Monday we discovered that the stock market's decline may just be the cost of doing business in this new realm. Yes, it was the worst day for the markets since Dec. 24 and it came because the Chinese chose to retaliate against our tariff hikes last week.
All I can say is you better strap yourself in because, the next six months I expect to see tariffs on the other $300 billion we import from China because it's become clear that President Trump has decided that the U.S. simply shouldn't do business with China and if you do you are going to have to pay the price.
It's a rather astounding proposition because China is such a huge trading partner, but the president has decided that our side doesn't get hurt nearly as much as their side, and the damage will be contained to a very few companies, namely A, B and C: Apple (AAPL) , Boeing (BA) and Caterpillar (CAT) , all of which count on China's market for growth.
I totally get that the president is focused on those companies only because Apple makes so many parts there so the government will have to make a decision whether to cut off its nose to spite its face, which we are told endlessly it wants to save. Boeing? One-quarter of their planes go to China. We are told that Boeing has a huge backlog away from China and that there are companies that will jump in the queue in a moment's notice. So the president doesn't really expect impact there. Caterpillar? The president, I understand, can't feel a lot of sympathy because it shouldn't have made China such an important market.
There's only one problem: the stock market doesn't buy it. Investors want out. They want out so badly that they were willing to sell pretty much everything other than utilities and the stocks of a few companies with products we will buy no matter what. We still love chocolate so Hershey (HSY) goes to an all-time high. Can you imagine if they made edibles? We love Clorox (CLX) but we can only use it on items we would not consume. And we love Campbell's (CPB) , perhaps because the sell by date is late in the century.
Should we be more worried? History says we should be. History says gigantic tariffs breed impeded trade and impeded trade means less business and less business means lower earnings.
There's one problem with that analysis. Most companies' earnings will not be hurt. We will end up selling for nothing other than that the textbooks say that all tariffs are like the Smoot-Hawley Tariff that preceded the Great Recession.
Now, we don't know that yet.
I think investors here don't realize how little we sell into China because they won't let us. We can make things there and sell them here but there's not much we make here that can go there.
Which is why when the Chinese unveiled their retaliation list it was pretty pathetic. I am going to list some of them because you are going to know how little ammo they really have. Here's the guts of the list: beans, beers, Brussels sprouts, cabbage, carrots cauliflower, broccoli, cucumbers, potatoes, sweet potatoes, rabbit meat, frog legs, almonds, cashews, apples, pineapples, dates, figs, mandarin oranges-mandarin!-hazelnuts, pears, macadamia nuts, whey as in curds and whey although curds aren't on the list, eggs, butter, pasta, rice, corn, eels, trout, chickens, turkeys, peanuts, cakes, wine, wheat and then here's some odd ones: televisions, DVRs, and cameras.
There's also threats that they will cut off our liquefied natural gas exports to them.
Now, here's what's pretty ironic about this list. The vast preponderance of these goods are made by farmers. The farmers, the president said, are going to get checks for the best year they ever had with China. Those goods will go elsewhere anyway so the farmers get a real payday. Could be a big win for them. Of course. They always seem to win. Jeffersonian instincts? No, more about primaries and two senators per all states, especially farm states.
A couple of these are funny: DVRs, cameras and gloves? Our manufacturing base for all of those were wiped out years ago, with the Chinese being instrumental in the destruction of the glove industry.
Liquefied natural gas? That's like Boeing planes: get in line. There is multiple year demand for our natural gas. We spoke with both Charif Souki, the founder of our export industry, and Tom Farrell, from Dominion Energy (D) -- strong stock there -- which exports natural gas and both have told us there is simply nothing to be had for years and years and years. So that's a real non-starter.
So where does it put us? I think that the president's view, the one says "there will be nobody left in China to do business with. Very bad for China, very good for the USA," scares investors who are panicking out. They aren't soothed by the fact that the president says if you buy from other countries than China you will do fine. He isn't asking that everything be made here. We are talking to a company, Williams-Sonoma (WSM) , which is moving some furniture making here because its visionary CEO, Laura Alber saw the 25% tariff coming.
It gets worse for the Chinese -- and maybe for the market which seems to reflect the Chinese market more than ours -- as the president is debating slapping 25% tariff on $300 billion more goods.
The Chinese will be out of things to tax, but it has threatened to sell its more than a trillion dollar Treasury hoard. I say, with interest rates plummeting Monday, you could price hundreds of billions of Treasuries right now. So good luck with that retaliation.
Can you buy things here? I said that Tuesday is the day, not today, because I have said that the retaliation would scare people into buying only the stocks of what does well in a recession.
But by the end of Tuesday people will probably lose interest in these stocks and will start picking among the rubble, targeting non-Chinese stocks, meaning the managed care stocks, the insurance stocks, and the telcos.
There are other issues. Most of the potential IPOs are going to be curbed deeply by the collapse of the Uber (UBER) deal. Short-term bummer: longer-term fantastic because we don't need any more supply.
There are semiconductor stocks that will be hurt that you have to wait to buy because we don't know whether their Apple business -- everyone has some Apple business -- will be hurt. We don't know if the Chinese will target individual companies like Starbucks (SBUX) and Nike (NKE) , with boycotts but Starbucks is allied with Jack Ma, a key Chinese billionaire, and Nike and the Chinese Ministry of Sport are partners in keeping the Chinese people in shape.
But let's go back to the real worry here for this market: Apple. It was a one-two punch here because first the U.S. Supreme Court is allowing the possibility of a lawsuit against Apple for inflated prices for apps because of its monopoly-like power. That doesn't at all mean that the plaintiffs will prevail. It does mean the case is not going to be thrown out. And second, Apple could really feel some pain if China boycotts it. I just think that if it happens the Chinese would be very afraid to lose all of the manufacturing that Apple does. But who knows? It's more powerful than live fish and pasta.
The bottom line: Monday the market turned against all but the soft goods. That tends to last for three days. Monday was day two.
Tuesday, day three, buyers tend to come back to stocks of companies with no Chinese exposure, namely FANG names -- Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google now Alphabet (GOOGL) , because in typical fashion China doesn't want them in to begin with. So get ready. Wild ride. But we are almost oversold and if we made cameras and DVRs and gloves we should be shaking. But we don't. Almonds and cashews? If that's our pain points, the market should stop sweating the program.