China Economic Worries Rise
- Hope of a US-style European bank bailout renews the rally.
- Technology, chips lag the rebound on some specific company stories, e.g. AAPL.
- Gold continues its selloff.
- Berkshire to buy back some shares. Doesn’t sound Buffett is that bullish on US companies.
- New Home Sales hit a 6 month low, but that was as expected so all must be okay.
- China economic worries rise.
- Stocks make fourth bounce attempt in 8 weeks.
Europe, the continuing market worry, allays some fears with a possible US-style bank package.
Stocks started the week positive. Futures were up, continuing the Friday relief bounce after a tough weeklong selloff. Somewhat surprising to see futures positive given there was no European bailout over the weekend. That hope was likely the cause of the Friday bounce, i.e. some short covering just in case the euros did something. When they did not the idea was that stocks would fall again.
Indeed after that initial bounce at the open stocks stalled and turned negative. Seemed the hope of a rescue plan was not in the cards for another week. Stocks gave up early gains and trade had a familiar look to it. New home sales for August came in at -2.3%, better than expected (how wonderful) but at a six month low. The market didn’t tank on the news though it did not surge either.
Then there was China. Supposedly ‘new’ stories about how its economy is not that strong and some indeed fear if it is going into a major recession. These are not new stories. We and others have talked about China’s bubble a year and more back. The most telling to us was the commercial real estate market with new office buildings and retail centers built but empty, with new facilities being build further out in the suburbs after the quality space was already built. All of this in a government-led effort to keep the economy going long enough for the investors to return. Kind of a ‘Field of Dreams’ build it and they will come back and invest mentality. Worked in the movie; don’t think it works for governments.
Thing is, bubbles can inflate and inflate and momentum perpetuates the expansion for long periods. Then it suddenly ends. You can see the bubble forming, know it is a bubble, but knowing when it ends is a crap shoot. The internet bubble ran for two years after it was identified as a bubble that would burst with calamitous effects. It did, but you sure made a lot of money in those two years. The worry is now, however, that the momentum is dissipating. We will see, but the point is, it is out there, another dark cloud that could blight any market recovery/rally. Of course you don’t know when so you make money while it is there because, as noted, bubbles don’t forecast when they are going to pop.
All of that was forgotten and forgiven, however, when the news broke on CNBC that Europe was considering employing the same financial sector programs the US used in 2008 in order to bolster confidence in banks and get them lending to one another and to third parties yet again. We know that European banks are struggling to obtain dollars; a special facility was created to allow them access because the regulators (and everyone else who bothered t look) could see a Lehman-style freeze out occurring. That banks could not obtain funding to operate and that other banks were not doing business with their cohort banks speaks to that problem.
To avoid any ‘uncontrolled’ insolvencies, therefore, Europe is considering opening the cash spigots to ensure the banks have the liquidity and funding needed to operate. Of course that likely also means they have the free money they can turn and use to buy bonds for a guaranteed return; a kind of government sanctioned carry trade to allow the banks to recapitalize at the taxpayers’ expense.
The market loved it and reversed the tendency to turn back down midday. Impressive 2+% gains on SP500 and DJ30. NASDAQ and SOX lagged; they did turn positive and put in solid moves. Solid but not great. JPM hobbled NASDAQ by opining that AAPL was cutting back on its orders of iPad parts by 25%. AAPL lagged all session. FSL (chips) warned on its Q3 revenue. Those stories kept techs quiet and indeed helped chips close negative, at least on SOX.
NASD 33.46, 1.35%. SP500 26.52, 2.33%. DJ30 272.38, 2.53%. SP600 2.11%. SOX -0.13%
The move bounced the indices off their August lows. SP500 and NASDAQ recovered their short up trendlines off of the August lows. Once again the indices have held the August lows that mark the top of the summer 2010 base, the one formed just ahead of QE2. A good place to hold, and now the indices are making their fourth bounce from that level in the past 8 weeks.
TUESDAY
Case/Shiller Home Price Index and Consumer Confidence for September are on tap for Tuesday. Prices are expected to fall another 4.5% and Confidence is believed to have risen all the way up to 46.6. Better get ready to raise interest rates to hold back that runaway consumer.
The economic data is going to remain crappy for now. What we focus on are the market cycles. Right now the market has carved out support above the summer 2010 base highs. Resistance, depending upon the index, is the November peak (SP500) or the June low (NASDAQ).
After last week’s plunge the indices, at least the NYSE indices, looked to be on a path to delve into those summer 2010 lows. They held support Thursday, bounced modestly Friday, and it looked to be just a relief move. It looked to be another relief move Monday until the news form the EU. Now if the market wants to buy this story it could be that the bottom is set yet again.
The question is whether this is just a roll back up in the range or something further, e.g. a move up to the June lows on SP500. With NASDAQ making a higher low it could try to make the break this move and work back up toward the top of the overall rally.
Could. Not counting on it. For now we are just playing this as another roll back up in the smaller range. Nothing wrong with that as we can make money with that range upside and downside. We picked up some more upside Monday, sold some downside, took some downside gain. We play the roll upside and if the breakout comes, great. If not, we play the next move down. Still not comfortable that the market can hold this support, but it is trying to hammer out a bottom here and thus far it has held. Again, we will play this range yet again if that is what the market wants.
