The panic buying by China’s newly-minted, day trader hordes took a breather on Tuesday which we think presents as good an opportunity as any to assess what factors might intervene to derail the self-feeding margin madness that has Shanghai and Hong Kong partying like it’s 1999 on the Nasdaq.
As everyone settles down in anticipation of another session of parabolic Hong Kong euphoria driven by desperate housewife traders, or a manic plunge straight down, none other than the CEO of the Hong Kong Exchange, Charles Li, found some time to pen a blog post to give "a little advice to investors", providing vivid aphorisms "Investment is like swimming: if you do not enter the water, you will never learn to swim" and to caution speculators that the opportunity is "not to quickly make a fortune, but ... to provide long-term wealth preservation and appreciation" and that there is also such a thing as risk as everyone scrambles to chase the latest bubble breakout. His blog post's punchline: "Do not worry! Do not panic!" We doubt anyone will panic, at least not until the selling begins.
When Will Bad News Cease to be Good News for Stocks? It is quite amazing to watch this. Even as one economic datum after another indicates that a major slowdown is underway that could well turn into a recession (keep in mind that this is not a certainty – at similar junctures in recent years, aggregate economic data recovered just in the nick of time), the US stock market continues to take everything in stride. The longevity, intensity and persistence of a bubble is per se not proof that it will inevitably continue – it is only an indication of the likely amount of pain the market will eventually dispense.
"Never, since 1900, have investors been this persistently bullish," warns Wells Fargo's Jim Paulsen. While the 13 previous cautionary signals since 1900 suggesting investor sentiment was too high have not been perfect, they have proved to be fairly good warning signs; and along with "massive overvaluation", and a dramatic "decoupling of markets from economic productivity" this extreme sentiment reading completes the trifecta of flashing red warning signs for US equity markets.
"One of the potential options Syriza might eventually consider could be a popular referendum on Eurozone membership – a step that would obviously involve great risks and uncertainties," UBS says, as Athens stares down a tough month ahead and an even tougher June and July.
BNP is out with a note calling China’s equity bubble “a microcosm for the overall economy: unsustainable growth in leverage masking ever-deteriorating fundamentals and increasing future downside risks. Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’."
The hunt for yield is driving investors into riskier debt at just the wrong time. With liquidity in the corporate bond market drying up thanks to new regulations, the rush to the exit is likely to be "very unpleasant," one analyst says.
"Because the Bank of Japan gobbles up dramatic amounts of debt, the cost of financing government spending stays low. It’s been said that a country that issues debt in its own currency cannot go broke. Theoretically that may be correct: the central bank can always monetize the debt, i.e. buy up any new debt being issued. But in practice, there has to be a valve."
The only market year to date that has shown truly impressive gains in both local currency and USD terms, is also the best performing market of 2014 - China, which is now up almost 100% in less than a year! Here, courtesy of UBS, is the complete list of what may be causing China's relentless stock market surge.
Plunge Protection Exposed: Bank Of Japan Stepped In A Stunning 143 Times To Buy Stocks, Prevent DropSubmitted by Tyler Durden on 03/11/2015 18:10 -0400
The BoJ has now gone full intervention-tard - buying Japanese stocks on 76% of the days when the market opened lower.
The US had a credit bubble, China has a credit bubble. The US had a housing bubble, China has a housing/investment bubble. Will China eventually have to go down the same path as the U.S., and the Eurozone? The answer: yes.
"The staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets, despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in lending standards on CRE loans. Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes. The effects on the largest banking firms of the sharp decline in oil prices and developments in foreign exchange markets appeared limited, although other institutions with more concentrated exposures could face strains if oil prices remain at current levels for a prolonged period."
Put on the a tin foil hat if you must, but US dollar's rally is resuming after short consolidation phase. I think the rally is only about 1/3 of where it is eventually going.
ECB's Jazbec: QE Could End Sooner Than Sept. 2016
A straight forward discussion of the factors driving the US dollar.