The Ticking Chinese Time Bomb
Sorry to ruin your bull market party, but there’s an issue we need to discuss … like, right now.
I’m talking about the Wuhan coronavirus and the U.S.-China “phase 1” trade deal.
Here’s the thing: More than 20,000 Chinese are infected with the Wuhan virus, with some 427 dead. Tens of millions are quarantined in the country. Productivity is grinding to a snail’s pace.
The situation has grown so dire that 24 Chinese municipalities and regions have told businesses to halt all operations until February 10. Maybe they hope the worst will pass by then? Seems like a crapshoot to me.
Anyway, those 24 regions accounted for 80% of China’s gross domestic product (GDP) and 90% of all exports last year. That’s huge, and it’s sure to impact China’s economic growth in the first quarter.
But by how much?
“We are thinking in the region of 3.8% year-over-year, and again plugging in those numbers, we’re looking at year-over-year growth of probably less than 2%,” says Pantheon Macroeconomics Chief Asia Economist Freya Beamish.
First, that’s quite a title there, Freya. I mean, wow…
Second, remember when everyone was biting their nails over last year’s slowing growth? China reported 6.1% GDP growth in 2019, and the markets dipped. Chinese GDP growth of less than 2% would be a serious stunner for the global economy.
And we haven’t even addressed the U.S.-China trade deal. Speaking of which, how will China make good on its promise to buy an extra $200 billion worth of U.S. goods in the next two years amid the Wuhan virus epidemic?
It won’t. China will have to invoke a clause in the trade agreement that allows for leniency in the event of a natural disaster. That clause involves a face-to-face meeting between the two countries, and nobody knows how President Trump will respond to such a request.
If you don’t think this virus outbreak will impact the U.S. economy, I’ve got some bad news for you.
Even if the worst of the Wuhan virus remains contained within China, that’s the second-largest economy on the planet we’re talking about! Nearly every major U.S. manufacturer, chipmaker and goods supplier has a supply or manufacturing chain that involves China at some point.
Furthermore, if China moves ahead with asking for leniency in the phase 1 trade deal, that’s $200 billion in purchases that will be delayed for U.S. companies.
As much as we hate to admit it, the U.S. economy is closely tied to Chinese growth. Sure, we’re trying to move away from that … but you just can’t switch some supply lines in such a short time frame. This situation will have an impact on U.S. growth. Just how much remains to be seen.
Right now, you should keep a close eye on the Wall Street Goliaths with close Chinese ties — big names like Apple Inc. (Nasdaq: AAPL), Cisco Systems Inc. (Nasdaq: CSCO) and Broadcom Inc. (Nasdaq: AVGO).
While the China situation won’t sink these companies, it could slow growth, which is bad news for any investor.
Remember what I told you after Facebook Inc.’s (Nasdaq: FB) ho-hum earnings? The glory days are gone for the market’s slowing Goliaths … and it’s game on for the high-growth “Davids” sweeping in. (See what I did there?)
No one can spot these high-growth Davids with the guts to take on Wall Street’s mighty giants like Charles Mizrahi. In fact, Charles’ knack for finding underdog stocks has helped him find 48 winning stocks in a row.
48? In a row?!
Yes, dear readers … in a row. And it’s all thanks to one investment secret that Charles is finally ready to unveil.
The Good: FN Great Results
While everyone else focused on the 5G “Spectrum” wars, Fabrinet (NYSE: FN) quietly helped build out the back-end network. What? You didn’t think that the existing hard lines would support this jump to 5G speed, did you? You need fiber in those back-end channels, boy! Copper won’t cut it anymore.
This morning, fiber-optic specialist Fabrinet posted impressive second-quarter results. You might even say they were fabrilous! (Or you might not … whatever.)
For the fourth consecutive quarter, Fabrinet trounced Wall Street’s expectations. Earnings topped the consensus target by $0.07 per share, with revenue beating by more than 3% at $426.2 million.
What’s more, Fabrinet projected third-quarter revenue to land between $410 million and $418 million. The company said it was being cautious due to the Wuhan virus outbreak, but it still surrounded the consensus target for $415 million in revenue.
The bottom line: If you’re looking for 5G investments, Fabrinet should be on your short list — if it’s not already in your portfolio.
The Bad: A, B, See Ya Later, Google!
Even a lower tax bill couldn’t save Alphabet Inc. (Nasdaq: GOOG) this quarter.
The Google parent topped earnings estimates (thanks to said tax breaks) but missed revenue expectations due to poor hardware sales and lower ad revenue.
Google Properties (which includes Gmail, Google Play and YouTube) saw revenue rise 18.5% to $31.9 billion — some $100 million short of expectations. Furthermore, traffic-acquisition costs rose a greater-than-expected 14% during the quarter. Rising traffic costs — i.e., the cost Google pays to partner websites — have been a thorn in Google’s side for some time now.
On the positive side, cloud computing revenue surged 53%, and YouTube revenue jumped 31%.
Still, the report left Alphabet investors searching for more. What they found, however, was a formal European investigation into how Google handles location data. We can add that to the growing pile of investigations and inquiries. That’s got to make investors feel all warm and fuzzy.
The Ugly: Tesla Tendies
What in the wild, wild world of electric vehicles is a-goin’ on here?
As you all well know, I’m a Tesla Inc. (Nasdaq: TSLA) bull … but come on!
TSLA shares are up more than 100% since the beginning of the year. Today, the stock breached $900. Short sellers lost more than $2.5 billion on Monday alone. This is insanity.
I get that there’s been a lot of really good news on Tesla lately. From better-than-expected earnings to Panasonic earnings (it’s all about batteries) to a $7,000 price target … Tesla has had a serious influx of bullish sentiment.
But the company’s $163.3 billion market cap puts it just behind Toyota Motor Corp. (NYSE: TM), making it the second most valuable car company on the planet.
Tesla’s fundamentals just don’t support these levels — there, I said it. What we’re seeing is a good old-fashioned short squeeze. Despite the recent run-up, more than 18% of Tesla’s outstanding shares remain sold short. These are some real troopers here. But how much more pain can they withstand?
After all, it’s not a question of if Tesla will correct at this point … it’s a matter of when. The problem is that TSLA could top $1,000 before all is said and done. If that happens, the shares will likely hit $1,500 before all of the remaining short sellers are crushed to a pulp.
I can’t tell you what to do if you hold TSLA shares. But I will remind you that the market can remain irrational longer than you can remain solvent.
I will say that it feels like we’re nearing a top for Tesla. I hope you have collision insurance for when things eventually go pear-shaped.
Last week, Great Stuff had its first-ever reader poll!
We asked: On a scale of 1 to 5, how much does social responsibility (aka “green investing”) play a part in your portfolio?
Given how much reader feedback I get on so-called green companies, I expected … well, I didn’t expect this:
60% of you don’t factor in social responsibility at all in your investing.
I have to say, I’m a bit flabbergasted. (I really like that word. Thank you for giving me a chance to use it!)
That said, I’m really looking forward to the results from this week’s poll. It’ll be in your inbox tomorrow!
Great Stuff: Not at All?
It’s that time again!
That’s right, it’s time to feed the Great Stuff beast!
We’ve got some hot topics to discuss this week, so be sure to write in to GreatStuffToday@banyanhill.com and let us know your thoughts!
Here are some of this week’s topics:
- “Not at all?” Really? Green investing is one of the hottest topics on Wall Street, but are Great Stuff readers truly not interested? (We’re really interested in this topic … do tell!)
- How high do you think Tesla will rally before it crashes?
- How are you preparing for the fallout from the Wuhan virus? (Or are you preparing at all?)
Now, you know the drill. You have about two days to drop me a line at GreatStuffToday@banyanhill.com to make this week’s edition of Reader Feedback.
Until next time, good trading!
Great Stuff Managing Editor, Banyan Hill Publishing