For two weeks we heard one chorus about earnings: The consumer, backed by the confidence that comes from easy job-hunting and solid employment, is spending with alacrity, but well within means, and it's buoying the entire U.S. economy.
This week? It's a different story. Despite that two-thirds of our economy is consumer-spending driven, the other third?
It's gotten so bad, so fast, that it's crying out for federal intervention of some sort. That's what's causing the weakness in the market, and the non-consumer economy? It's just plain worrisome.
Tonight, for example, we are going to hear from one of the largest power companies in the country, American Electric Power (AEP) , which reported this very morning. Now when people hear data from the government about a fast or slow economy, they've gotten jaundiced about its accuracy.
There's nothing inaccurate about power data. So my breath was taken away when I heard CEO Nick Akins, say "the largest economic headwind we have at this impact of the trade war on the businesses is in AEP service territory."
Akins goes on to say: "The increasing number of tariffs on goods beyond steel and aluminum have impacted export manufacturing in our service territory. Certainly the trade wars have weakened the world economy and caused a strengthened the U.S. dollar, which is even more of a hurdle."
I can't wait to ask Nick about this change, one that shows a dramatic decline, of 4.6% for non-oil-and-gas related sectors.
One can only hope that Fed Chairman Jay Powell recognizes that he has to check in with power companies like AEP, because if he does, he will realize how the tariffs are really decking parts of this country. Now I knew that this could happen, but I back the fight given how unfair the Chinese have played, but, holy cow this is a real doozy of an industrial downturn.
Once again I want to reiterate that the consumer's in good shape. But how long can that last if the industrial economy's having such a downturn.
It takes two to have a trade war, of course, and if you ask me, as someone who has read or listened to most of the calls of the big industrial companies, China is faring far worse than we are. This morning 3M (MMM) reported. Morons who just read headlines bid the stock up 8 points in the pre-market. But once the conference call was digested, 3M shed those points and more.
Why?
I think a big reason is the shocking slowing in China. I am used to hearing that Venezuela has hammered a quarter or that Argentina, Brazil and Turkey brought about weakness that couldn't be avoided.
But I never thought that China would be the source of such weakness. Yet it's become a given of late and it's extremely stark. Nicholas Gangestad, the CFO on the 3M conference call, pretty much matter-of-factly threw out: "For the year we now expect organic growth in China to be down ... to mid-single digits vs. a prior expectation of flat, as we continue to experience challenging end-market conditions, particularly in the electronics and automotive industries."
Electronics and automotive? Isn't that why all of our companies moved over there to sell? I am not used to hearing that Brazil, Canada and Mexico were all much better than China.
Yesterday, Caterpillar (CAT) disappointed, although it maintained its year projections, which caused the stock to bounce back today after hideous action yesterday. One of the reasons I thought it could have a relief move is that China's become less than 10% of its book of business. That's now a godsend. Nine years ago, Caterpillar virtually doubled down on China by spending $7.6 billion to get Bucyrus, a storied mining equipment manufacturer.
Then growth slumped and mining cooled; the acquisition didn't really pan out. The best thing about the CAT quarter: There may be many leaks being sprung, but China, including Bucyrus, isn't one of them.
How about Dow Inc. (DOW) ? I used to recommend this stock, because of its exposure to the growth in China. While there were some decent line items for the company in China, notably polyester, but CEO Jim Fitterling made it clear that China is "having some big pressure right now." Thank heavens for the U.S.-offset to the Chinese weakness, allowing Dow to make the numbers, but a sagging forecast brought the numbers down.
How terrible is it in China? Let me give you a new benchmark. Align Technology (ALGN) , the maker of Invisalign, and it's stock took it on the chin, today. Why? The U.S. has cooled but CEO Joe Hogan blamed "the tougher consumer environment" in China for slowing sales.
Of course, it's not just tariffs that have me worried. One of the great secular growth themes in manufacturing is aerospace. We just heard from Boeing (BA) and if the delay from the problems with the 737 MAX continues, it may have to stop production.
Boeing's a huge chunk of our remaining manufacturing capacity, that's right, actually a meaningful amount -- that's not something the Fed can control with lower rates nor the president with, say, tariff relief. It's just a tailwind turning headwind, and that's not what the industrial economy in the U.S. needs.
Today the stock of Tesla (TSLA) got rocked by weaker sales. The conference call was other worldly. Given the demand story that Elon Musk traced out and the $5 billion war chest Tesla has, you would expect the stock to be up $35, not down $35.
I know Elon's pretty much a happy warrior, never really seeing clouds in his coffee, but I have to wonder how much of his confidence comes from potential sales in China. I say that, because while we know that a Tesla's not a Ford (F) , the Ford Chinese numbers we got this morning were simply atrocious. You can't count on China these days to buy anything.
Now I know that clashes with the mainstream media that say the Chinese are long-term thinkers with a 100-year plan, but all I can say is nothing lasts forever, including governments that can't spur growth.
We know there are pockets of tremendous strength in this economy. Retail spend at the big box stores continues unabated. While the most recent mortgage application data shows a decline in the low single digits, that market is coming along fine. Tech stocks are taking a breather, something that makes sense when you consider the assault on them from the U.S. government.
I just have to say that the industrial economy is weak enough that Jay Powell has plenty of ammo he needs to cut rates. And if we get tariffs on the last $300 billion in goods and if oil goes down -- still a bright spot in the firmament -- then one rate cut won't do it.
The bottom line, as I have been saying since this earnings season began, we have two economies, the manufacturing economy and the consumer economy. They are bifurcated for the moment. If the Fed doesn't move and the president does, meaning he ratchets up the tariffs next week, if trade talks fail, I just don't think the industrial cordon will hold.
DOW, GS and JPM are holdings in Jim Cramer's Action Alerts PLUS member club.
