while we still have these high tariffs, I would say that's inconceivable. To me this is a sign that the Chinese need a deal far more than we do, and we got the better of them.
If China lives up to these buys, I can see a major spike in the earnings of a host of companies.
For example, we manufacture so few large products in this country that it is hard to think where they can get $80 billion worth of manufactured goods to buy.
But there's one quick way to spend that money: place orders with Boeing (BA) . No wonder the stock of the beleaguered plane-maker moved up four points despite some revelations about how Boeing employees denigrated Lion Air's management as idiots before the tragic accident that killed 189 people. The purchases could be timely given that Boeing's order numbers are awful, the worst in decades.
Caterpillar (CAT) and Deere (DE) can use some big orders, too.
Energy? We have a surfeit of energy coming out of the Gulf, as multiple trains launch to send our natural gas around the world. So many experts warned that there wouldn't be enough customers for all our natural gas. Looks like this deal could make them eat crow if the Chinese fulfill their promises. Ag? Look for Tysons' (TSN) stock to fly if China increases buying, something that might be a necessity given the decimation of about half of their hog supply.
These orders are so potentially voluminous that we are getting brokerage recommendations to buy the rails given how much has to be spent to China. I prefer Union Pacific given its direct routes to the Southern California ports.
Now, normally, you would expect that while the tariffs have been effective, forcing the hands of the Chinese to make these buys would drive up the costs of our goods. But Tuesday we got the consumer price index for December and it only rose .2 percent with many categories, like used cars and trucks, electricity and transportation services, while the categories I most feared a spike in -- apparel, shelter, and commodities -- barely registered.
Have your cake and eat it, too?
Sure seems like it. I know that the narrative the media settled on was that there is no path forward beyond what's been arrived at, and that caused a selloff in an overbought market. But I think that's like thinking about the next game when we just won the Super Bowl. The timeline is not what's important. What's important are the buys of the goods and that the tariffs remain on until the purchases are made.
Away from trade, we got our first big earnings reports, Delta (DAL) , the airline, as well as Citigroup (C) , JPMorgan Chase (JPM) and Wells Fargo (WFC) .
Three out of four were astonishing.
Delta reported a quarter that was buoyed by robust U.S. travel, far better than expected. Sure, it benefited from capacity issues related to the 737 MAX woes, but the fact is the numbers make the stock too cheap for worse, coming in at 8-times earnings. Ed Bastian, CEO of Delta, called it a terrific holiday season.
Then JPMorgan and Citigroup gave you monster good quarters. Consider this: JP Morgan had deposit growth of 7% and loan growth of 3% and still had a strong net interest income, despite the decline in the Fed funds rate. Again, like the China trade deal, that wasn't supposed to happen. I think that the certainty that came with the trade truce led to a spike in trading, which produced a portion of this giant upside surprise.
Even as JPMorgan is the largest bank, it has growth deposits twice as much as the industry average over the past six years, principally because of investments in better branches, better trained people and strengthening technology. The company has gained 200 basis points in market share over the past six years.
This isn't just significant for JPMorgan, it's also significant for the technology companies, as the banks can't afford not to spend.
You know that if you take one look at the pathetic results of Wells Fargo where it's pretty clear that a lack of spend, perhaps because of the turmoil it's undergone, is causing the bank to dramatically underperform. That's why its stock got hammered while JPMorgan's rallied handily.
Finally, there's the cheapest bank that may very well have had the best quarter: Citigroup, which had excellent growth in all lines, especially credit cards, with double-digit growth. The company, which has now bought back a billion shares out of a total of about 3.1 billion, just a few years ago.
Again, the market's overbought. But the statistics from these banks show a robust consumer spending within means, the exact opposite of what we were seeing 10 years ago. It's a healthy picture, one that presents a good backdrop for the inevitable selloff after weeks of positive action.
One other positive: The endless rally in the FAANG technology names on the same information seems finally to have been tapped out. That's so needed. The bank stocks had been stalled for a bit, allowing for room to run. Same with the airlines.
A selloff would be a terrible thing to waste, as we found from those stocks, with the exception of Wells Fargo, where a selloff is expected and deserved.
