China: The Good, Bad And Worst

May 28, 2019

DaBoyz showed a deft touch as the week drew to a close, guiding the broad averages to a respectable close even thought there were no buyers around. Stocks often soar ahead of summer holidays, but this Memorial Day weekend they seemed challenged merely to stay in positive territory. Although there were no aggressive bids in evidence, especially for tech stocks, neither were there any urgent sellers. The result was a moderate rally that saw the Dow Industrials rise 108 points and the S&Ps tack on a negligible 6 points. Seasonality clearly failed the bulls, and that could have bearish consequences when stocks begin to trade again Monday evening. Traders could always develop amnesia over the three-day holiday, forgetting about the things that have been weighing on stocks these past few weeks.

Tariff-war headlines in particular have been unsettling, although Trump’s spin control has helped somewhat to calm the herd. He keeps hinting that a deal is coming, even if it appears that not much of  one is possible. Some high-minded banter in the Rick’s Picks chat room illuminated the spectrum of possibilities. “There is a lot to like about the Chinese,” noted one subscriber. “They have a really diverse culture, they are hard working and smart. The problem I would agree is their form of government as it grows increasingly oppressive and dictatorial. They are extremely threatened by the tough talk out of Washington and have responded by inciting nationalistic feelings on a billion and a half obedient citizens who never felt threatened by America before. If they would react this strongly to the mere demand to trade fairly can you imagine what they will do if push comes to shove over Taiwan?

Risks to the West

“If past behavior is the best predictor of future actions we only need to ask ourselves what will be the value of US interests in China if a shooting war started in the South China Sea? What the party of Xi has done is forced every Western company with economic interests in China to assess the risk of continuing to do business there. I think its fair to conclude that your assets, factories and interests would become worthless overnight. Disengagement from the Chinese mainland is no longer a casual thought, it may actually be the imperative. I will admit I am very disappointed with the outcome.”

Another chat-room regular was less pessimistic. “This flim-flam is far from over with China. Both sides will agree to back down in areas, but they’ll act tough in the news. The backing down will happen over the next six months to a year and no one will even notice it. Both populists played like a fiddle. I really hope Trump stands tough on the intellectual property and a few other things though.”

We shall see. In any event, the stock market doesn’t like uncertainty, and that is why even a bad deal could be good for stocks. “Sell the rumor, buy the news” is what I advised here earlier, and I’m sticking with it for now. My S&P cash rally target is 3095, about 9.5% above current levels.

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