More Trade War Crossfire—Short Term Looks Ugly—Time To Hedge

Dear Subscriber,

WELL I said yesterday that my old pal from CNBC Larry Kudlow is recovering from his heart attack he was coming back tomorrow and would walk back some of the crazy. 

So much for that call. POTUS comes out and takes the safe way out and falls back from the crazy predicted but then KUDLOW comes out and does a bellicose number on trade war. FYI--when you have been a "free trader" for 45 years like Larry and THEN you come out sounding like a dyspeptic Peter Navarro, the market takes it poorly.

The day turned into a "sell the good news" day. Kudlow said as America gets stronger economically China has become weaker by issuing bad loans and relying on state-run entities. That created the headline "WHITE HOUSE ECONOMIC ADVISER LARRY KUDLOW CHALLENGES CHINA’S SUPPOSED SUPREMACY."

“China’s economy is not doing well. They are slowing down by many, many  measures,” Kudlow continued. “Half of that economy is state-run enterprises that are losing money daily. Half of that economy is being financed by state-run banks who are issuing couple of trillion dollars of nonperforming loans? That’s a business and economic model which is not durable.”

“So I believe China’s operating from a greater position of weakness than folks think and we are operating from a greater position of economic strength,” he concluded.

In other words "We're America, Bitch!"

Here is video from Fox Business Network

So...what looked like a sturdy rally turned into another display of the technology sector’s vulnerability to trade tensions. Up as much as 0.9 percent an hour into the session, tech stocks gave it all back and more after Kudlow, reiterated the White House’s hard line on commerce and trashed China like a red-headed stepchild. From peak to trough, the Nasdaq 100 Index retreated almost 161 points, the biggest plus-to-minus swing since April 24.

Key point: IF KUDLOW is the one we are depending on for being the "cooler head" in this trade war showdown, his performance was NOT encouraging. He sounded like he has come back from a heart attack drinking NOTHING but the trade war Kool-aid.

SMH Short At Record

The amount of SOXX shares shorted increased to about 31 percent of the float on Wednesday, the highest in over a month, according to data from S3 Partners. Part of this play is I am sure wrapped in a stronger dollar trade, with 92 percent of SOXX domiciled in U.S.A.,  The run in the US dollar is fueled by the bear markets in Emerging Country and China stocks--cash coming out is going into the US dollar as a safe haven play. 

In short, we are headed to a showdown at the OK Corrall on July 6th and the U.S. trade "negotiation team" is going into this showdown with the feeling they hold the trump cards (pardon the pun") and have the leverage to extract a "miracle" outcome."

IN my world that is called "The Russian Roulette" strategy and brinksmanship. 

On our team, we have a 72-year old POTUS who has only blown up trade agreements, an 82-year-old Secretary of Commerce who is a washed-up private equity maven, a 74-year old CNBC TV commentator who just had a heart attack, and a trade negotiator who has also never negotiated an international trade agreement.

What could go wrong? 

Action to Take: PROTECT PROFITS

We are heading into ALL kinds of risk going into the July 6th announcement of NEW TARIFFS. In my opinion, expecting Trump to fold all his cards and "settle" this issue by July 6th is virtually impossible. #1) I lived in DC for 24 years--EVERYONE is heading out right now for long 4th of July weekend. IF they were going to have a break-through they would not be talking crap today
#2 China plays the long game--and no one there is up for re-election. #3 Wall Street trading desks are closing out the first half of the year--they are re-balancing their book by selling winners (i.e. our stocks) and building cash or hiding in utilities and high yield corporate bonds. #4 Trading desks and liquidity will be really thin starting tomorrow. 

But mostly, Betting on the last minute rabbit-out-of-the-hate is just bad risk-reward. We did the same hedge move going into Brexit and it did well.

LOOK for advice on hedges for semi-conductor positions--we are doing the math and set-ups in the morning. 

SELL URTY--take profits and sell FINU AFTER the CARA news comes out in the morning.-the trade war threat is killing the yield curve which is killing banks. Also as I talked about a while back, the Deutsche Bank implosion is continuing and there WILL be counterparty risk for all global banks. 

Tomorrow we get the final call on new banking capital regs..that should be a bump.

Final: I hope this escalating trade war hits a crescendo in early July and there is a settlement. We are RIGHT at the point where corporate confidence is reaching that "Hey--let's wait for this crap to play out before we make a new commitment" stage.

We are seeing it already in manufacturers getting hit with aluminum and steel pricing issues. The Harley Davidson fiasco is a perfect example of unintended consequences. 

Our mantra: Hope for the best; prepare for the worst.

PS: IF any you subscribers have insight into how this Bully/Retreat/Bully/Retreat trade war scenario ultimately plays out, drop me an email tsmith@transformityresearch.com. We are pretty good at analysis of a lot of things. Analysis of Trumponomics? The only thing I know for sure is when the heat gets too much, the POTUS falls back and lets the lieutenants take the lead as attack dogs. 

When do the threats end and hard negotiations get completed?

NOW would be a really good time.

Toby