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I mean, its SEC Media day for crying out loud! Who wants to talk about Greece anymore? I applaud Spencer Rand, CFA here at Monument with making that the first thing he pointed out when I saw him this morning, followed quickly with, “…and South Carolina is tomorrow.” I expected a greeting along the lines of “futures are up of 1% this morning on the Greece news.” Grasshopper. Okay, I’m taking some artistic license with the still celebrated talent of Salt-n-Pepa, so let’s talk about China, baby.

China’s stock market got ugly last week, which created some anxiety in U.S. markets toward the middle of the week.

First, here’s some historical context on China. China’s fast-growing economy has slowed in recent years, and government officials felt that encouraging individuals to buy stocks would be one way to help China shift from an investment-led economy to a more consumer-driven economy. With the encouragement of government officials, the small retail investor jumped in, creating a bull market rally that sent shares into outer space. You can see from the chart below, the Shanghai Composite Index rocketed 152% from June 30th, 2014 to its June 12th, 2015 peak … I’ll get to the subsequent decline of 32% from that high a little later.

Shanghai Composite Index
As an aside, this all occurred at the same time China’s economic growth was slowing. Anyway, in addition to this throng of new investors, heavy margin purchases contribute more fuel to the fire. Take a look at Figure 2.

Are you saying to yourself, “sounds a lot like the U.S. markets in 1999…”?


The reality as it relates to the U.S., (translation: why you should care), is that China is the world’s second-largest economy and has also been one of the key drivers of global growth over the past ten years or so. Investors are troubled that a collapse in China’s stock market could further dampen the Chinese economy, (which has already been slowing rather than growing), and potentially create a financial crisis in its already shaky banking system.

Putting it all in perspective, the U.S. exported $123 billion in goods to China last year and while that sounds like a lot, you have to remember our economy runs at around $17 trillion. According to something I read on Business Insider this weekend, there are only a few high-profile firms that depend significantly on sales to China and overall revenues from S&P 500 companies amount to just 2%.

Worries about the stability of the Chinese financial system and global repercussions are the bigger concern for right now. Basically, the Chinese government stepped in and intervened to stop the sell-off. I read speculation that Chinese stock brokers stopped taking sell orders. I guess that’s one way to stop a sell-off.

I’m not sure anyone other than a qualified trader, (you are most definitely, certainly, positively, probably not one), should be messing around with playing any China trade. In the blink of an eye last week, the index reversed positive over +10%. Traders who called that and got it right are geniuses … all two of them. They will follow that up with three consecutive wrong calls this week. Trust me.

Where We Stand

• I still don’t think this Greece thing is going to spread or become a big deal for anyone other than a person standing in line for dough at a Greek ATM.
• China could actually become a big deal but only if the financial system implodes. I don’t see any warning signs that something like that is actually on the horizon.
• Oil is lower … again
• Earnings season has kicked off. I’ll get into that next week. While the first four months of the year have been ho-hum, the economic picture is improving. Construction, housing, consumer spending and employment are all doing better. I’ll bet earnings accelerate in the second half relative to the downtrend we’ve seen since the end of 2014. My bet is on analysts’ revisions lower are too low and we will see some surprises to the upside as the reporting season progresses.

Call with questions



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