The Obama/China Quotient

The Morgan Stanley Cyclical Index over the last five trading days has been having an enormous meltdown.

Many American companies were surprised when the Chinese decided to restrict lending to eliminate the bubble in their overheated economy. So many of these businesses focused on China when they recognized that the United States was simply too slow. But now, China has become a whirlpool that sinks their earnings and their stock prices. Cramer said damage is being done to the cyclicals that put their money on the Chinese.

But, not all cyclicals are tied to China and some have enough global exposure to escape, such as Copper Industries, which has almost no exposure in China and is a cyclical centered on the US; Boeing is up nicely because it’s a worldwide company that’s not beholden to China. Ford Motor Company is not a China play either, and is doing well.

The cyclicals with more exposure to China have all had huge rebounds because of the belief in China’s ability to grow its way out of trouble and lead worldwide recovery. Since the March 6 lows Caterpillar is up 130%, United Technologies is up 75%, Vale S.A. has gained 104%, Joy Global had a 173% move and Bucyrus International has soared up 393%. Many of these companies have cited China as being key to their strength over the past quarter. But, now that China has suspended new lending across the country since January 19, there’s no way Chinese demand will be able to stay at current levels, Cramer said. For this reason, companies will have to give back some of these gains.

Not everyone is being forthcoming about the anticipation of a China slowdown. Yet, some companies have been honest about what’s coming. United Technologies, which saw a 15% growth in new orders from China during the fourth quarter, said on its conference call that UTX is “…focused on trying to keep some of the economic growth, the factories and some of the residential housing prices in check to eliminate the possibility of an asset bubble there.”

Cramer worries in particular about Bucyrus International and Joy Global. Also, investors should sell Peabody Energy because this coal company just reported and growth here isn’t American, it’s Chinese. Cramer is concerned Freeport-McMoRan Copper & Gold is losing China. FCX is an American company that knows China uses 30% of the world’s copper, including tons that it excavates from its nearby Indonesia mine. “No wonder the stock got hammered after it reported a great quarter last week,” Cramer said.

Caterpillar also saw strength in China this past quarter and admitted that looking ahead, they see tightening. Here’s what CAT said about China, “…it’s probably prudent on their part to at least tap on the brakes here. Hopefully tap on the brakes, not send everybody through the windshield…”

Cramer said even though the oils haven’t reported, they also are getting rattled because China’s the marginal buyer of crude.

Investors should swap out of the cyclicals on any strength because they are “due for a bounce” and jump to consumer staples like Kimberly-Clark, McDonald’s, Clorox or ConAgra Foods, Cramer said.

The bottom line: investors can still own industrials, but only those with the least amount of China exposure like Copper Industries, Boeing or Ford Motor Company, and don’t forget to bulk up on the defensive consumer staples as well.

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