Global Market Comments
June 17, 2019
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SCARY THING ABOUT THE MARKETS)
(SPY), (TLT), (GLD), (TSLA)
Tag Archive for: (TSLA)
There’s one big scary thing about the markets right now. As I mentioned last week, the major indexes are sitting on a precipice of a right shoulder of a ‘Head and Shoulders” top.
Traders are expecting a trade war settlement and a Fed interest rate cut in July. While the economy in no way needs a rate cut, stock markets desperately do. In fact, they need another dose of steroids just to remain level. It reminds me of a certain recent California governor (I’ll be back).
If we get them, markets will grind up a few percentage points to a new all-time high. If we don’t, the top is in, possibly for this entire economic cycle, and a 25% swan dive is in the cards.
It's what traders call “Asymmetric risk.” If we get the bull case, you make sofa change. If we don’t, you lose dollars. It’s what I call picking up pennies in front of a steamroller. But in the 11th year of a bull market, that’s all you get. The truly disturbing part of this is that this setup is happening with valuation close to a historic high at a 17.5X price earnings multiple.
We’ll get a better read on Wednesday at 2:00 PM EST when the Fed announces its decision on interest rates. The post meeting statement will be more crucial than usual. What’s in a word, Shakespeare might have asked? If the Fed drops the word “Patient”, then a July interest rate cut is a sure thing. The algos reading the release at the speed of light will be the first to know.
It was initially off to the races last Monday when the one-week trade war with Mexico came to an end and some immigration issues were settled.
The tariffs are off, even though the Mexicans say the terms were already agreed to months ago.
There is no big ag buy either. The economy is still sliding into a recession, and the bond market has already discounted three of the next five quarter point rate cuts.
US exports are in free fall, with Long Beach, America’s busiest port, seeing seven straight months of declines in shipping volumes. They were off 19.5% in May alone. Recession indicator no. 199.
Buy bonds (TLT), gold (GLD), and short the US dollar (UUP), says my old friend, hedge fund legend Paul Tudor Jones. He is certainly reading the writing on the wall. The legendary trading billionaire believes that plunging interest rate cuts are going to dominate the scenery for the rest of 2019.
Tanker attacks sent oil soaring. After 50 years of waiting, it finally happened, torpedo attacks against two tankers in the Straits of Hormuz bound for China. Oil rocketed 4%, then gave up the rally, and stocks are amazingly up on the day.
Go figure. A decade ago, this would have been a down 1,000-point day for stocks and Texas tea would have soared to $100. Clearly, tensions in the Middle East are ratcheting up, but with the US now the swing oil producer, why bother?
With US oil production climbing to 17 million barrels a day by 2024, up from 5 million b/d in 2005, the Middle East can blow itself up and nobody cares. The US by then will have created an entire Saudi Arabia’s worth of new oil production over a 20-year period. US troops there are defending China’s oil supply, not ours.
The US budget deficit soared by 38.7% YOY, to $739 billion. It’s the fastest growth in government borrowing since WWII. Much of today’s economic growth in on credit and this can only end in tears. Enjoy the good times while they last.
Major semiconductor maker Broadcom (AVGO) disappointed hugely on earnings, tanking the market, and the stock plunged a heartbreaking 12%. The trade war gets the entire blame. It turns out that Broadcom’s biggest customer is the ill-fated Huawei whose CFO is now sitting in a Canadian jail awaiting extradition to the US. Other semiconductor stocks especially got slammed. The canary in the coal mine just died.
China’s industrial production hit a 17 year low, and yes, it’s because of the trade war, trade war, trade war. When your biggest customers come down with the Asian flu, you at the very least catch a severe cold. Start shopping for Robitussin.
Global Trading Dispatch closed the week up 15.38% year-to-date and is down by -0.34% so far in June. That’s show business. You work your guts out trying to understand this market and it turns out to be for free. Or worse yet, you get a bill without an amount due. This is something that regular salary earners don’t understand.
My nine and a half year profit appreciated to +315.52%, pennies short of a new all-time high. I think I’ll be flatlining at a high for a while to create a base from which I can jump to new highs. The average annualized return ticked up to +33.21%. With the trade war with China raging, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter.
My twin bets on Tesla (TSLA) worked out very nicely and I took profits on both. It was an option play whereby I expected that (TSLA) shares would not fall below $150 or rise above $240 by the June 21 option expiration.
Several followers have seen good success using every Tesla dip below $200 to go naked short August $100 or $125 Tesla puts in small quantities for a decent amount of change.
The long view here is to wait for some kind of summer meltdown and then go long into a year-end rally as 2020 election-related turbochargers start to hit the market.
The coming week will be all about waiting for the Fed to jump. We also get some important updates on housing data.
On Monday, June 17 at 8:30 AM EST the Empire State Manufacturing Index is out.
On Tuesday, June 18, 8:30 AM EST, the May Housing Starts are released.
On Wednesday, June 19 at 2:00 PM EST, the Federal Reserve decision on interest rates is announced. Vital is whether the word “Patient” remains in their statement.
On Thursday, June 20 at 8:30 AM, the Weekly Jobless Claims are printed. We also get the Philadelphia Fed Manufacturing Index.
On Friday, June 21 at 10:00 AM, we learn May Existing Home Sales. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, by the time you read this, I will be winging my way somewhere over the Pacific Ocean. It’s a 14-hour flight from California to New Zealand, and the plane carries two crews.
It’s a genuine four movie flight. I’ll take off on Sunday and don’t arrive until Tuesday because I’ll be crossing the International Dateline. When I arrive, I’ll feel like death warmed over. It’s all in the name of research and finding that next great trading idea.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 14, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY JUNE 26 BRISBANE, AUSTRALIA STRATEGY LUNCHEON)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (BYND), (AMZN), (GOOG), (AAPL), (CRM), (UT), (RTN), (DIS), (TLT), (HAL), (BABA), (BIDU), (SLV), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader June 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you think Tesla (TSLA) will survive?
A: Not only do I think it will survive, but it’ll go up 10 times from the current level. That’s why we urged people to buy the stock at $180. Tesla is so far ahead of the competition, it is incredible. They will sell 400,000 cars this year. The number two electric car competitor will sell only 25,000. They have a ten-year head start in the technology and they are increasing that lead every day. Battery costs will drop another 90% over the next decade eventually making these cars incredibly cheap. Increase sales by ten times and double profit margins and eventually, you get to a $1 trillion company.
Q: Beyond Meat (BYND)—the veggie burger stock—just crashed 25% after JP Morgan downgraded the stock. Are you a buyer here?
A: Absolutely not; veggie burgers are not my area of expertise. Although there will be a large long-term market here potentially worth $140 billion, short term, the profits in no way justify the current stock price which exists only for lack of anything else going on in the market. You don’t get rich buying stocks at 37 times company sales.
Q: Are you worried about antitrust fears destroying the Tech stocks?
A: No, it really comes down to a choice: would you rather American or Chinese companies dominate technology? If we break up all our big tech companies, the only large ones left will be Chinese. It’s in the national interest to keep these companies going. If you did break up any of the FANGS, you’d be creating a ton of value. Amazon (AMZN) is probably worth double if it were broken up into four different pieces. Amazon Web Services alone, their cloud business, will probably be worth $1 trillion as a stand-alone company in five years. The same is true with Apple (AAPL) or Google (GOOG). So, that’s not a big threat overhanging the market.
Q: Is it time to buy Salesforce (CRM)?
A: Yes, you want to be picking up any cloud company you can on any kind of sizeable selloff, and although this isn’t a sizeable selloff, Salesforce is the dominant player in cloud plays; you just want to keep buying this all day long. We get back into it every chance we can.
Q: Do you think the proposed merger of United Technologies (UT) and Raytheon (RTN) will lower the business quality of United Tech’s aerospace business?
A: No, these are almost perfectly complementary companies. One is strong in aerospace while the other is weak, and vice versa with defense. You mesh the two together, you get big economies of scale. The resulting layoffs from the merger will show an increase in overall profitability.
Q: I had the Disney (DIS) shares put to me at $114 a share; would you buy these?
A: Disney stock is going to go up ahead of the summer blockbuster season, so the puts are going to expire being worthless. Sell the puts you have and then go short even more to make back your money. Go naked short a small non-leveraged amount Disney $114 puts, and that should bring in a nice return in an otherwise dead market. Make sure you wait for another selloff in the market to do that.
Q: What role does global warming play in your bullish hypothesis for the 2020s?
A: If people start to actually address global warming, it will be hugely positive for the global economy. It would demand the creation of a plethora of industries around the world, such as solar and other alternative energy industries. When I originally made my “Golden Age” forecast years ago, it was based on the demographics, not global warming; but now that you mention it, any kind of increase in government spending is positive for the global economy, even if it’s borrowed. Spending to avert global warming could be the turbocharger.
Q: Why not go long in the United States Treasury Bond Fund (TLT) into the Fed interest rate cuts?
A: I would, but only on a larger pullback. The problem is that at a 2.06% ten-year Treasury yield, three of the next five quarter-point cuts are already priced into the market. Ideally, if you can get down to $126 in the (TLT), that would be a sweet spot. I have a feeling we’re not going to pull back that far—if you can pull back five points from the recent high at $133, that would be a good point at which to be long in the (TLT).
Q: Extreme weather is driving energy demand to its highest peak since 2010...is there a play here in some energy companies that I’m missing?
A: No, if we’re going into recession and there’s a global supply glut of oil, you don’t want to be anywhere near the energy space whatsoever; and the charts we just went through—Halliburton (HAL) and so on—amply demonstrate that fact. The only play here in oil is on the short side. When US production is in the process of ramping up from 5 million (2005) to $12.3 million (now), to 17 million barrels a day (by 2024) you don’t want to have any exposure to the price of oil whatsoever.
Q: What about China’s FANGS—Alibaba (BABA) and Baidu (BIDU). What do you think of them?
A: I wanted to start buying these on extreme selloff days in anticipation of a trade deal that happens sometime next year. You actually did get rallies without a deal in these things showing that they have finally bottomed down. So yes, I want to be a player in the Chinese FANGS in expectation of a trade deal in the future sometime, but not soon.
Q: Silver (SLV) seems weaker than gold. What’s your view on this?
A: Silver is always the high beta play. It usually moves 1.5-2.5 times faster than gold, so not only do you get bigger rallies in silver, you get bigger selloffs also. The industrial case for silver basically disappeared when we went to digital cameras twenty years ago.
Q: Does this extended trade war mean the end for emerging markets (EEM)?
A: Yes, for the time being. Emerging markets are one of the biggest victims of trade wars. They are more dependent on trade than any of the major economies, so as long as we have a trade war that’s getting worse, we want to avoid emerging markets like the plague.
Q: We just got a huge rebound in the market out of dovish Fed comments. Is this delivering the way for a more dovish message for the rest of the year?
A: Yes, the market is discounting five interest rate cuts through next year; so far, the Fed has delivered none of them. If they delayed that cutting strategy at all, even for a month, it could lead to a 10% selloff in the stock market very quickly and that in and of itself will bring more Fed interest rate cuts. So, it is sort of a self-fulfilling prophecy. The bottom line is that we’re looking at an ultra-low interest rate world for the foreseeable future.
Good Luck and Good Trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 3, 2019
Fiat Lux
Featured Trade:
(MONDAY, JUNE 24 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR WHAT A WASTE OF TIME!),
(SPY), ($INDU), (JPM), (MSFT), (AMZN), (TSLA)
“Sell in May and go away” has long suffered from the slings and arrows of non-believers, naysayers, and debunkers.
Not this time.
Looking at the trading since April 30, we have barely seen an up day. Since then, the Dow Average has plunged 1,900 points from a 26,700 high, a loss of 7.1%. We are now sitting right at my initial downside target of the 200-day moving average.
The Dow has now given up virtually all its 2019 gains, picking up only 2.0%. In fact, the market is dead unchanged since the end of 2017. If you have been an index investor for the past 17 months, your return has been about zero. In other words, it has been a complete waste of time.
There are a lot of things I would have preferred to do rather than invest in index funds for the past year and a half. I could have hiked the Pacific Crest Trail….twice. I might have taken six Cunard round-the-world cruises and met several rich widows along the way. I might even have become fluent in Italian and Latin. Such is the value of 20-20 hindsight.
You would have done much better investing in the bond market, which has exploded to a new two-year high, taking the ten-year US Treasury yield down to a once unimaginable 2.16%. During the same period, the (TLT) has gained 11 points, or 9.0% plus another 3.0% worth of interest. You did even better if you invested in lower grade credits.
Which leads us to the big question: Will stocks bottom out here, or are we in for a full-on retrace to the December lows?
Unfortunately, recent events have conspired to point to the latter.
The United States has now declared trade wars against all neighbors and allies around the world: China, Mexico, Europe, and Canada. On Friday, it announced 25% punitive tariffs against Mexico before NAFTA 2.0 was even ratified before Congress, thus rendering it meaningless. Businesses are dropping like flies.
As a result, GDP forecasts have been falling off a cliff, down from 3.2% in Q1 to under 1% for Q2. The administration’s economic policy seems to be a pain now, and more pain later. It is absolutely not what stock investors want to hear.
If you are a business owner now, what do you do with the global supply chain being put through a ringer? Sit as firmly on your hands as possible and do nothing, waiting for either the policy or the administration to change. Stock investors don’t want to hear this either. The fact that stock markets entered this cluster historically expensively is the fat on the fire.
Having hummed the bear national anthem, I would like to point out that stocks could rally from here. We enter a new month on Monday. There will be plenty of opportunities to make amends and the G-20 meeting which starts on June 20. This should provide a backdrop for a rally of at least one-third of the recent losses, or about 600 points.
But quite honestly, if that happens, I’ll be a seller. The economy is doing the best impression of going down the toilet that I can recall, and that includes 2008. Only this time, all the injuries are self-inflicted.
As the trade war ramped up, China moved to ban FedEx (FDX) and restrict rare earth exports (REMX) to the US essential for all electronics manufacture. Most modern weapons systems can’t be built without rare earths. The big question in investors' minds becomes “Is Apple next?”
The OECD cut its global growth forecast from 3.9% to 3.1% for 2019 because of you know what. Stock markets are now down for their sixth week as the 200-day moving average comes within striking distance.
There was more bad news for real estate with April Pending Home Sales down 1.5%. If rates this low can’t help it, nothing will. Where are those SALT deductions?
The bear market in home prices continued in March with the Case Shiller CoreLogic National Home Price Index showing a 3.7% annual price gain, down 0.2%. Home price in San Francisco is posting negative numbers. When will those low-interest rates kick in?
The bond market says the recession is already here with ten-year interest rates at 2.16%, a new 2019 low. German bunds hit negative -0.21%. JP Morgan (JPM) CEO Jamie Diamond says the trade war could cause real damage to the US economy.
US Capital Goods fell out of bed in April, down 0.9%, in another important pre-recession indicator. No company with sentient management wants to expand capacity ahead of an economic slowdown.
Despite all the violence and negativity, the Mad Hedge Fund Trader managed to crawl to new all-time highs last week, thanks to some very conservative positioning on the long side in the right names.
Those would include Microsoft (MSFT), Amazon (AMZN), and Tesla (TSLA). All of these names were down on the week, but the vertical bull call spreads were up. You see, there is a method to my madness!
Global Trading Dispatch closed the week up 16.30% year-to-date and is up 0.51% so far in May. My trailing one-year declined to +19.71%.
The Mad Hedge Technology Letter did fine, making money on longs in Microsoft (MSFT) and Amazon (AMZN). Some 10 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit jumped to +316.55%. The average annualized return popped to +33.32%. With the trade war with China raging, I am now 70% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.
I’ll wait until the markets enjoy a brief short-covering rally before adding any short positions to hedge my longs.
The coming week will be a big one with the trifecta of big jobs reports.
On Monday, June 3 at 7:00 AM, the May US Manufacturing PMI is out.
On Tuesday, June 4, 9:00 AM EST, the April US Factory Orders are published.
On Wednesday, June 5 at 5:15 AM, the May US ADP Employment Report of private hiring trends is released.
On Thursday, June 6 at 5:30 AM, the April US Balance of Trade is printed. At 8:30 Weekly Jobless Claims are published.
On Friday, June 7 at 8:30 AM, we learn the May Nonfarm Payroll Report is announced which lately has been incredibly volatile.
As for me, I am going to be leading the local Boy Scout troop on a 20-mile hike with a 2,500-foot vertical climb in the Oakland Hills. Hey, you never know when Uncle Sam is going to come calling again. I need to stay boot camp-ready at all times.
At least I can still outpace the eleven-year-olds. I’ll be leaving my 60-pound pack in the garage so it should be a piece of cake.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 29, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY, JULY 10 BUDAPEST, HUNGARY STRATEGY LUNCHEON)
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),
(KISS THAT UNION JOB GOODBYE),
Have you tried to hire a sewing machine operator lately?
I haven’t, but I have friends running major apparel companies who have (where do you think I get all those tight-fitting jeans?).
Guess what? There aren’t any to be had.
Since 1990, some 77% of the American textile workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is, at last, coming home, the race is on to find the workers to man it.
Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events.
There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low-cost producer which have killed thousands.
Today’s young consumers want to look cool but have a clean conscience as well. That doesn’t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well-off are willingly paying top dollar for a well-made “Made in America” label.
Look no further than 7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all-American manufacturer.
As a result, wages for cut-and-sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for the industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers.
They advertise in languages with high proportions of blue-collar workers, such as Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying U.S. factories.
But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today’s fast-paced, high-turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades.
It has also been blamed for losses of U.S. jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no-brainer.
Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began filing overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines.
After the U.S. normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn’t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000, and $26,000 for trained technicians, with total compensation still rising 20% a year. At this rate, U.S. and Chinese wages will reach parity in about 10 years.
But wages won’t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks.
Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters such as earthquakes, fires, and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a highly tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the U.S. fleet and the Chinese military playing an endless game of chicken off the coast, we are one midair collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the U.S., whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxconn factory by Apple’s CEO Tim Cook was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the U.S. all the faster. The Chinese press was ripe with speculation that Apple-induced reforms might spread to the rest of the country like wildfire.
The late General Motors (GM) CEO Dan Adkerson once told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the U.S. economy would be huge. Some economists estimate that as many as 10% to 30% of the jobs lost to offshoring could return.
At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20 billion to $60 billion in GDP per year or up to 0.4% in economic growth per year.
It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ½ years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low-wage jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
So How Does This Thing Work?
Mad Hedge Technology Letter
May 28, 2019
Fiat Lux
Featured Trade:
(CHINA’S RARE EARTH WEAPON)
(TSLA), (AAPL), (LMT), (BAESY), (RTN)
There are many ways to describe the trade war the U.S. administration finds itself in.
Many experts have chimed in too categorizing it as a fight for technological supremacy.
There are many different ways to skin a cat.
I’ll tell you what is really going on.
Above all else, this logjam has more to do with a battle for resources, and more specifically, rare earth elements that power the devices, cars, and gadgets that many westerners have become accustomed to.
Let’s make no bones about it, Beijing has cornered the rare earth’s market spanning from assets in the Congo and the cobalt that is produced there to supply on their own turf forcing the U.S. to be reliant on China for about 85% of its rare earth supply.
In other words, the rare earth industry in China is a large industry that is important to Chinese internal economics.
Rare earths are a group of elements on the periodic table with similar properties.
The elements are also critical to national governments because they are used in the defense industry for top-secret weaponry.
Permanent magnets can be used for several applications including serving as essential components of weapon systems and high-performance aircraft such as drones.
China has touted their own state-owned companies to reach deep into this market and make it their own.
The results are visible to the entire world and China gaining a stranglehold on these valuable inputs will have lasting consequences.
Rare earth metals are made up of 17 elements — lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, and yttrium.
U.S. companies will need to start developing new supply channels in other markets and Australia could allow U.S. companies' lifelines in securing the orders they need to function as a company.
Military companies important to national security devour these types of precious metals and Raytheon Co (RTN), Lockheed Martin Corp (LMT) and BAE Systems (BAESY) all produce sophisticated missiles with these elements powering their guidance systems, and sensors.
These traded companies’ shares could be in for short-term turbulence if China decides to pull the rug out from underneath banning Chinese companies doing business with American companies, or by slapping on tariffs to respond to the tariffs on Chinese imports.
California's Mountain Pass mine is the sole US rare earth facility with a caveat.
The owner of the mine ships over 50,000 tons of rare earth concentrate for processing in China, meaning that it will be harder than first thought to strip China out of the process.
China and America are in the first stages of a massive decoupling.
Not only smartphone operating systems will be affected with Huawei announcing it will roll out its own in-house operating system after Google announced that they will pull its apps and use of the Android system off of Huawei’s phone, but almost anything of significant value from an Ivy league computer engineering degree to electric cars will be retrenched on each side.
This is terrible news for Tesla (TSLA), and they could be hit next by the Chinese communist party if they deem electric cars integral to national security because of the data and sensors that deliver precious information back to Silicon Valley.
Tesla is in the midst of building a Gigafactory in Shanghai and their growth strategy is solely focused on China.
China standing up to the U.S. is a blunt force way of saying that nobody will dictate to the Chinese their future prospects except themselves.
They feel after 35 years of economic super growth, they should be granted with the options of choosing their destiny.
Huawei will feel the repercussions of these detrimental policies with their European business a big question going forward.
Germany was always a large bullseye for the Chinese government and scooping up robotic centerpiece Kuka, was a smash and grab in broad daylight.
The sleeping giant of Germany has woken up and is on the offensive after allowing the Chinese unfettered access for a generation.
Risks are high in Germany and they could be the first industrial power to be gutted and left behind the woodshed by China Inc and the CCP.
The U.S. faces a conundrum in that the method in which aided China’s rise of forced technology transfers and IP theft can only be stopped if actively removed, meaning we are headed for a game of chicken with the other side hoping the other side blinks first.
The market fallout will be deep and wide-ranging with the most movement in technology companies that are leveraged to China meaning chip companies.
But then there are the tech companies who have deeply embedded interests in China such as Apple (AAPL) whose supply chain is in the eye of the storm with Foxconn.
The worst possible case is China banning the sales of precious earth metals to the U.S. forcing the U.S. to buy from a 3rd party country which in turn would increase costs of American products.
This is what I would categorize as a hard landing and absolute decoupling.
The common denominator of this trade war is higher costs for the American consumer and mass layoffs in China – this is my base case.
However, I would argue that a rare earth's ban would not be as bad as initially thought because many consumers are tapped out with phones, tablets, and computers.
The elongated refresh cycle will not mean consumers will go without access to the internet and its services.
In terms of the stock market, this puts a wet towel on the positive momentum of early spring when the Nasdaq roared higher.
The Nasdaq could be stuck under 8,000 for the summer unless a rapprochement takes place which I would put at 30% for a structural détente and 65% for a kick the can down the road détente.
The ironic unintended consequence is the safe haven trade of buying treasuries has come back in vogue and could be a huge boon for the domestic real estate market.
This extends the bull market in properties at least another six months with lower rates allowing fresh buyers to take advantage of lower financing opportunities amid a bump in inventory.
The bull market absolutely needs the real estate market on-sides to perpetuate because of the fragile nature of this part of the late economic cycle.
I also believe that U.S. President Donald Trump will become even more brazen as stronger economic data stateside suggests he could pile on even more pressure on the Chinese communist party to coerce them into a big win that will aid him in his reelection efforts.
Let’s not forget that much of this has to do with the 2020 road back to the White House.
As it stands, corporate America has finally understood the message of moving their supply chain out of China which means mass layoffs for many Chinese particularly in the southern region around Guangzhou.
This is not a marketing charade, this trade war has teeth.
China’s Central Bank will be forced into dovish policy to help state-owned companies who many are akin to zombie companies and another relic of communism that has yet to be uprooted.
All this means debt, debt, and more debt piling up on the mainland and on American shores.
If you thought this was the time of austerity, then you are truly wrong.
The end game could be a Chinese yuan that drops like a heavy stone through the psychological threshold of $7 and on its way down to $7.50.
If this comes to pass, expect a 10% correction and a demonstrably strong U.S. dollar, Japanese yen, Swiss Franc, and a generational entry points into the equity market.
