Thursday, December 10, 2015

Will China Sink Our Markets Again?

Will China Sink Our Markets Again?

Mike Larson | Tuesday, December 8, 2015 at 4:18 pm

Market Roundup
17,569.07 (-161.44)
2,063.59 (-13.48)
5,098.24 (-3.57)
10-YR Yield
2.24% (+0.01)
$1,073.40 (-$2.00)
$38.98 (-$0.32)

Remember that story about China’s problems being fixed? Never mind! The country is back in the hot seat, with its currency, reserves, imports and exports all tanking. That, in turn, is raising fears about an August redux — after all, the crisis in China was a key reason our markets went pear-shaped back then.

Let’s start with the data. China has been bleeding reserves like mad in recent months thanks to the slumping economy, capital flight and other forces. Investors were hopeful that the outflows were slowing … but fresh November data put the kibosh on that.
Chinese forex reserves plunged $87.2 billion last month, more than double the losses economists were expecting. The country’s reserve hoard has now shrunk to $3.44 trillion — still substantial, but the lowest since February 2013.
120815_1526_WillChinaSi1.jpg Chinese exports have fallen, another sign of a troubling outlook for that country’s economy.
At the same time, Chinese exports dropped 3.7% in November while imports fell 5.6%. Those figures were much worse than economists expected, with imports now down a record 13 months in a row.
The fresh figures are putting renewed pressure on the value of China’s yuan currency. Take a look at this chart, which shows where the yuan is trading in the offshore market in Hong Kong.
You can see we’re closing in on the panic lows we saw in August when the country launched its first surprise devaluation. That move caused the Dow Industrials to plunge more than 1,000 points in a single day.
Another big fall …
Throw in the fact that crude oil, commodity stocks, junk bonds and other indicators have already undercut the August 2015 lows …
That the Dow Transports, Dow Utilities, Russell 2000 and other indices are badly lagging the Dow Industrials …
That the Treasury yield curve is continuing to flatten, while many sectors are dragging …
And you have to wonder. Specifically, just how long can the major U.S. averages keep trading at fantasyland levels while the foundation beneath them rots away? Maybe the answer is not long at all, if the market action today and yesterday is any indication.
Bottom line? If you haven’t already positioned your portfolios for more potential turmoil, by raising cash, selling some stock market winners, and buckling down, I wouldn’t wait much longer.
(Editor’s note: Mike has more investment recommendations in his Interest Rate Speculator service. Click here for more details.)
Now, let me hear from you. Should we be worried about a renewed meltdown in China? If many of the same conditions that were present in August are present again today, could the Dow plunge to the 15,600 level it hit back then? Or do you see more reason for optimism in the waning weeks of 2015? Share your thoughts below.
Our Readers Speak
The ongoing carnage in crude was topic number one at the website, and for good reason. Here are some of the thoughts you had.
Reader Chuck B. asked why the government isn’t stepping in to give this vital U.S. industry a helping hand the way they bailed out their banker buddies in the last crisis. His comments:
“The Federal Reserve guaranteed loans for a bunch of bankers who were going broke. Why can’t they do the same for the three dozen or so American oil drillers who have already filed for bankruptcy because of Saudi actions?
“Isn’t that a kind of economic war against this country? Isn’t oil supply a matter of national defense, if the Middle East oil becomes unobtainable due to all the goings on over there? But, of course, the drillers are not bankers, and not important to the administration or the Fed.”
Reader Freddy added: “If the feds had any guts, they would support and help the oil companies who really need it to go back to drilling as much oil as can be harvested out of the North American fields. Put those OPEC guys under so much pressure they would have nowhere else to go but cut their production. I wonder what they would do if we stop buying their oil and become self-sufficient, as many insiders in the oil patch believe we are able to do.”
Meanwhile, Reader Jim shared some thoughts about where things might go next based on his background in the industry. Those comments: “I have been in the oil business for forty years and have never seen anything quite like the current situation. The race to oversupply is unprecedented.
“The OPEC meeting was something of a surprise to me. Many of the members have to be feeling major pain — but the fact nothing was done or even said to stem the bleeding indicates to me this could go on a lot longer than many people think. We hit $10 in the late nineties and I’m not sure that is out of the question now.”
What impact would that have? Reader Ed P. said it’ll ultimately be a positive for the U.S.: “Let oil fall to $25. That will help Joe Sixpack who makes $40K per year. The Koch brothers and Rex Tillerson don’t need help from anyone.”
But Reader Joe G. countered by saying: “I learned in the Army that for every soldier, there were about six civilians supporting each one of us. So taking that into consideration, think about this …
“There will be probably 300,000 jobs lost in the U.S. energy companies, whether exploration and production, or transportation, or refineries. Now factor in the six multiple, and you have upwards of over 2,000,000 Americans potentially out of work or in reduced-quality jobs. Is that good for the economy?”
These are some great observations, and I appreciate you sharing them. I believe the Fed and the government is underestimating just how important the American energy industry has become in the last several years.
The surge in domestic production, transportation and related businesses helped create tens of thousands of well-paying jobs here — and promote energy self-sufficiency. Moreover, many of those jobs were in parts of the country that previously weren’t heavily dependent on the energy business. So plunging energy prices are no longer the huge positive for the economy they were in, say, the late 1990s when oil dropped to around $10 a barrel.
Then there’s the credit-quality issue. You simply can’t have the junk bond market melting down day in and day out — in part because of energy default concerns — without it tightening credit and hurting stock markets more broadly. Or in plain English, the credit problems are no longer “well-contained” to energy bonds — just like they weren’t “well-contained” to subprime mortgages a decade ago.
Am I being too cautious? Or do you think I’m on target? I’d love to hear from you below if you haven’t thrown your hat into the ring yet.
Other Developments of the Day
BulletChina’s wealthy can see the writing on the wall, so they’re getting their money the heck out of Dodge. The Wall Street Journal reports that Chinese investors are pouring money into U.S. real estate, often without even visiting, to avoid government scrutiny, currency devaluation and other threats to their wealth. Both commercial and residential properties are being targeted.
BulletCanadian Pacific Railway (CP) is continuing to pursue Northern Southern (NSC), raising its previous $28 billion bid for the railroad company. But NSC quickly rejected the sweetened offer as too cheap and fraught with regulatory risk.
BulletMeanwhile, the chipmaker Fairchild Semiconductor International (FCS) said an unidentified party offered to buy the firm for $21.70 a share, or $2.46 billion. That would top a $20-a-share offer already on the table from ON Semiconductor (ON).
BulletWe saw more weakness in crude prices overnight, with both domestic and foreign oil benchmarks falling to their lowest levels since the Great Recession in 2009. The New York Times reported that roughly a quarter of a million energy sector workers have lost their jobs worldwide in the last year already. That number is certain to rise in the months ahead as more bankruptcies and defaults sweep through the industry.
Any thoughts on the influx of Chinese capital to our shores? The latest corporate merger fights? The ongoing decimation of the energy industry? Let me hear about it below.
Until next time,
Mike Larson
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Mike Larson Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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