Teslas on sale in China, again

Stocks fell yesterday after an economic release suggested that Americans just love to spend money! Strong retail sales brought a smile to the face of retailers but a likely frown from Fed members… and interest rates… and interest rate sensitive stocks.

On the other side of the street. There is plenty of data to digest these days. Economic numbers aplenty, earnings season, general news, trips to your local grocery store, ever changing gas prices, blabbing Fed members, MORNING NOTES LIKE THIS… shall I keep going? Most of all that has been acutely focused on inflation, interest rates, and their impact on corporate earnings. All for good reason, because the markets… you know, those things that affect the value of your savings, are highly dependent on what’s happening with that data. But quite recently there has been something new which may not yet have popped on to your radar. China.

Yes, China, once again. Of course, nobody is ignoring China, but it has been on the fringe of the tail-risk assessments ever since the Fed took up its sword against US inflation. China emerged from its stringent lockdowns, and many assumed that the country’s recovery would be a boom for its formerly iced economy. But was it? Earlier this week the Peoples’ Bank of China (PBOC) surprised markets with the equivalent of a rate cut. The banks “official” reason was to tackle price deflation. It’s true, the country did experience deflation recently. Side note: deflation means that prices are going down versus disinflation which means that prices are growing at a slower pace. The PBOC reasoned that cheaper money would lead to more business investment and consumption. That would put upward pressure on prices and put them on a more tenable path of inflation. You are probably thinking “that is a good problem to have.” It may be better than run-away inflation, but it is still not good for so many reasons which I won’t get into this morning. What we need to focus on is the reasons for Chinese deflation. Take a look at the following chart from the smart folks at Bloomberg. It should be clear to you that the Chinese economy is losing steam and is on a bit of a downward spiral. Take a look and keep reading.

You don’t need to be an economist to recognize from this concise chart that the Chinese economy is struggling. Earlier this week we also learned that Country Garden, a Chinese real estate development company was struggling with its debt. The admission brought back memories of Evergrande which has appeared to be perpetually on the rocks for some time. Though that “country garden” is some 3600 miles (5700 kilometers) from New York’s beloved Conservatory Garden (in Central Park ), it can have a very real impact here. First, many popular investment firms and banks are exposed to debt issued by Country Garden. Companies like BlackRock, Fidelity International, JPMorgan, and Apollo, to name a few. Now to be clear, while the exposure only represents a small portion of those companies’ investments, it is important to recognize that the investment world, is indeed a “world” thing.

The challenge goes beyond just bond investments. I covered Tesla’s cutting prices of its vehicles in China earlier this week. Wouldn’t you know it, just this morning we learned that Tesla cut prices once again on its vehicles in China. Now, we know that Tesla is a rational company which would not simply cut prices for customer appreciation. Tesla is lowering prices to spur demand. Low consumer demand is well… not good for an economy, NOR is it good for Tesla… you know, lower prices, less revenue. I am sure that I don’t have to tell you that many of your favorite companies sell products in China. I know you love Apple . Apple’s 8^th largest customer is China Mobile, which represents some $5 billion in revenues. How about Microsoft? Of its corporate customers, some 7% are domiciled in China. How about US mainstay Ford Motor Company? Nearly 12% of its customers are domiciled in China. This may not surprise you, and that was certainly not the point of this morning’s note. It is clear that China is undergoing some economic challenges. The markets in the past few days have certainly not ignored those woes. While some of the fears may be overblown at this stage, the risks of a Chinese economic contraction cannot be overlooked. I suppose I can end with that very basic instruction your parents gave you as child. When entering traffic, always look both ways… to the west AND to the east.

WHAT’S SHAKIN’ IN THE PREMARKET

Tesla Inc (TSLA) shares are lower by -2.18% in the premarket in response to its cutting vehicle prices in China for the second time this week. See above ☝. Potential average analyst target upside: +11.1%.

Target Corp (TGT) shares are higher by +7.57% in the premarket after it announced a blowout second quarter EPS beat of +28.90%. The company is being heralded in the premarket for its ability to prosper in a time of shifting consumer demand from discretionary goods to staples. The company did provide a cautionary full-year guidance that was below analysts' expectations, but the news has, so far, been overshadowed by the company’s strong Q2 results. Dividend yield: 3.51%. Potential average analyst target upside: +26.6%.

YESTERDAY’S MARKETS

NEXT UP

• Housing Starts (July) are expected to have increased by +1.1% after falling by -8.0% in June.
• Building Permits (July) may have increased by +1.5% after declining by -3.7% a month earlier.
• Industrial Production (July)is expected to come in with a +0.3% increase after printing a -0.5% decline last month.
• FOMC Meeting Minutes from July 26 will be released at 2:00 Wall Street Time. Watch this carefully, it can be a market mover.
• After the closing bell: Cisco Systems and Synopsis will release Q2 earnings.