China's Big Trade Win

My phone started ringing on Sunday afternoon as soon as the futures markets opened in Asia. The U.S. had reached agreement with China on trade and the Dow futures were up 200 points.

Had the next leg of the bull market begun? ?Was it time to buy?

I asked what were the specifics of the deal. There weren't any. I asked about generalities. Those were absent as well.

All they knew was that the U.S. was suspending threatened tariff increases in exchange for a vague Chinese promise to buy more U.S. exports over the long term.

It was in effect a big Chinese win. The development allows the Middle Kingdom to do nothing but stall for time until the next U.S. administration comes to power regardless of which party wins. The Chinese think in terms of centuries, so waiting three more years for a better negotiating backdrop is no big deal.

It vindicates my own call on how the Chinese trade war would play out. After a lot of threats and saber rattling, the administration would achieve nothing, declare victory, and go home.

Traders should NOT be buying this pop in stock prices on pain of death. All that will happen is that stocks will trade back up to the top of the recent range, and then stall out once again as we slide back into slow summer trading. In fact, all we have accomplished is to revisit last week's high in stocks.

Stocks (SPY) weren't buying this trade agreement for two seconds, nor were bonds (TLT), foreign exchange (UUP), gold (GLD), or energy (USO). Not even the agricultural markets were believing it. Soybeans (SOYB), the commodity most affected by the China trade, were up a measly 2.45%. If markets really believed something substantial was afoot they would be limit up three days in a row. I've seen this happen.

It was obvious that little was accomplished when you saw the endless parade of administration officials praising the deals merits. My half century of trading experience has taught me when someone is working so hard to sell you a bridge, you look the other way.

And here is the problem. Beyond cutting-edge technology, there's nothing that China HAS to buy from the U.S. China's largest imports are in energy and foodstuffs, both globally traded commodities.

The oil and gas coming out of America looks pretty much like the Saudi Arabian and Russian kind. U.S. energy infrastructure is already groaning at the seams as it approaches 11 million barrels a day.

To double that from current levels just to fill the trade gap with China would require a multi-decade effort financed with trillions of dollars in private capital just to produce more oil with prices at a three-year high. In other words, it isn't going to happen.

The same is true with agriculture. I doubt there is a single farmer in the country willing to risk his own money to increase production on the back of the China deal. Rainfall is a much bigger concern.

In the end, stocks will eventually rise to new highs by the end of the year, just not right now. And they will do so on the back of the prodigious earnings growth of U.S. companies, which has been expanding at a breakneck pace for nearly a decade.

It is notable that the only major index that hit new highs today was the small cap Russell 2000 (IWM) where the constituent companies essentially do NO trade with China.

To believe otherwise would be giving the cock the credit for the sun rising, which happens every morning like clockwork.

 

 

 

 

 

It Worked Again!