China: The World's Biggest Conundrum
Posted at 1:51 p.m. EDT on Friday, June 19, 2015
What's the deal with China? What is really going on there?
This morning we learned the jarring news from Hershey (HSY) that chocolate sales are down because, and I quote, "Macroeconomic challenges and trends are affecting consumer shopping behavior resulting in continued softness within the China modern trade." Jeez, people are cutting back on chocolate?
Making matters worse, Hershey had just shelled out $394 million for an 80% interest in Shanghai Golden Monkey Food last September. In today's release, Hershey said it was "moderating" its full-year net sales expectations for the Shanghai Golden Monkey acquisition because of the Chinese slowdown.
This news is on top of a note this morning from the Wells Fargo research department that Macau gambling is coming in at a four-year low, with June numbers being as much as 20% down from the average for the first five months of the year - and those numbers were incredibly weak to begin with. That spells trouble again for MGM (MGM), Wynn (WYNN) Las Vegas Sands (LVS).
We know from Diageo (DEO) that its best liquor brands haven't been selling well in China. I covered that last night on "Mad Money."
We also know that sales for expensive clothes and accessories such as watches are way down, quite a change from the old days.
What could be going on here? First, I think that the Communist Party is cutting down on conspicuous consumption. The big gambling junkets to Macau are clearly a thing of the past. You don't get that kind of a dropoff unless it's mandated.
But expensive jewelry, liquor and chocolates? Some of that could be the crackdown on government corruption. For example, if you want to bribe an official, what better way to do it than giving them a big case of Johnnie Walker Black or an expensive Richemont watch.
This, to me, all seems too government-led, and not consumer-led.
Now it is true that the Chinese stock market got hammered hard this week, with the major stock index having its biggest weekly drop since 2008. But Hershey flagged these trends from April and May when the index was still soaring. Same with all the other consumer product and gambling slowdowns.
I think the Chinese Communist Party's reforms are starting to really take hold, and that's what's really going on. Which leads me to a couple of other questions. Did Alibaba (BABA), for example, see this coming and pick a remarkably good time, in retrospect, to come public? Sure, the last quarter was a good one, but it was followed up with a charm offensive by management in this country to try to drum up more business for the company.
Could the spending malaise spread to other parts of the economy that the U.S. sells into?
Hard call. Apple (AAPL) is still doing incredibly well selling phones in China. Starbucks (SBUX) recently told us that business is, indeed, accelerating in China. Yum! (YUM), which has been battered because of issues at its Kentucky Fried Chicken division in China, has seen a gradual positive turn. Auto sales are alternately hot and then not, again a confusing set of data.
Plus, we are getting conflicting numbers about China trade. Many of the big commodity companies have seen orders slow in China for several years now. But the Baltic freight index recently has jumped about 40% and that's a terrific measure of trade into China. And Nordic American Tankers (NAT), an oil derivative on Chinese growth, has been hot as a rocket, rallying 40% this year.
Frankly, China is the biggest conundrum in the world right now. It's almost impossible to figure out. My take? The People's Republic is a developing, fluid story. In many ways, the next leg of growth -- or lack of it -- worldwide will need to come from a turn in this economy. After this week's news, call me nervous about a turn. We will need to stay tuned, but when chocolate sales turn down, I say you can't afford to be too bullish about this alleged juggernaut of an economy.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long AAPL and SBUX.
Posted at 2:40 p.m. EDT on Wednesday, June 17, 2015
Oil's sticking here. It's not collapsing like so many people think it is going to, and even higher gasoline inventories today aren't cracking prices as you would think.
There's plenty of excess in the pipe, especially natural gas liquids. But the rig count has been cut in half and it will be mighty hard for the second half of the year to maintain the production we've seen so far in the first half.
What caught my eye today is that some of these valuations are way out of whack versus when oil's per-barrel price was in the $40s not that long ago. That's particularly true of Exxon Mobil (XOM) and Chevron (CVX), which are trading below where they were when oil was that low.
To me, that says some of these companies are going to find it cheaper to drill on Wall Street than in the oil patch. That's been the pattern of what happens once oil seems to have stabilized -- as I think it has -- and I would adjust your portfolios accordingly as we are doing today for Action Alerts PLUS.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the stocks mentioned.