China is in a full-scale melt-down.
The Shanghai dropped 5.3% fro the day and the Hang Seng finished down 2.22% and that 5.3% is very impressive when you consider that 10% is "limit down," the point at which trading is halted so, if half the stocks were even, then half the stocks were halted!
The concept behind "The China Syndrome" is that a severe meltdown of containment in a nuclear reactor would create a reaction so hot that it would melt through the housing of the building and through the Earth, in theory all the way to China (ignoring the fact that gravity doesn't actually work that way).
In this particular case, we have a liquidity incident in China where the gaping hole that is being blown in their economy is so great that the effects are certainly being felt here – on the other side of the World. This is no surprise to PSW readers – we've been worried about China since last year and they've been melting down since early this year – it just took this long for the rest of the World to see it. Today the Hang Seng failed to hold it's 20,000 line, which is what lead to 2011s August 20% melt-down to 16,170 (from a higher high of 24,500) and 2012's 10% break-down to 18,056. Not exactly a "black swan" event, is it?
This weekend, Forbes realized that "Pessimism Grows in China" with 36.4% of 5,000 businesses surveyed saying they believed the macroeconomic landscape has weakened, compared to 31.9% who said so in the first quarter. Nomura Securities economist Zhiwei Zhang in Hong Kong said he would not be surprised if China’s second half GDP fell below 7%, bordering on the old “hard landing” territory. Similarly, the Washington Post sees "China's Economic Slowdown Emerges as Risk to US Economy."
These are just those boring old Global Fundamentals I keep banging the table on BUT, fundamentally, to a large extent China has brought this crisis on themselves by attempting to stomp out their housing and lending bubble by PURPOSELY starving their banks of cash, causing the interbank lending rates (SHIBOR) to skyrocket – forcing the banks to reign in their own off-balance sheet investments ahead of their annual audits in June.
This punishes lenders who have taken on too much debt and relied on short-term repo agreements to prop up their balance sheets (ie. business as usual in China). To some extent, this is the cure that kills but, hopefully, they are cutting off dead weight to get stronger: “As their tenure will last for 10 years, they are willing to tolerate some short-term pain in order to achieve long-term policy objectives—preventing financial crisis and delivering sustainable growth,” the Japanese bank Nomura said in a research note. It predicted that defaults in Chinese manufacturing companies and non-bank financial institutions were imminent in the coming months.
As you can see from the chart above, the PBOC relented somewhat over the weekend and made a $50Bn injection into the system to get SHIBOR back to single digits. If they pull off the impressive trick of stabilizing things here (around 8%), they will have made their point to the banks and speculators and then it may actually be time to pick up a little FXI ($31.50, not reflected on Dave's chart yet) as well as a few beaten-down Chinese companies, including our old favorite, CHL, who came back down to $48, just a few bucks higher than where we liked them last January.
That's right, I'm not too bearish. I have been, because we were ridiculously overbought but this is the correction we've been looking for and I'm agnostic as to whether we correct to 1,550 or 1,450 on the S&P but I'm still pretty sure we'll hold 1,450 and, since we KNOW how to buy stocks with a 15-20% discount – there's no need to wait for some of our bottom-fishing expeditions if we don't think the market is going down more than another 7.5% from here.
This week, we're coming into the end of the quarter so we can't trust the action but we have earnings coming in now for Q2 and that's the kind of fundamental data we can sink our teeth into, We know earnings are jacked up due to R&D write-offs (as I noted on June 14th) but not everyone's, of course – it's just a factor we'll take into account, along with the wild currency swings that will play mayhem with the earnings reports of International players.
The Fed is NOT off the table and 1,450 on the S&P is my non-Fed target and this is NOT a non-Fed environment – by a long shot.
The US housing market is still pretty strong (relatively) and Zillow just did a survey that projects that 60% of homeowners (70M) will spend $1,000 or more ($70Bn) on home improvements this summer. That's good news for HD, LOW, SHLD, SHW – Sears is one we're already playing as they got cheap but all 3 of the others are off their highs, following the broader market's lead.
Interest rates may be climbing to 2.5% on the 10-year but that's still 2.5%! 6% was the average in the go-go 90% and America never started more new businesses or hired more people. Rising rates (Fed Meddling aside) are a sign that there's a DEMAND for money (ie. velocity) and, with the amount of liquidity that's already soaked into this system, it won't take much movement to get everyone good and wet.
Gas prices have moderated but still high at $2.75 (where we're long on /RB this morning) but it's a damned site better than the $3.34 that was killing us in Q1 and about back to where we were last summer and the summer before that. Also, you can poke holes in the numbers but we are adding close to 200,000 jobs a month and let's say they average a crappy $36,000 – it's still $3,000 x 200,000 per month than consumers had before and that's $600M more PER MONTH and growing at $600M per month so $600M in June, $1.2Bn in July, $1.8Bn in Aug, $2.4Bn in Sept – that's the power of an economy that actually grows jobs!
We had 3 great articles on wages this weekend, pointing out that a lower minimum wage (relative to inflation) costs workers (and our economy) Billions of Dollars each year while a study by the Restaurant Opportunities Centers United, a national organization focusing on racial equity in the restaurant industry, discovered that nearly 58 percent — or roughly 6 million — of the 10.4 million U.S. workers living below the federal poverty level in 2011 would be pulled out by such an increase in minimum wage to just $10 per hour. (Proposed legislation introduced to Congress earlier this year by Rep. George Miller (D-Calif.) called for just that.). Having Corporate America pay their workers a living wage would save the taxpayers Billions on welfare and food stamps!
Keep in mind, we're not asking employers to pay $10 more – just $10, which is $1.50 more per worker or $60 a week or $3,120 a year which would be $32.4Bn total Dollars out of $3,000,000,000,000 in Corporate profits to change the lives of 10,400,000,000 (3% of our population) and pull 6M of those people off the government welfare rolls. This is what the GOP is fighting against – America!
Even Bloomberg agrees with this premise and goes it one better, making "The Capitalist's Case for a $15 Minimum Wage" pointing out that it's a fundamental law of capitalism that, if workers have no money, businesses have no customers.
Globalization has let US Corporations ignore that rule for years now but, when Europe and China weaken, as they have now, they suddenly realize they've left themselves with nowhere to turn to. According to Bloomberg, If the minimum wage had simply tracked U.S. productivity gains since 1968, it would be $21.72 an hour — three times what it is now.
Studies by the Economic Policy Institute show that a $15 minimum wage would directly affect 51 million workers and indirectly benefit an additional 30 million. That’s 81 million people, or about 64 percent of the workforce, and their families who would be more able to buy cars, clothing and food from our nation’s businesses.
How does this make me bullish about the long-term economy? Because I pay attention to politics and change is in the air. There's a growing realization of this issue that I have spent years writing about and, finally, it's gaining traction and this is the solution I've pushed for since 2006 – well before the lack of wages and skyrocketing commodity costs led to the financial crisis.
This time, hopefully, will be different.
Yeah, I know I tend to have a twisted sense of humor, but here is my LOL for the day….
http://www.washingtonpost.com/world/asia_pacific/us-factory-boss-held-hostage-in-china-by-workers-demanding-severance-packages/2013/06/24/92546166-dc9f-11e2-a484-7b7f79cd66a1_story.html
…Isn't the picture just precious!… 🙂
What you won't hear in the 1020 household:
"Honey, what do think about a vacation in New Jersey this Summer?"
http://www.nbcnews.com/id/52291171
"or, how about Florida?"
http://usnews.nbcnews.com/_news/2013/06/11/18903252-bloodsucking-vampire-mosquitoes-set-to-haunt-florida?lite
😉
So when do we start?
11:11:11am tomorrow.
I do hope the minimum wage moves up to $9/hr…..
http://money.msn.com/investing/5-companies-that-owe-workers-a-raise
….and Micky D's will pay out 5.5 billion to shareholders this year?
FU MCD!
Pharm: That would require Mark Faber to be right for the very first time. Referring to the GK comment earlier, there's no good reason, given a slowing China and EM disinflation [energy, commodities], that we should see rising yields tanking equities this year..
1020 – Thanks for the head's up. My brief vacation will be spent above 6,000 ft. in Utah and Colorado, both so dry that mosquitoes don't even bother to try breeding. But moose and mountain lion are out there waiting for the unwary hiker. Having said that, my three kids are the most dangerous wild beasts I must survive this summer, by an order of magnitude!!
Interesting play on DNDN
DNDN hasn't been doing too well lately but they do have an approved immunotherapy drug PROVENGE, for prostate cancer, that they are having trouble marketing and they have six ongoing clinical trials. I'm not recommending DNDN but if you are interested DNDN closed today at $3.93 and the 2015 $4 calls and puts are $3.36 yielding $3.43/$2.25 or a return of 87% if called away.
Another play would be to sell the $4 puts at $1.81 and buy a BCS
emg mkts very oversold..could see some hedgie short-covering/profit-taking into quarter end..which would likely boost US too…same thing could also happen in bonds.
Not sure that the volume bars are displayed properly – they were a lot higher earlier today when I checked!
In any case, not a very bullish finish…
Minimum wage / 1020 – Funny that these big corporation always say that they have to pay their CEO millions to retain the talent, but apparently they also think that what applies to one person doesn't to the thousand of other employees who can be retained by $7/hour (and of course the fear of losing their job without a big severance package). Hypocrites!
Aapl – just took advantage of the free offer from best buy. Upgraded the wife's iPhone 4 to 5. Total: $52 for taxes
Crazy stuff…
http://gizmodo.com/you-can-finally-buy-the-magical-spray-that-waterproofs-563613333
/CL -Phil. At 2:11 you posted waiting for inventories before shorting. I assume you mean Weds. Weekly numbers. Correct?
Good morning!
As we expected, the PBOC finally took steps to calm the markets and our futures are recovering.
GDX/Jabob – They are still talking gold down. Eventually they'll get the last man out.
Severance/1020 – Taking the boss hostage is a start of an interesting new trend for China.
Mosquitos/1020 – Oops, time for me to move! I hate those things. The cicadas were a bust by me though – maybe cause we're up on a mountain but the only ones I saw Tina brought up from town in a jar for the kids to check out. And Florida too? All I can say is Vegas baby!
Start/David – Let me know if people are interested, my guys are already working on a format but our schedule, at the moment, is end of summer. Could go faster if there's a lot of interest.
MCD/1020 – Not too much direct impact on them as 3/4 of their stores are franchises. In fact, here's a guy who calculates the impact on operations would be about 1%! I think that's light but still – it's certainly not 10% or anything silly like what we're hearing on Fox for these minimum wage hikes and, frankly, if a company only exists BECAUSE it pays people a sub-standard living – then maybe America is better off without that company. I'm sure Foxconn would say they can't stay in the US if they have to pay people more than $2.50 an hour – that's the point of minimum wage – we're supposed to draw a line in the sand in our country and say "NO, we don't WANT that kind of business here." I think MCD's greatest worry is that, if they pay their employees better, they WON'T eat at MCD's anymore…
Here's our girl Liz Warren talking to a restaurant owner at a Senate hearing – God I love her!
Speaking of stuff we don't want here – pollution in Asia is completely out of control. That's something we exported along with our factory jobs and it's making some of their cities unlivable.
They are now executing chronic polluters but there's a lot of cities in China where people don't like to be outside and they have constant health alerts telling people to wear masks (made mostly by JNJ!). Overall, the country wants to decrease pollution by 30% by 2017 – pretty drastic. Unfortunately, the main way they will accomplish this is to export their factories to Africa. Hard for us to complain though – those are our old factories they're exporting.
Anyway, so this stuff is all tied in because pollution is a function of GDP and China WANTS to cut their GDP if they have to to reduce pollution – as it's now to the point where the pollution is negatively impacting the economy anyway (people don't go out – less business, also massive clean-up costs are becoming necessary). Interesting times.
EOQ/Angel – I hope this is a bottom, this melt-down has been epic.
Big Chart – Still the waterfall break-down – need that 14,800 line on the Dow and that's about 1% up from here, as is 9,000 on NYSE but at least the RUT held 950 so still hope if they hang on (and hopeless if they don't!).
Volume/StJ – Yesterday was normal volume, only 1/3 of what Friday was on DJI but, DIA was busier so, I guess it depends what volume index they are using.
Wages/StJ – In order to oppress the workers they have to be dehumanized and devalued – it's all part of the process or people at the top may feel some pangs of guilt for exploiting their fellow man.
BBY/Jfaw – But you have to do a contract right?
Never Wet/StJ – That's so cool! Not sure if I trust spraying my IPhone though.
How about this one – we're on our way to flying cars!
Oil/Jfaw – Yes, Wednesday. At this point in the contract cycle, there's little pressure on the traders so they can pump the markets up at will. They'll react to a bad inventory report (they're mostly all bad) but then they go back to pumping, which is the primary purpose of their job.
Chart
Jun 25
Jun 25
Jun 25
Jun 25
Jun 25
Jun 24
Jun 24
Jun 24
Crazy, isn't it?
You gotta love it – I say it yesterday and it becomes news today:
Phil, on that oil chart, how do you figure out the barrels to roll?
BBY – yes, contract extension.
Phil – The oil contracts are now trading with declining prices going forward into time. Previously the first three or four contracts were contango (rising prices going out in time) which makes rolling the contracts expensive. If the contracts have the normal declining price trends, how does this affect a traders ability to push prices higher? (Perpetuate the demand myth)
WAS THERE A TRADE REC I MISSED ON CL IT TOUCHED BETWEEN 8:57 and 9:01?