What Real Friends Do

Looking beyond the tech stocks... China moved the market today... And not because of the 'meeting'... A rate cut and an energy deal... Knee-jerk reactions and possible long-term impacts... What real friends do...

Folks say it's all about the tech stocks...

Many market watchers have observed how large tech stocks have moved the market. These few companies account for a disproportionate stake of the S&P 500 Index and Nasdaq Composite Index.

So when the major U.S. indexes were all down close to 1% late this morning, I (Corey McLaughlin) would have expected the recent headline-making tech names like semiconductor company Nvidia (NVDA) to be down big...

Interestingly, though, this wasn't the case. It was a mixed bag. Nvidia was up almost 1%... Amazon (AMZN) was up a little... Apple (AAPL) was close to even... and Alphabet (GOOGL) was down a hair... Microsoft (MSFT) was the only "FANG+" stock down significantly, off 1.5%.

By the afternoon, though, Tesla (TSLA) shares were up 3% and the indexes had made a bit of a comeback...

So, yes, when these large-cap stocks move – because of their heavy weightings in many indexes – they can move the "market." And this fact is worth noting when these stocks' sentiment and valuation become extreme... and when the U.S. president gets around to meeting "with AI experts in San Francisco," which happened today.

That is not a joke and may be a sign of a top in the artificial-intelligence ("AI") space.

But today's action was a reminder that a whole wide world of stocks makes up the market. As we'll discuss today, one economy outside the U.S., and one industry in particular, was all the evidence investors needed.

Today was about China – and not the 'meeting'...

If you took some time to look even briefly beyond the indexes and the top headlines, you'd see that the energy sector was the biggest loser. The Energy Select Sector SPDR Fund (XLE) was off more than 2%...

West Texas Intermediate oil prices – the U.S. benchmark – didn't change much, but Brent crude, the international standard, was off nearly 2%. That's a "divergence" from U.S. prices not seen all that often.

To add to the story, natural gas futures were down 4%. What gives?

Well, two things. A lot of the headlines about China today focused on U.S. Secretary of State Antony Blinken's "unexpected meeting" with Chinese President Xi Jinping on Monday in some kind of attempt to cool relations down among high-level officials. But some developments with the Chinese economy were more significant for stock prices today...

First, the Chinese central bank cut its main interest rate for the first time in 10 months, in an acknowledgment that its recovery from ending its COVID-19 lockdowns has fizzled. It was a measly 10 basis points, so not a huge cut, but it's a signal out of the world's second-largest economy that it might need some juice.

As our Stansberry NewsWire's Kevin Sanford wrote on Friday, foreshadowing this move from the Chinese central bank...

China initially boasted solid 4.5% growth in the first quarter, capturing the world's attention with its success story and generating optimism. It seemed as though the country's recovery would be an economic blockbuster that would captivate investors and inspire confidence.

But as the plot unfolded, cracks in the narrative began to emerge.

The latest economic data released this week presented investors with a sobering reality. Slowing growth, cooling exports, and a persistently struggling property market indicate a plot that is losing its momentum.

Additionally, youth unemployment is rising to record levels, and major Chinese tech firms have lost $300 billion in market value since the pandemic. The latter fact is especially troubling since these companies' U.S. peers have added $5 trillion in value.

Oh, maybe it still is all about tech stocks then...

Not so fast...

As Kevin wrote in the NewsWire on Friday...

China's economy is also facing challenges from abroad, including strained relations with the U.S. and trade disruptions caused by tensions with Western countries (though some would say these are self-inflicted). Multinational manufacturers are reevaluating their reliance on China in their supply chains due to concerns about potential trade disruptions.

The message coming out of Blinken's meeting with Xi over the weekend was essentially that both agreed that "we need each other." But U.S.-China relations are going to be complicated at best moving ahead... and possibly adversarial for years to come.

On the heels of that meeting, China made some more significant news – at least to me – in another way... The China National Petroleum Corporation ("CNPC") announced it has agreed to a big energy-supply deal with another major state-run energy entity.

The CNPC has signed a 27-year agreement with the Middle Eastern country of Qatar in which China will buy 4 million tons of liquefied natural gas per year from state-owned QatarEnergy and take a partial stake in the expansion plans of a massive Qatari natural-gas project.

Qatar is among the largest exporters of liquefied natural gas in the world... And competition for the fuel has escalated since Russia's invasion of Ukraine, since Russia's pipeline gas used to make up nearly 40% of Europe's imports.

Now China and Qatar are becoming cozier friends...

QatarEnergy CEO Saad Sherida al-Kaabi has previously said the company would work with "value-added partners" on the expansion of its North Field project. China is getting a 5% stake in a gas train in what is the second major deal Qatar has reached with China in the past few months.

As global news service Reuters reported...

In April, China's Sinopec became the first Asian energy company to become a "value-added" partner in the project.

QatarEnergy has also signed equity partnerships on the project with international oil companies but has said it plans to retain a 75% stake in the North Field expansion, which will cost at least $30 billion including construction of liquefaction export facilities.

As Beijing's ties with the United States and Australia, Qatar's two biggest LNG export rivals, are strained, Chinese national energy firms increasingly see Qatar as a safer target for resource investment.

Making big-money energy deals is what real friends do.

Another interesting note...

Qatar said it plans to put the profits from expanding its natural gas exports into a "future generation" part of its sovereign wealth fund, which already stands at $445 billion. So that's where profits from this deal will go, in addition to Chinese interests that may benefit.

(On a side note, I am thinking about exploring the idea of sovereign wealth funds in a future issue... including the reach of Saudi Arabia's Public Investment Fund, which you may have heard about recently in relation to golf's PGA Tour. If you have anything you'd like to see covered on the topic, let me know with an e-mail to feedback@stansberryresearch.com.)

In the meantime, here are some takeaways...

The combination of a flagging Chinese economy and China's big natural gas deal with Qatar was not great news for U.S. energy companies, whose shares were generally down across the board today. The biggest factor is likely the signal China is sending about its lukewarm economy.

But over the longer run, the deal between China and a Middle East energy giant – and future ones like it – could possibly be a tailwind for U.S. energy prices as supply gets diverted to the "East."

That's the reality of an uneasy-at-best relationship between U.S. and Chinese leaders. For example, for how well Blinken's meeting with Xi was purported to have gone, Chinese state media still quoted Xi afterward saying...

Competition among major powers does not conform to the trend of the times, let alone solve America's own problems and the challenges facing the world.

It's always nice to hear someone say, "Let me tell you about your problems – and everyone else's."

In any case, for all these reasons we talked about today, we saw global and U.S. oil prices diverge in the past 24 hours... U.S. energy stocks take a tumble... and this action weigh on the major stock indexes.

This should serve as a reminder...

There's life beyond the tech stocks...

In one way, you can see today's market action as bullish. Even with a signal that the world's second-largest economy is not humming along, U.S. stocks generally held steady.

The benchmark S&P 500 remains above its 200-day moving average, a simple measure of a long-term trend. And its 50-day moving average continues to rise, too...

As our colleague Brett Eversole wrote about this today in DailyWealth, history suggests that outperformance in mega-cap names that we've seen lately shouldn't be taken as a warning that an entire market downturn is to come.

Yet stocks like Nvidia and Tesla are trading at more than 50 times and 70 times forward 12-month earnings, respectively, and a pullback of some kind in these popular names would not be surprising.

At the same time, oil prices have already been trending down since June 2022. Same for natural gas since last August. Materials stocks and real estate were each down 2% today, too. These can be taken as signs of a recession ahead, or one that is already here.

If the economy is indeed headed toward a recession over the next year, I wouldn't suggest paying an eye-popping premium for growth today... especially when the Federal Reserve has just signaled that it will hike rates further in an effort to "fight" inflation...

But in the shorter term, we don't ignore price action, and the market doesn't necessarily care what we think... That's why exposure to mega-cap stocks has a place in a well-diversified portfolio. Our Portfolio Solutions products have a few, for example.

Just don't ignore the "real economy" and its indicators, either. For a day, at least, it looked like the stock market remembered that they exist.

The Secret Reason Every Market Seems Broken

Josh Crumb – the CEO of financial services company Abaxx Technologies – says the commodities market is "chronically underinvested." He said to watch out for a medium- or long-term supply shock in a higher-inflation, higher-volatility era...

Click here to watch or listen to this episode of The Daniela Cambone Show right now. And to catch more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 6/16/23): Adobe (ADBE), A.O. Smith (AOS), Commvault Systems (CVLT), Dassault Systèmes (DASTY), D.R. Horton (DHI), SPDR EURO STOXX 50 Fund (FEZ), Lennar (LEN), McCormick (MKC), MSA Safety (MSA), NVR (NVR), Palo Alto Networks (PANW), Pure Storage (PSTG), Construction Partners (ROAD), Spotify Technology (SPOT), and Zimmer Biomet (ZBH).

In today's mailbag, feedback on Dan Ferris' latest Friday essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"This article is the most up-front and truthful information available. Just had a similar conversation with my sister yesterday. I concur totally with your opinion. Thank you." – Paid-up subscriber Sally C.

"Always love Dan's work (and diatribes). Almost always agree. We ain't seen nothing yet!! History shows markets are a cycle that repeats itself. Easy money also makes for outrageous valuations for even innovative and successful companies. (Think MSFT and Apple.)" – Paid-up subscriber Dave F.

"Enjoyed the story about the S.F. pizza outfit, cooking pizza in the van, and experiencing severe difficulties. Wonder, how many monster government expenses are suffering similar treatment? How much tax money will be blown to build new EV battery facilities?; did anybody realize that Lithium – a major component – is hardly available in the States? 70% is produced in China – they have plenty of Lithium resources – [and] also control the three major suppliers in Australia. We were dumb enough not to be in before!!" – Paid-up subscriber Claus S.

"Dan, I don't know if this is a good idea, or if it would result in worse capital allocation decisions, but here it is.

"Cathie Wood and Masayoshi Son should merge their business interests.

"I have never seen two people that supposedly manage money that chase every squirrel better than my dog. They have an innate ability to find the most capital-intensive businesses to invest in years or decades before their technology is ready for prime time, and placing funds into those businesses at the top of their markets, just waiting for the inevitable bad results that come forward before their 'investments' ever succeed. Although I will give Mr. Son credit for his success with ARM Holdings; however, his list of big failures has negated that one success.

"The one possible good outcome of their merger would be that there would only be one of the two making these excessive bad bets, and one middleman would be cut out of the action (or what they call, 'fees')." – Paid-up subscriber Kevin B.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 20, 2023