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Monday, August 24, 2015

Remain Buckled Up

Financial Review

Remain Buckled Up

DOW – 588 = 15,871
SPX – 77 = 1893
NAS – 179 = 4526
10 YR YLD – .06 = 2.00%
OIL – 2.30 = 38.06
GOLD – 5.50 = 1155.90
SILV – .56 = 14.89

The “Fasten Your Seat-belt” sign stayed on for the entire trip.

The Dow Jones Industrial Average dropped 1089 points, or 6%, to 15,441 to start the session; that was the largest intraday drop in Dow history. The S&P 500 opened 100 points, or 4.9%, lower at 1,874. The Nasdaq Composite began the day down 360 points, or 7.6%, to 4,349. All three major US market indexes are now in correction territory, a 10% drop from a recent high. The latest round of selling comes on the heels of the worst week for the broad S&P 500 since 2011 that stripped more than $1 trillion in market value from US equities.

Before the market opened, Dow futures, S&P 500 futures and Nasdaq 100 futures triggered circuit breakers after falling at least 5%. The New York Stock Exchange operator NYSE Group invoked the rarely used “Rule 48,” which relaxes some trading rules in a bid to ensure a smooth opening to trading. The rule is instituted when trading before the start of the regular session is especially volatile. At the market open, a slew of single stocks and exchange-traded products triggered single-stock circuit breakers, which are initiated when there is a price drop of 10% or more in a five-minute period.

Over the past 5 days the Dow Industrials dropped 2,198 from peak to trough; the Dow lost 1,697 from peak to today’s close; and the Dow was down 1,666 from the open 5 days ago to today’s close. All major trend lines have been violated.

You know things are bad when we start talking about circuit breakers; just to refresh your memory, the New York Stock Exchange said it will halt trading for 15 minutes if the Standard & Poor’s 500 Index drops 7 percent. And just when it looked like the circuit breakers might trip, the market recovered; almost. The Dow bounced back to a loss of only about 100 points; maybe short sellers covered; maybe the Plunge Protection team stepped in; maybe bargain hunters nibbled. Who knows? And then the major indices resumed their slide in the final hour of trade.

A downturn in the stock markets is fairly common; a weekly drop of more than 5 percent has happened 28 other times since 1980. On average, the market is relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks. Also important to note is that 60 percent of the time, the index moves higher the following week.

Some of the standout years include huge drawdowns of more than 20 percent over the next 12 weeks in 1987 and 2008. On the opposite side of the spectrum, there were massive turnarounds in 1998 and 2009. So, just because the markets drop 10%, it doesn’t mean the markets will go into a 20% bear market. Of course, if you are going to a 20% loss, you have to pass by 10% first.

U.S. markets average one 10 percent correction every 20 months. On average, we should expect these declines to take 71 trading days to play out (about three months). These 10% corrections are more common in a secular bear market. We are not in a secular bear market.

World stock markets fell sharply again as panic selling in China picked right back up to start the week. China’s stock markets have now wiped out the gains built up during the year. The Shanghai Composite Index closed down 8.5%. Fresh signs of a slowdown in China, the world’s second largest economy, have jolted stocks, bonds, currencies and commodities in recent days. Investors were further rattled today by the lack of fresh steps to stem the selloff over the weekend from Chinese authorities. Taking the cues from Asia, the European markets closed lower across the board.

The Chinese central bank is reportedly ready to flood the banking system with liquidity to increase lending, the latest in a series of measures designed to give the flagging economy a boost. China gave approval for pension funds run by local governments to invest in the stock market. The measure was approved over the weekend by the State Council. State media in China estimate close to $97 billion will be eligible to be invested under the new rule. Analysts also expect the People’s Bank of China to lower the reserve requirement ratio by 50 basis points to 100 basis points in reaction to massive capital outflows.

Of course, the People’s Bank of China has already intervened in markets; by devaluing its currency, freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market; one day it appears to provide relief, the next day (like today) it hits the sidewalk with a thump. This has reportedly set up a power struggle in China. The whole world is waiting for massive action from the Chinese government, an economic bazooka that can blast through all this market madness. The problem is that China doesn’t have one. That’s because China’s growth model is broken, and it can’t be fixed by cash injections or other emergency policy measures. The old fixes won’t work anymore.

The Federal Reserve has been intervening in the US markets for the past 7 years (OK, the past 100 years, but the past 7 for today’s example). And after years of Zero Interest Rate Policy and $4.2 trillion in QE securities added to their balance sheet, we are left to wonder what other tools they have in their toolbox. The Fed has been talking about raising interest rates, and that now appears dead for the September FOMC meeting. Or to put it another way, they wouldn’t raise rates if the meeting were held tomorrow. Who knows where we’ll be in 3 weeks. What the Fed and the PBOC are learning is that the global economies are now inextricably linked. The strong dollar and a slowdown in China hits emerging markets. The US is not an island in the global economy. And maybe monetary policy intervention in the markets just can’t get the job done anymore.

Ten-year Treasury yields dropped below 2 percent for the first time since April. Futures traders cut the probability to 24 percent that the Fed will raise interest rates at its September meeting, from 48 percent on Aug. 14. The chance of a December increase fell to 47 percent from 74 percent.

Oil prices plunged to 6.5-year lows as concerns over demand from China rippled across energy markets. Brent crude is below the $45 per barrel level for the first time since 2009, while WTI crude is back into the $30s. Commodities sank to the lowest in 16 years.

Gas prices in the US remained level over the last two weeks, according to the bi-weekly Lundberg survey. Prices were 22% lower than they were for the two-week period a year ago. Significant cuts in retail prices are expected across the US due to the latest developments in the oil markets.

The euro strengthened to $1.15 and the Japanese yen is also higher with traders discounting a move by the Federal Reserve to raise interest rates next month. The euro is now at its lowest level since last February.

Now, that is all backdrop for today’s market movement. Why did stocks fall? More sellers than buyers; actually the numbers matched but selling was the more compelling storyline for the day. Why did markets fall? Who knows? Still, I have seen the steady parade of economists who predicted 9 of the last 5 recessions, and market pundits who predicted 20 of the past 2 corrections, explaining why we are all going to hell in a handbasket.

We’ve also had the Alfred E. Neuman pundits, saying they’re not worried and the markets will rebound tomorrow and everything is beautiful. Whenever you get involved in stocks, you should know your exit plan, even before you buy. If your exit plan called for you to be out, then you should be out. If your plan called for you to remain at these levels, then you sit and wait it out. If you get emotional about market moves, you should not be in the market.

As global markets convulsed this morning, Apple chief executive Tim Cook dashed off an email to Jim Cramer at CNBC. Cramer read the email live on air. Cook wrote: “I can tell you that we have continued to experience strong growth for our business in China through July and August… Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last two weeks.”

Well, as you might imagine, that calmed the frayed nerves of Apple investors, at least a little. Apple shares started the session down more than 15 then managed to rally into positive territory, finishing down 2.5% for the day. The difference was about $75 billion in market cap. Which raises the questions:  Where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader? And, just how is this not a Regulation Fair Disclosure violation?

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