Wednesday, June 27, 2018

Industrial Stocks and The Trade Issue

In last week's video I touched on the action in the Dow and illustrated the huge hit Boeing and Caterpillar were taking due to trade issues. 

Here's that chart of the Dow components; the two lines at the bottom represented the percent changes in Boeing and Caterpillar stocks:

click to enlarge...

In the updated chart below I separated Boeing and Caterpillar from the pack and moved them to the bottom panel. Note their huge move this morning on the White House's dramatic reversal on investment restrictions on China-owned companies:

Which is consistent with our present narrative on industrial stocks:

INDUSTRIALS (16% of equities) 6/23/18 
Industrials are absolutely feeling the pain of the current trade environment. In that the Administration clearly aims to “protect” industrial players in key states, it virtually goes without saying that retaliation from our trading “partners” will be focused on the industrial sector (thus we recently dropped our target from 18% to a still high 16% of equities). Therefore, large positions in the index like Boeing and Caterpillar (both huge gainers until recently) are getting absolutely hammered and bringing the sector down with them. The 5 worst performing positions generate their revenue from foreign markets to the tune of 57%, 46%, 60%, 55% and 53% respectively. Yes, a trade war would be a very bad thing for U.S. industrial companies!

Our industrials ETF is currently down over 4% on the year.

Coming into the year we were quite bullish on the space based on very strong macro conditions (better than at the start of 2017 [which saw the sector up 21%]) and strong prospects for a much needed infrastructure plan in the U.S. . Not to mention ongoing huge infrastructure build outs in much of the rest of the world (Caterpillar is experiencing monthly sales increases in every region where they do business) – consider the foreign revenue figures I featured in paragraph 1.

While the stronger dollar poses a bit of a headwind for multinational industrial companies, it’s safe to say that this year’s dismal results are virtually all about the trade dispute(s). Therefore, if/when cooler heads prevail, as long as general conditions remain relatively bullish till then, prospects favor a huge rebound in the space. Thus, the sector remains our second highest target.

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