The Yuan Stops On The Water’s Edge

The key focus is on technology, and what this would mean for American tech names selling into China. While the S&P tech sector was among the hardest hit yesterday, computer chip makers were hammered.

American Technology Secrets: Not for Sale

The market was slammed on Monday due to reports of the White House’s preparedness to curb investments in certain industries that could benefit the Chinese government’s “Made in China 2025” ambitions. 

While the focus has been on controlling trade in an effort to open China’s market, to stop the shakedown of foreign businesses, and to curb the theft of intellectual property, yesterday’s news had a different angle. 

According to reports, the Trump Administration is considering slowing investments by companies that have 25% or more ownership. Chinese investment into the United States soared into the election of President Trump - from 2000 to the first quarter of 2018, there have been 1,556 deals worth $139.9 billion.

• 1990 to 2015: $64 billion
• 2016: $45.0 billion
• 2017: $29.0 billion

A big part of last year’s China direct investment slowdown was a combination of China’s efforts to slow capital flight, and the Committee on Foreign Investment in the United States’ (CFIUS) actions.

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CHINA FINANCE STOCK MARKET

It is unlikely the administration’s potential new rules would have held up many deals accomplished over the past two decades. Late in the session, Peter Navarro spoke and tried to calm the market, which saw the Dow rebound almost 200 points, but the Street was determined to send Trump & Co. a warning.  

Real Panic?

When I look around at signs for panic where we’d normally see it, there was mostly calm feelings or indifference. The ten-year Treasury yield declined to 2.88% while gold was down $3.40.

The CBOE Volatility Index (VIX) was up 25%. It is up more than 56% this year, but it’s from such a low base that it’s 78% lower than its 2008 peak.

I’m salivating about the investment opportunities. Others are hiding in foxholes, and some have already said America can’t win. In fact, I think Harley Davidson (HOG) panicked with that announcement of moving some manufacturing outside the United States. 

Let’s face it: the company is growing and taking market share in Europe, Middle East, and Africa, while its U.S. business swoons. There probably was going to come a time when some manufacturing would have to be moved. The cover of a trade dispute allows management to ignore questions about its domestic business, which is still 200% larger than Europe.

The Problem: Lack of Leadership

Market Breadth underscores the problem with the selective nature of the rally, which has been led by tech and recently aided by consumer names.

Yesterday, losers outpaced winners, revealing the problem of investors loading into a just a handful of names:

NYSE

• Advancing Issues: 720
• Declining Issues: 2,263
• 52-Week Highs: 39
• 52-Week Lows: 104

NASDAQ

• Advancing Issues: 709
• Declining Issues: 2,300
• 52-Week Highs: 68
• 52-Week Lows: 79

I want to reiterate that we aren’t losing this trade skirmish no matter what the globalist headlines read this morning. 

Shenzhen Composite Index

• -17.3% 2018
• -41.6% three years

Quick Resolution

Of course, I would love for this episode to be over sooner rather than later, so we can get back to what really matters in real-time: the continued momentum of this economic recovery.

Today’s Session

This morning, I discussed Harley Davidson (HOG) on Fox and Friends and pointed out how unfortunate it is that management made its manufacturing move to Thailand about tariffs, considering, it was planned long before, just as the Kansas City plant closure was already announced. I understand the company wants to grow its business around the world, especially as it declines in the United States.  In fact, the company says it wants 50% of its volume to be outside the U.S. by 2027.  In the most recent quarter, retail sales in the U.S. were -12%, and shipments were down more than 15%.

I just think it’s dangerous for American businesses, which are benefiting big time from new tax rates (Harley pocketed an extra $25 million in the first quarter), to allow their names and products to be a part of the political narrative, especially when foreign countries can use this to justify their unfair tariffs.

The big corporate news item of the morning is from Lennar (LEN), which posted strong earnings. 

• Deliveries +57%
• New Orders +62%, volume +79% in value to $6.0 billion
• Backlog +92%, volume +114% in value to $8.6 billion
• Statement from Lennar Management

"Concerns about rising interest rates and construction costs have been offset by low unemployment and increasing wages, combined with short supply based on years of underproduction of new homes. Demand remained strong as we continued to see pricing power support margins while affordability remained consistent. During the quarter, we used our strong cash flow generation to reduce our debt levels by $1.1 billion, paying off $825 million of homebuilding debt maturities in May and early June as well as the remaining $250 million of Rialto's senior notes without refinancing."

Macro Conditions

“Low unemployment and increasing wages”

Pricing Power not hurting volume = expanding margins

“Demand remained strong as we continued to see pricing power support margins”

Paying off debts before rates increase (smart use of cash)

“Strong cash flow generation to reduce our debt levels by $1.1 billion”

Buy Signal

There are a lot of oversold names, but the broad market is under enough pressure.  Everyone should keep their powder dry for the moment.  For the Dow Jones Industrial Average:

• Above 24,655: I would nibble
• Above 25,3120: I would buy more aggressively