Oil falls on Iran deal; China consumers vanish.

Transcript

Tom Oil is down five percent, the Strait of Hormuz is back in business, and the markets are absolutely loving it buddy! We are talking a massive tailwind for stocks.

Marie Hold on Tom — it is Tuesday, June sixteenth, and while the oil move is loud, it might be masking a much darker story out of China. Welcome to the London Edition of Investment Flash, I am Marie, joined by Tom and Gerald.

Gerald Yeah look, Tom’s right about the immediate relief, but honestly, calling a sixty-day ceasefire a 'breakthrough' feels a bit like celebrating a rain delay in the middle of a hurricane. To be fair, the price action in the U-S Oil Fund was brutal in the last session.

Tom No way, Gerald — look at the tape! The S&P 500 E-T-F was up nearly two percent and the Nasdaq one hundred E-T-F surged over three percent. That is not just a rain delay, that is a full-blown momentum party because cheaper energy is the ultimate gift for tech.

Marie Wait — wait a second, Tom. You’re cheering for the Nasdaq while the Financial Times is reporting that China’s retail sales just fell for the first time since the lockdowns. This isn't just a cooling off; the Chinese consumer has basically vanished.

Gerald The thing is, Marie, it is even worse when you look at the valuations. The China Large-Cap E-T-F is trading at point eight seven times book value — it is basically being priced for a permanent structural decline, and yet, it keeps finding new ways to hit fifty-two-week lows.

Tom Okay, sure, but isn't that just the 'value trap' of the century? I mean, Gerald, you love a low multiple, but even you have to admit that the leveraged China bull funds being down thirty-eight percent year to date is a horror show.

Gerald Hah — yeah, yeah, it’s a horror show I’m quite happy to watch from the sidelines, mate. But look, if you want a real reality check on that China slump, just look at the luxury market. Eight billion dollars wiped off the value of the handbag market?

Marie See, THIS is what I mean about the broadening weakness. L-V-M-H is down twenty-one percent year to date and it’s still trading at twenty times forward earnings. In this environment? That is not a discount.

Tom For real? You’re telling me people aren't buying six-thousand-dollar bags anymore? Next you’ll tell me they’ve stopped buying Ferraris.

Gerald Well, actually, Morgan Stanley just upgraded Ferrari to overweight with a target of four hundred and thirty-eight dollars. They’re saying the launch concerns are totally overblown. It’s down about thirty percent from its high, so it’s actually looking like a decent value compression play.

Marie I’m going to push back here. One analyst note doesn't fix a luxury sector that is clearly losing its grip on the aspirational shopper. Even Hermès is starting to look a little less bulletproof.

Tom Alright, alright — luxury is tough. But let's talk about the pivot to defense. Did you see Renault and Thales teaming up for a tactical vehicle prototype? That is a total game changer for a car company trading at four times earnings.

Gerald Honestly, Renault at a price-to-earnings ratio of four is one of those things that makes you double-check your screen. It is deeply undervalued, and the defense angle gives them a revenue stream that isn't tied to whether a Parisian architect wants a new electric hatchback.

Marie Exactly.

Tom One hundred percent.

Gerald That's the whole story right there.

Marie Not so fast on the celebration though. We have to talk about these U-S restrictions on A-I models. MarketWatch is warning that if the government clamps down on model releases, the semiconductor party could end very painfully.

Tom Oh come on, Marie! The Semiconductor E-T-F is up seventy-three percent year to date. You can’t tell me a few regulatory papers are going to derail the greatest hardware boom in history. That’s just noise.

Gerald Tom — Tom, that’s the third time this month you’ve called a major regulatory shift 'noise'. The Semiconductor E-T-F is trading at over forty-three times trailing earnings. At those levels, any whisper of a restriction is a loud, ringing alarm bell.

Marie No but that's exactly my point — the risk is in the hardware. If people rotate out of chips, they’re going to go straight into software. The Software E-T-F is down nearly ten percent this year. It is the perfect reversal candidate if the A-I story shifts from 'who builds the chip' to 'who writes the code'.

Tom Okay, I'll give you the software rotation, but what about Morgan Stanley’s Mike Wilson calling for a cyclicals rally? He thinks the oil drop is the catalyst for industrials and financials to finally catch up to tech.

Gerald Yeah, look, analysts revising price targets after the stocks have already moved is basically a free retirement plan for them, isn't it?

Tom ha — fair enough. That was a bit of a low blow, Gerald.

Marie He’s not wrong though! But seriously, if we are looking for a broadening rally, we have to talk about the Fed. Chairman Warsh is speaking today, and if he sounds even slightly hawkish, this whole 'soft landing' fantasy for industrials evaporates.

Tom Wait, you’re worried about Warsh? After the Iran deal? The market is pricing in euphoria, buddy. I’m staying long the S&P 500 until the tape tells me otherwise.

Gerald See, this is the classic Tom move. I remember when you said semiconductors were 'cooked' in the second quarter, and then you bought the dip three days later.

Tom Pff, okay, I deserve that. My track record on timing the 'bottom' is about as good as a weather forecast in London. But hey, I’m still bullish on the momentum.

Marie Hah — calling the bottom on memory chips again? That’s like six bottoms this cycle, Tom. Honestly, the most original take we saw today came from U-B-S. They’re saying we actually NEED an A-I stumble for the European rally to be sustainable.

Gerald Oh, that's brutal, but I love it. The idea is that the A-I hype is sucking all the oxygen out of the room. If tech cools off, investors might actually look at things like Eurozone E-T-Fs or the broader capital expenditure cycle in Europe.

Tom So the 'bear case' for my favorite tech names is actually the 'bull case' for your boring European value stocks? That’s convenient, Gerald.

Gerald alright, alright — maybe it is. But look at the Eurozone E-T-F, it's up over six percent and sitting near fifty-two-week highs. It’s not exactly 'boring' when it’s making people money.

Marie Look, we have to be realistic. The oil drop is a sixty-day interim deal. It is not a permanent peace. If we get to August and the Strait of Hormuz is under threat again, this entire 'equity tailwind' narrative reverses in a heartbeat.

Gerald Right.

Tom Yeah, yeah.

Marie Spot on.

Tom So what’s the move? We shorting China or buying the dip on Ferrari?

Marie The highest conviction signal today is the China short, hands down. When retail sales fall for the first time since the pandemic, you don't fight that trend. We are shorting the China Large-Cap E-T-F and the China Internet E-T-F.

Gerald I’m with Marie on that. And I’d add a short on L-V-M-H. The luxury handbag slide is just the tip of the iceberg for consumer discretionaries in a slowing global economy.

Tom I’ll take the other side on the U-S stuff though. I’m staying long the Nasdaq one hundred and the industrials. If energy stays low, those margins are going to look fantastic next quarter.

Marie Just keep an eye on the Fed, Tom. If Warsh kills the vibe, those margins won't matter. As always, none of this is investment advice — we’re just three people staring at terminals so you don’t have to.

Gerald Fair enough. If you’re enjoying the show, hit follow on Spotify or head over to investmentflash.com for the full breakdown and the charts that explain why I’m so worried about luxury bags.

Tom Do it! We’ll be back to see if the tech rally survives the morning. We're back for the New York Edition, later today at nine a.m. New York time.

Marie See you then. Stay sharp.