It's important to put the current situation in context. A 7% drop is a very serious drop because based on statistical inference if the total exchange is at -7% it means that many stocks have already reached their daily limit of -10%. This drop because it happened so early into the trading day is an historically large market crash, much steeper than 1929 or 1987. The market in China is made up mostly of inexperienced retail investors and traders so it runs on emotion and is probably the least reflective of actual underlying business and economic conditions of any stock market in the world. It is a cause for concern given the weakness in both their manufacturing and non manufacturing PMIs, both the official and the Caixin. It is the timing of the stock market rout and the PMIs that raises more concern with this selloff. The increasingly rapid drop in the Yuan is an extremely important tell that the economic managers over there are circling the wagons. The trade figures are due out in a few days. My guess is they would show even more deterioration than we have seen so far. Also that the government made an early move to block selling by major stockholders underscores the seriousness of the crash and connects it to the PMI data and the exchange rate. All this suggests the economic problems may be much deeper than it appears from any data. I have maintained for a while that we are in a hard landing. That has to be distinguished from both a soft landing and a crash landing or economic collapse. We had a hard landing in late 2008 and the economic numbers were a lot worse. We had real sequential loss for one quarter. That is a long way down from 7% growth estimates. The base case right now would be something akin to 2008, the equivalent of a moderate recession in the US. which is a big deal for a country which has not had one since its been industrialized. Now that we have gotten this far into the hard landing and are virtually certain their economic numbers lack a grounding in reality, the door must be opened for the first time to a crash landing. Right now the major probability is they will have a hard landing. However there is also maybe a 5% chance there will be a crash landing, that is something worse than we had in 2008. While this is terrible for commodities and materials stocks, it will have very little effect on the US. My best estimate would be it hurts the US GDP by a maximum of ~0.3%. It will also not have a major effect on US companies overseas profits. China accounts for only a small portion of those profits, less than 10%. There is very little US bank exposure over there to the best of my knowledge. Its possible European banks have a lot more exposure. The EU particularly Germany also has lot more exposure to foreign trade with China than we do. All this suggests to me buy US stocks on the downside move, whenever you think the time is right.
Early on you wrote.... "The market in China is made up mostly of inexperienced retail investors and traders so it runs on emotion and is probably the least reflective of actual underlying business and economic conditions of any stock market in the world." Then the rest of it is about how we're all fundamentally in trouble because the market dropped 7%. So... which is it? CBOE Vix futures vs. front month (3) futures yesterday was in heavy backwardation, which means to me that the market sees this as little more than an Asian tantrum. As much as anything, I think the Chinese got spooked because the gov't put in the limit down number. To most Chinese people, an action like that from the gov't typically means something bad is coming and they freak out....which they did.
Among the behavioral factors, could it be that Chinese "investors" are essentially gamblers, who in the absence of any fundamental or technical analysis, and fearing their government's efforts to control markets, behave like lemmings in an effort to protect their "winnings" so they can do as their rich Chinese brethren have already done and 1) accumulate $500,000 or more so they can immigrate to the United States; or 2) purchase real estate in the U.S. using money they moved out of the PRC through questionable means, sometimes buying property with a suitcase full of cash.
Interesting. I assume we didn't face this heavy backwardation in August last year? What is different this time? Because all my indicators rise red flags, not yours obviously. CM
I think it has to do with whether traders believe there is a legitimate or fundamental or systemic issue with the US economy. I don't recall all of the catalysts for August, but I think it was more on the home front and more real. The timing of the first interest rate hike was in play and we hadn't had a selloff for a good while. And the technical folks like to see pullbacks. The Greece debt thing was real, mostly because of the fear of spreading etc... I don't see the China thing as a real issue and the backwardation bears that out. China could be a real issue, but since they are so secretive and squirrelly over there we probably won't know until it's too late. Their growth rate is allegedly still north of 6% while the US would probably kill a hooker if we were guaranteed to be over 2%. Oil is a real issue, but no one talks about the huge bonus to the pockets of the US consumer from cheap gasoline. So yeah, some countries are in trouble and oil players are in trouble but the consumer is getting a lot more $ in their pocket. I read somewhere it's nearly $600 per person this year. When we drop, I always try to ask myself WHY we're dropping and if it's real and whether we're going to keep going down...and why. What really changed to make us drop 100 points off the S&P? What indicators do you use? How do you see this playing out?
Thank you, very interesting. Well, I use mainly technical and price action indicators. ST Trend is bear for equities. Look at moving average : they are at least as ugly as August '15, and begin to be similar with 2011. So, IMO, we are not facing a classic 10% correction. Another indicator to follow is the EURUSD. As strange as it could be, again we find some buyers for the EURO. Since 2015, it seems EURUSD is a risk-aversion proxy, thanks to Yuan. So, at the moment, I am short Dax and Nasdaq, long Euro. Maybe long T Bonds. Let s see how long it could last. CM
"Whats happening in China" Babyboomers just are not buying like they used to like in getting biggest toys, and kids born in next generation had to be kicked out just to get a job and they don't buy much. Health Care stocks will always be better investments or anything relating to Babyboomers which still has most of the buying power in USA. So less buying of goods from China, one way for market to go and their currency as well. I paid $1.61 a gallon for unleaded gas today here in West Texas.
The markets are down because demand sucks, all over. Find me anywhere there's strong demand, except maybe bankruptcy lawyers in the oil patch, and I'll listen. The consumer can carry this economy only so long. And declining markets only exacerbate the problem, as people get spooked and hold off purchases. I really hope I'm wrong, cause ive got a truck to put on the road, and freight rates are already bad.
Ktm, thanks for your input, but as far as I remember the cny devaluation was a much bigger catalyst to the global sell off in August than Greece tremors or US domestic issues (the day the central bank of China increased the usdcny midpoint 2% is when the bids almost disappeared upon US markets opening ) hence the worries about the market seem pretty much the same. That beeing said although i trade quite actively around single names, sectors and less actively world areas, i try not to time the overal market much and plan to stay significantly net long a bunch of equity markets even if the sell off continues - but it's a tough beginning of the year.