We May Well Be Seeing The Divorce Between China And The U.S.

Summary (Seeking Alpha)

  • The market needs to face up to the possibility of a divorce. Once we do that, we can concentrate on the economy and business performance.

  • It looks like we are coming to a pivot point with this meeting. I expect more strong volatility.

  • Keep monitoring companies that are holding up under this lack of visibility. They continue to be a buy.

  • While I got a bloody nose betting against Domino's, I will keep at the earnings report opportunities with options.

Divorce will be messy, a trial separation is happening now

The last thing I want to do is talk about Geopolitics when I'm trying to write about stocks. Don't get me wrong. I would be glad to don an itchy plaid cardigan with elbow patches cradling a snifter of brandy, spouting theories at another time. Unfortunately, people's money is at stake here, and this entire sorry exercise is blinding both trader and speculator on the true future value of stocks. We are already in a situation that does not offer clarity. This gives the bears the opportunity to roar RECESSION...The more talking heads talk about bad times coming, the more they hasten that prospect. There are also more individuals who're feathering their nest by touting an economic downturn than not. Would you be surprised there are whole industries dedicated to fear? From sellers of gold coin to companies that sell freeze-dried dinners, to home generators, to sellers of annuities, and of course, insurance. Some of this is legit, some who are selling "sure-fire ways to keep your money safe during the coming depression!" etc. are obviously not. But all the voices together and joining with the politicians on the other side of the aisle who are pouncing on this discourse are pressuring traders and investors who are long.

Will a possible China divorce throw us into a recession?

No, while there are legitimate concerns, to my eye, they are temporary, even to extent of the next few weeks. The notion that the US can do very well without China trade has already been shown to be true. We may have to be sanguine at the slower pace. China might just decide that they can do as well without us. I think that is the wrong notion. I think the rest of the world would think twice about carrying on with China without the US involved. China is doing to the rest of the world what they are doing to us. As long as the US keeps banning companies like Huawei and the many video and image recognition tech companies, as long as the US keeps tariffs on, Americans and other non-Chinese companies will leave China. China can claim that they are growing all they want. The waves of factories closing in China and opening in Vietnam, Thailand, Indonesia, are evidence that things are not so rosy. China will come around, and to such time, the US can carry on growth as it pleases. In the end, the fastest-growing companies will come back into favor.

Keep your hedges on

I went through a lengthy paragraph or two yesterday on hedging, and those that have probably are less anxious than the others. Hedging does not just mean buying options. Cash is the cheapest and best hedge. You could buy GLD and SLV. Gold and silver have been a traditional hedge against uncertainty. The VIX at $19 is pretty high, but perhaps it is worth allocating a small amount on a VIX ETF right now. However, I would be more comfortable buying the VIX below $15. I did quote a price for the VIX option yesterday as well. The VIX is even higher now.

Once again, keep watch on names that are green on a day like this

Tesla (TSLA) and Roku Inc. (ROKU), are up nicely. DocuSign (DOCU) is up pennies, but it has been going up steadily since its great earnings. Nearly all the housing names have been going great, and almost all in the green. I regret that I gave them short shrift going into earnings since I expected everyone who wanted to be in those names are already there. Housing was a group that I have been highlighting since the 10-year started retreating from 3% and going lower. At this point, I have to stand mute since it's unclear if these names are fully valued or have room to grow. Analysts are still upgrading housing-related names and raising price targets. I would suggest looking through the housing names, look at the price targets, and take them more seriously at this point. Speaking of upgrades, Microsoft (MSFT) has been upgraded today and in the green. I still believe that FAMG - Facebook (FB), Apple (AAPL), MSFT, and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are a buy. Amazon (AMZN) is still struggling and will probably need to report its earnings for us to see either a strong break from this level or a new march to projected highs. I can't see AMZN muddling along at this same $1,700 level for much longer.

Don't count your premarket chickens before they hatch

I was feeling really flush with my call on Domino's (DPZ) (see yesterday's item). In fact, the stock opened down more than 10 points. As you can tell, DPZ is now 20 points higher based on an announced billion-dollar buyback and happy talk that DPZ will outlast the VC 3rd party delivery services. The CEO in the earnings conference call was confident that DPZ systems and food quality will keep them in the game. I have no doubt that that is true, but what used to be a technological advantage is now a commodity. Everyone has an ordering app, and everyone has delivery. No. Domino's needs to leap ahead of the competition. Perhaps, they should unbundle their delivery service, or maybe they should launch other cuisines, like Mexican... Whatever they do, announcing a buyback is not going to fix falling same-store sales growth. All that said, the strong return on my option turned into a loss. I am glad the exercise cost only several hundred bucks. I think this demonstrates that gains must be taken right away in this game. I did not expect that this will work on every earnings gambit, but I think this is a worthwhile exercise, and I will continue to keep you at my shoulder as I trade on earnings that I think has a good chance on disappointing and maybe a few where I think earnings will be well accepted. My thought is, I probably will focus on companies that you are actually holding. Instead of cursing at me, perhaps you should follow me in and buy some low-cost puts to insure your holdings. See! We are still on the same team...

As of this writing, the Dow is down only 80 points

This should not serve as an all-clear sign. I think we still have some turbulence going into this meeting. What it does say is that perhaps we are finally confronting this China trade issue, and maybe China is not so scary. Americans are still going about their business spending prodigiously while still saving at levels not seen in decades at 8%. We faced down many powerful dictators, and we will face down President Xi. China is not moving toward Democracy as we hoped. The Chinese are not conducting trade as we'd hoped. Whether you support Trump or want him impeached, most Americans recognize fair-play. So, come what may, freedom and rule of law will win out. It is an essential ingredient to capitalism. China's centrally-controlled economic policy is not sustainable, and all we need to do is gently push China. Maybe we withdraw some of the benefits of free trade, and WTO as we are doing with Tariffs right now, and China will see the light. Until then, our markets will be more volatile, hedging and cash management for your portfolio are essential.

I would not blame you if you did not trade at all this week.