That Was The Week That Was-2nd Week July

 

A funny thing happened on the way to work in China…

There was a time you couldn’t stand in line at the grocery store, or fill up your car tank with gasoline, without getting a stock tip from a complete stranger. It was the era of the internet and the day-trader. In the 1990s many people in the United States, who were not stock market investors, suddenly became enthralled with the new thing called a computer and the Internet. Overnight they became  ‘players’. Their philosophy was simple: You couldn’t lose money betting on the new ‘dot.com’ stocks. Their rational was as long as dot.com was in the name of the stock you were fairly sure to win big time. Even ‘independent stock analysts’ appeared on cable television saying what just about everyone thought they knew: It was the decade of the internet and the new-new thing. Everyone from school teachers to garage mechanics had to invest in the stock market to get rich.

There were people that quite their jobs. Day-trading emerged as an  obsession-occupation where folks huddled over computers and televisions to earn a living. And what a marvelous living it was until someone discovered that the ‘Emperor Wore No Clothes’, and it all came crashing down. It was March, 2000 when $5 trillion in market cap was wiped out. It took over 15 years for the Nasdaq to recover from that decade of excess. Four years before that fall, in 1996, Alan Greenspan called it ‘Irrational Exuberance.’

We’re seeing a similar scene playing out in China as Chinese stocks had been enjoying a seven year high, up 162%  in 2015 from its low in 2014. This is more disconcerting than Greece. The last few weeks the Chinese markets have dramatically reversed their ascent to come crashing down. The Chinese Shanghai index is off more than 25% from its highs reached in June.

The new, small investor has opened millions of brokerage accounts in 2015 so they could play this stock rally, reported WSJ July 6th. Sophie Wang, a 32 year old college teacher said she opened her first trading account ‘on advice of my hairdresser.’ So far she is down 32%.

China is concerned about the recent selloff. IPO activity has been temporarily shelved as a means to curb activity. The Central Bank has pledged they would ease lending requirements, Still the small investor has sold more than he has bought which has accelerated the market’s decline. Analysts have concluded that the main cause of the selloff was that earlier gains were too fast and too much. The China’s small cap index was up 233% from its low in 2014.  WSJ June 6, 2015

 I warned readers a week earlier about the China market correction. See my previous blog.

The Greek Drama Continues and the U.S. Markets Retreat But Don’t Fall.

As soon as the Greek vote no was announced Sunday I checked the U.S. futures market and the DJIA futures were off about 300 points. When markets opened the futures were off triple digits but midway in the trading day they actually were even and slightly in positive. In the end the Dow closed down Monday less than 50 points.

Brett Stephens in Opinion WSJ June 6th, wrote,’ Greece and the Flight from Reality. A people who want wealth without work will have neither. Here are more points of interest:

• Greece has 133 public pension funds, each administered by its own bureaucracy. (This number was supposed to come down to 13).
• 18% of their GDP is on public pensions since Greeks retire early and live longer than their Eurozone peers. (5% GDP in the U.S.)
• Their military spending is the highest in Europe.
• Labor costs are 25% higher than in Germany.
• A liter of milk costs 30% more than anywhere else in Europe due to regulations.
• Pharmaceuticals are also more expensive.

For the millions of American Investors there doesn’t seem to be a panic. Follow Buffett's advice and ignore the noise, concentrate on your long-term goal.

The volatility index is up mildly from June 29th.

Tuesday futures showed a modest higher open but were off 200 points on the Dow at the open. Markets closed up, which indicated the kind of volatility we are now seeing.

 

You’ll be hearing the ‘R’ word as long as the dollar is strong, China continues to fall, copper and metals drift lower,Fed officials refuse to close their big mouths and Greece is unresolved. Jimmy Cramer talked about what we can expect to be hearing a lot of warnings about Recession. He also commented about staying away from buying oil stocks until they’ve fallen more. He wouldn’t be a seller but would add when and if oil stocks fell more. –Cramer, The Street, CNBC 7/7/2015

  The Big Concern Should Be China. Chinese Markets fell again Wednesday, the yuan hit a four month low against the U.S. Dollar. The Shanghai Composite has lost 32.1% since mid-June. WSJ 7/8/2015

‘The signs of overtrading (Chinese Investors) are hard to exaggerate….trading volume on many recent days has exceeded that of the rest of the world’s markets combined. Turnover is 10 times the level seen at the peak of the previous China bubble in 2007, and virtually the entire market inventory is changing hands every month.’- WSJ 7/8/2015 China’s Stock Plunge Is Scarier Than Greece.

‘A CLASSIC MANIA BUBBLE’-Ruchir Sharma, author, Breakout Nations, and Emerging Market head at Morgan Stanley Investment Management. Sharma appeared on CNBC and also wrote an op-ed piece for the WSJ July 8th. He was reporting on China and was much stronger in his opinion about the Chinese collapse on CNBC than in his opinion piece in the Journal. He said there are four basic signs of a bubble and the Chinese market has the extreme end on all of them. The margin debt acquired by Chinese investors is the highest in the history of mankind. The Chinese markets were already weak with extreme valuations before investor started piling into the markets. There was and is no basis for that kind of investment rally. He concludes that there is no global drama that bears closer watching than Beijing’s battle for control of their stock markets. 7/7/2015, 7/8/2015 WSJ, CNBC.

Markets down in the early going Wednesday with Utilities, Non-Cyclical Consumer Goods and Healthcare holding up fairly well versus Energy, Basic Materials, Telecommunications and Financials which were leading losing sectors. 7/8/2015 Source: Google Financial

Glitch Closes NYSE Trading Wednesday For Most of Day. Not a Terror or Hack Attack Say Experts. Opens Before The Close. NASDAQ Handled Orders While NYSE Down. 7/8/2015 DOW OFF 261 points.

Global Tumult May Give Fed Pause as to When to Raise Rates. WSJ 7/9/2015

 New Yorker 4/20/2015

Corporate Earning Season and Johanna Bennett at Barrons Predicts Corporate Earnings Will Easily Hurdle a Low Bar. With Greece worsening debt crisis and China’s stock market rout domestic stocks are not cheap with a market that trades at 16.8 times forward earnings. Barrons.com 7/9/2015

Markets Opened Higher Thursday. Closed off their highs but still in positive territory.

 

Questions, call Paul @ 586 295 0430 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.

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