China Gives Green Light To Sell

After a frenzied rally of almost 30% in Chinese stocks this past month and 50% over the past year, Chinese regulators have again taken charge to deflate a rapidly filling balloon. China is quite sensitive to asset bubbles and balancing risk and reward. They will clamp down on unregulated credit financing through shadow banks in the corporate world, yet they will ease credit elsewhere when the economy slows too quickly. The shadow banking assisted real estate bubble remains a risk at a time of slowing exports and weak global demand.

In recent months the Chinese stock market has blasted off in what appears to be another potential bubble. Today China just placed greater restrictions upon shadow banking and expanded the ability to Sell shares of stock short. In effect they have just sent a message that there will be less Shadow Banking funds available to Buy stocks and at the same time there will be increased ability to Sell stocks. This doesn’t mean Chinese stocks will crash, but psychologically investors sensing the high risk of such a shift have headed for the exits short term. This is only ONE day down, even if its 5%. It could be recouped quickly, but with all of the international markets so interconnected, its important to watch for further trouble. 5% in the Dow would require another 500+ points below the close today (17th).China stock index 4-17-15

Germany actually sent the US a warning shot the day before China sent shivers through the market. For some reason as the late April deadlines loom for Greece to pay the current debt obligations, the market just realized they are likely to enter default mode. It has appeared quite obvious, but apparently a new threshold of certainty is hitting Europe that the Greeks can’t bluff their way out of this one. While German 10 year bonds yield almost 0% and the US 10 year is under 1.9%, Greek 10 year yields have zoomed back up to 13%.   Greek Prime Minister Tsipras  has begun selling unimportant assets in an effort to buy time before the big debts become due this summer. He wants to maximize his funding and leverage until the last moment before defaulting and risking an exit from the Euro. Is it Shakespearean that he is selling gambling licensees?Greece 10 Year 4-17-15

German stocks sold of sharply yesterday – 16th – in part due to increased expectations of a Greek default and sold off further today – 17th – as China contracted. German stocks 4-17-15

US stocks were testing record highs the past 2 days despite the early drop in Germany and fell in sympathy today 280 points on the DJIA or about 1 to 1.5% in the SP 500 Index and most averages. SP 4-17-15


It was a sharp drop today, but only a drop in the bucket compared to China’s 5% one day drop. A one day correction of 5% in the US would have resulted in our DOW (DJIA) losing over 900 points!

Should we worry about this one day correction? We know that prices can recoup all their losses and more quite quickly in the US and especially in China. If the Chinese decide this was a bad Fortune Cookie then the Government may allow this correction to continue long enough to deflate the stock speculation that has taken hold. No doubt selling in Europe and China will hurt the US which is already vulnerable to slowing earnings valuations.With the US stock indices stuck in a very tight 3 to 5% trading range for almost 5 months now and our growing concerns that a large correction looms, we would prefer to await some technical resolution of this price congestion before weighing in on the short to medium term. Dow 17,600 and June SP 2030 remain key supports that should not be tested in order for the medium term uptrend to remain on solid ground. If support holds again then Dow 18,800’s will be the potential on any upside break to new highs. This congestion has tested resistance 3 times and support twice over the past 8 weeks and as of mid-April, each further test exponentially increases the odds of a breakout trend developing.

The technical picture is mixed as most indicators have less import during a trading range as prices coil and build up energy for a point and figure breakout in either direction. Fundamentally we have a slowing economy with a sub 1% GDP expected for the 1st quarter in the US, weaker earnings and surprisingly weak consumption given the windfall rise in savings thanks to falling energy costs.

Medium term we see that borrowing costs are low, debt service is easy, personal savings rates have been rising, jobs and wages have been improving and yet the economy is somnolent. Assuming the stock market doesn’t panic we expect the economy to rebound in the 2nd and 3rd quarter and fears of a rate hike to surface in accordance with that strength. It has been Goldilocks for stocks, but when economic data that is too cold or too hot it will cause this market to quake with the risk we have discussed before of 20 to 30+% on the downside. We don’t have to panic>20% lower, but if prices panic lower we suspect new talk of economic stimulus will arise.

A 2011 or 1987 style 20 to 30+% correction in an ongoing economic expansion may occur, but we maintain that economic cycles don’t fade into a peak and instead reach a level of scarcity and inflation that causes credit to tighten and a contraction to follow. We are not there yet! Not even close. Nor have we begun to move in the direction of credit tightening which can last for a couple years. This is likely of similar timing of the 1980’s and 1990’s 8 to 10 year up cycle as we are 6 years into an economic expansion  and most data proxies point to a mid-cycle market – not too cold and not too hot!Quits  4-17-15



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