New Year Market Massacre Intensifies as China Sickness Spreads

January 7, 2016 in Economy, Financial Crisis, News, Stock Market Crash by Slad


Money and Markets
Mike Larson | Thursday, January 7, 2016 at 4:20 pm 

Here we go again. Last night, Chinese stocks plunged around 5% right off the bat. That triggered a temporary, market-wide trading pause.

Then when activity resumed, the benchmark Shanghai Composite Index dropped all the way to negative-7%. That halted trading for the rest of the day.

In the 25-year history of Chinese stock markets, there has never, EVER been a trading session that lasted only 29 minutes. A whopping 1,600 individual stocks plunged the maximum 10% that is allowed.

One Chinese investment manager dumped every stock his firm owned, telling Bloomberg, “This is insane.” A retail investor told the Wall Street Journal, “I am speechless,” after attempting to sell a stock only to find it had already tanked by its daily limit.

The yuan fell to another five-year low against the dollar.

The carnage spilled over into the currency market, too. The Chinese yuan dropped to yet another five-year low of 6.5646 against the buck. Investors now are widely assuming the Chinese economy is poised to slow even further, and are yanking money out of the country as fast as they can.

The evidence? We just learned that China’s currency reserves plummeted by a record $108 billion in December. Not only was that five times as much as economists forecast, but it also brings the total decline in reserves from the 2014 peak to a hefty $660 billion.

At $3.3 trillion, China’s hoard is still sizable. But it’s definitely getting smaller by the month. And China is far from the only country being forced to liquidate reserves and dump stocks and bonds held by their sovereign wealth funds. Those are the huge “hidden sellers” I talked about recently.

The carnage didn’t stay bottled up in China, either. European bourses all dropped by a few percentage points, while U.S. Dow futures plunged around 400 points in the early morning hours.

“The carnage didn’t stay bottled up in China.”

Then Chinese authorities tried to stem the panic by announcing they would suspend their current circuit breaker plan. That led to a bounce off the lows later in the morning.

But the bounce began to falter before long. Then the markets fell out of bed this afternoon when Reuters reported that the People’s Bank of China was being urged to allow an even-sharper currency devaluation. Advisors are reportedly recommending a quick drop of as much as 15% – much more than the mid-single-digit slump we’ve already seen. The Dow ultimately closed down 392 points on the day.

So what is the message of the markets? Where do we go next? I can’t say what’ll happen in the next few hours or couple of days. We may very well see an oversold bounce soon, given how far and how fast stocks have fallen.

Lastly, I can’t stress enough how caution should be your investing watchword until further notice. You can play market bounces with quicker trades. You can buy select, high-grade, high-yield blue chip names when panic takes hold, and generate some upside gains.

But if the overall trend continues to shift from up to down, as I first postulated in mid-2015, it will take new approaches and new investments to survive and thrive. At the very least, consider reading up on some of the inverse ETFs and hedge vehicles available from providers like ProShares. Or educate yourself about other tools like options at the CBOE. They can help protect against risk, and generate substantial profits, in down markets.

Now that I’ve shared my take on the action, I’m interested to hear yours. Is this the start of a fresh, major leg down in global markets? Or are we going to find our footing quickly? Should we be worried about what’s happening in China, or just continue to focus on the decent (though not great) domestic economy? Hit up the comment section and share your views.

Our Readers Speak

What’s going on with Apple (AAPL)? The auto industry? The markets overall? And how would you spend the dough if you hit the Powerball? Those are some of the topics you commented on overnight.

Reader Rick said the following about the former tech stock darling: “The competition has killed Apple’s cash cow market. Other products are cool and cheaper. They banked on China for continued growth and it isn’t going to happen. They don’t have any magic bullet product to replace the growth.

“Smart money will shift to other momentum stocks. Their CEO might want to read RIM’s tragic history. He’s repeating history.”

Reader Al weighed in on the auto sector, saying he’s surprised by all of the negativity: “It is amazing that the carmaker stocks are dropping. I could understand Volkswagen’s demise. Yet with sales records getting broken for most auto manufacturers, the slide can only be temporary in my opinion. Even oil prices being at an 11-year low should help carmakers.”

Reader Jim jumped into the discussion on the global economy, offering the following take: “The U.S. economy is not immune to problems overseas. The Saudis are losing $600 million a day and selling stocks and bonds to cover their losses. Mexico, Brazil, Venezuela, and Ecuador are basket cases.

“Our neighbor to the north, Canada, is in the tank. Russia, China, Japan, and all of Europe are in great peril. This low oil scenario is symptomatic of a worldwide malaise, breaking out all over. We will be in recession with the rest of them before you know it.”

The solution for all this negativity? Hit the Powerball jackpot! Reader Chuck B. said this is what he’d do:

“$500 Million? That would give me perhaps about $150 million after taxes from the single payment, which is all that would make sense at my age. I would put aside a few million for myself, give my heirs something, and set up a charitable foundation with the rest. That is about all that would make sense.”

Reader Phil was a bit more whimsical though, saying: “If I hit the jackpot, I will buy a yacht, a plane, and plenty of wine and women to populate both of these toys. Of course I will also need a supercar to get from one to the other.”

Dare to dream, eh? Well, Saturday’s drawing isn’t that far away.

As for stocks, let’s just say the market action we’re seeing now clearly validates the worries I’ve been expressing for the last seven to eight months here in Money and Markets and in my Safe Money Report. I haven’t liked large swaths of the market since last summer.

While we may see an oversold bounce at any time, this market truly does walk, talk, and growl like a new bear. So keep that in mind when you’re deciding on investing strategies. And whether you’re on the same page as me, or have your reservations about getting too bearish, let me hear your views in the comments section below.

Other Developments of the Day

BulletLackluster holiday sales claimed their latest victim late yesterday, when department store retailer Macy’s (M) said it would close 36 of its 770 brand name locations in the next few months. It’s also closing a St. Louis call center. As many as 4,500 positions will be eliminated, though some affected workers will be shifted to jobs elsewhere in the company.

BulletIs today’s crisis like 2008 all over again? That’s what billionaire investor George Soros warned at an overseas economic summit. But Soros also said that this crisis is clearly centered in foreign markets and economies like China, rather than the U.S. as it was eight years ago.

BulletThe junk bond market meltdown is getting worse, at least by one metric. Not one single high-yield borrower in the U.S. has issued new bonds since mid-December. Dealogic said that’s the longest junk bond issuance drought going all the way back to 2009. I’m not surprised these lousy companies are having a hard time raising money — junk bonds delivered the worst annual returns since 2008 last year.

BulletThe war of words and recriminations between Saudi Arabia and Iran got worse overnight, with Iran accusing the Saudis of bombing its embassy in the Yemeni capital of Sana. Saudi Arabia has been attacking Houthi rebels in neighboring Yemen for several months, but it dramatically stepped up the intensity of the airstrikes overnight.

BulletNobody managed to pick the winning Powerball numbers last night, so the jackpot has rolled over yet again. The Saturday drawing could now result in winnings of an estimated $675 million — the most in any U.S. lottery ever.

There’s a lot of negative news out there to digest — on junk bonds, on financial markets, on the geopolitical front, and more. So please take a moment to comment on the stories I just highlighted, or any others on these topics, in the discussion section here.

Until next time,

Mike Larson

PS: Mike’s gala January Safe Money Report issue is out today. Click here to get his five forecasts for the year ahead. You’ll also get specific “Buy” and “Sell” actions you can take right away to get your portfolio in shape for this tumultuous environment.

 



 

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 Bankrate.com. 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.