Big 'News' on China

Big 'news' on China... The White House says we're closing in on a deal... And then denies it... Apple reports another blockbuster quarter... Why shares are plunging anyway... Don't miss our second 'Stock of the Week'...

The big 'news' on Friday was that the White House was closing in on a trade agreement with China...

According to an early-morning report from Bloomberg, President Donald Trump had asked his Cabinet to begin hammering out the terms of the deal. From the report...

President Donald Trump wants to reach an agreement on trade with Chinese President Xi Jinping at the Group of 20 nations summit in Argentina later this month and has asked key U.S. officials to begin drafting potential terms, according to four people familiar with the matter.

The push for a possible deal with China followed a telephone call the president set up with Xi on Thursday, the people said, requesting anonymity to discuss internal deliberations.

Trump asked key Cabinet secretaries to have their staff draw up a potential deal to stop the escalating trade conflict with Beijing, the people said, adding that multiple agencies are involved in drafting the plan. It was unclear if Trump was easing up on U.S. demands that China has resisted, and reaching any accord still faces significant hurdles.

This report followed the president's tweet on Thursday that he had a "long and very good" conversation with Chinese President Xi Jinping. U.S. stock futures immediately jumped higher on the news. But the rally didn't last long...

You see, there was just one problem...

According to Larry Kudlow, the president's top economic adviser, the report was false. As financial-news network CNBC reported later that day...

Trump has not asked his Cabinet to put together a trade deal with China, White House economic advisor Larry Kudlow said Friday, contradicting an earlier report.

"There's no massive movement to deal with China," Kudlow, director of the National Economic Council, told CNBC's "Halftime Report. " "We have already put out asks to China with respect to trade."

"We're doing a normal, routine run-through of things that we've already put together and normal preparation," he said. "We're not on the cusp of a deal."

The broad U.S. markets fell to their lows of the day following Kudlow's comments. The benchmark S&P 500 Index fell as much as 2%, while the tech-heavy Nasdaq lost more than 3% in midday trading.

But the excitement didn't end there...

A few hours later, the White House appeared to reverse course yet again. As news service Reuters reported...

"China very much wants to make a deal," Trump told reporters in Washington just hours after his top economic adviser expressed caution about talk of a possible U.S.-China trade agreement.

"We've had a very good discussions with China, we're getting much closer to doing something," Trump said before departing the White House for a campaign event.

"I spoke with President Xi (Jinping) yesterday. They very much want to make a deal," Trump said. "I think we'll make a deal with China, and I think it will be a very fair deal for everybody, but it will be a good deal for the United States."

Now, we have no idea what was actually going on here...

Perhaps it was merely the result of a miscommunication between the president and his staff. But it provided ample fuel for cynics who argued the president was simply trying to "juice" the markets ahead of tomorrow's midterm elections.

Regardless, we believe the near-term chances of a trade deal remain slim. China is almost certainly waiting to see how tomorrow's elections turn out. A Democratic victory could swing the ongoing "trade war" in its favor. On the other hand, should Republicans maintain control of Congress, the White House may feel emboldened to push even farther.

In the meantime, don't be surprised to see the trade-related volatility to continue.

The other big news on Friday came from Apple (AAPL)...

The consumer-electronics giant reported its latest quarterly earnings after the close on Thursday. And by most measures, it was another blockbuster quarter. As the Wall Street Journal reported...

Apple reported its fourth consecutive quarter of record revenue and profit, as the combination of higher iPhone prices and strong app-store sales propelled the technology giant to its best year ever...

Revenue for the three months ended September 29, the final fiscal quarter, rose nearly 20% to $62.9 billion from the same period a year earlier, Apple said Thursday. Profit soared 32% to $14.13 billion, helped in part by lower taxes resulting from the U.S. tax overhaul. Both numbers beat analysts' forecasts.

However, these excellent results were overshadowed by a few less-positive developments...

First, the company said it sold significantly fewer of its flagship iPhone smartphones than Wall Street analysts had expected. Its latest quarterly records were driven primarily by higher iPhone prices, rather than a greater number of iPhone sales, as has typically been the case in the past.

The company also projected weaker-than-expected sales in the coming holiday quarter – which is typically its most important of the year. And it said it would no longer be reporting unit sales or average selling prices of its various products, including the iPhone, iPad, Apple Watch, and Mac, among others, giving the impression that Apple itself believes this trend could continue.

The market clearly didn't like the news... Shares closed 7% lower on Friday.

Unfortunately, the news didn't get any better today...

This morning, Japanese newspaper Nikkei reported that Apple has asked its top two iPhone assemblers – Foxconn and Pegatron – to cancel plans for additional production lines, suggesting demand for its new iPhone XR is weaker than anticipated.

Shares fell another 2.8% today. They've now lost a little more than 13% since hitting an all-time high last month.

Now, make no mistake...

Apple is still a high-quality, capital-efficient business with a valuable brand and incredibly "sticky" products. And it will likely remain long after its rapid sales growth inevitably slows.

However, it's also important to remember that Apple is currently one of the so-called "FAANG" stocks that have become so popular with investors over the past couple years. These stocks have suffered the worst of October's correction as investors have rushed to unwind these bets. Apple held up longer than most, but it, too, has now joined in the decline.

Of course, Apple doesn't share the extreme valuations of most of the others in this group, but that doesn't mean it can't fall further from here. Just as investors can push prices to absurd valuations on the way up, they can just as easily push them to unreasonable valuations on the way down.

In short, if you're long-term Apple investor, there's no need to panic... But be sure to keep an eye on your trailing stop, just in case.

New 52-week highs (as of 11/2/18): CME Group (CME) and Starbucks (SBUX).

In today's mailbag, Stansberry Portfolio Solutions portfolio manager Austin Root responds to a confused subscriber. Send your questions and comments to feedback@stansberryresearch.com.

"As a recent Alliance member, I am confused. Income Intelligence just recommended I sell BX and MIC because they hit their stops, but I'm looking to build a portfolio based on The Income Portfolio and it has both positions indicated. I currently own both positions not sure what is recommended. Sell or hold?" – Paid-up Stansberry Alliance member Bruce K.

Austin Root comment: Thanks for writing in, Bruce. Your question is a good one. We've discussed this topic before, but it's worth addressing again. First and foremost, it's important to note that Income Intelligence and The Income Portfolio are separate strategies. To be sure, there are likely to be some similarities in investment recommendations. After all, Doc Eifrig both runs Income Intelligence and is a lead guru on the Investment Committee for The Income Portfolio. But at the end of the day, the products are distinct. (And you can see that by looking at the many investment recommendations that the two do not have in common.)

As such, you will see from time to time that one of our strategies is holding an investment while another is selling. But it's worth noting why that's happening. In this case, Income Intelligence made recommendations for the two securities you referenced at different times and at different prices than did The Income Portfolio. So it makes sense that we may have different exit points.

And it's also important to note that Doc isn't necessarily selling these positions because he doesn't like them anymore. He's simply honoring his stops, as we always do at Stansberry Research. And just because we stop out of a position in one product doesn't mean we want to (or have to) sell it in all of our other publications. And so in this case, we still like Blackstone (BX) and Macquarie Infrastructure (MIC) for The Income Portfolio, so we will continue to hold until we hit our own, unique stops... or until the thesis changes.

Speaking more broadly about all of our strategies, what our analysts and editors do in each of their own publications is independent from one another. And we think this is a good thing. You get a chance to see different perspectives... and understanding where we may disagree could be as helpful to your investment process as noting where we agree.

That may not be the answer you necessarily hoped to hear, but ultimately, decisions about whether to sell or hold depend on your individual investment goals and entry points. I hope that helps.

Regards,

Justin Brill
Baltimore, Maryland
November 5, 2018