Chinese Crackdown on Market Surge, Greek Debt Worries Combine to Smack Stocks

MARKET ROUNDUP
Dow	-279.47 to 17,826.30
S&P 500	-23.81 to 2,081.18
Nasdaq	-75.98 to 4,931.81
10-YR Yield	-.028 to 1.85%
Gold	+$6 to $1,204
Crude Oil	-$0.56 to $56.15

Just when the Chinese stock market was notching another massive gain …
And just when investors thought it was safe to ignore Greece …
The markets threw everyone for a loop!
Stocks tanked almost 300 points right after the open, and remained weak for the rest of the day, though the major averages closed somewhat off their lows. 

First, Chinese regulators stepped in to calm the incredible rally we’ve seen in the Shanghai, Shenzhen, and Hong Kong markets. Specifically, they banned an investment approach that uses so-called umbrella trusts to increase investor leverage.

Chinese regulators expanded short-selling rules, which could lead to downside pressure on its equity markets.

They also took steps to make it easier for mutual funds and big institutional investors to lend out shares to short-sellers. That would help short-sellers ply their trade with less hassle, leading to more potential downside pressure on Chinese equities over time.
Still, it’s unlikely the Chinese would purposefully tank their markets (for long). Policymakers are trying to bolster GDP growth in the wake of its recent collapse to multi-year lows. Crushing stocks and investor confidence won’t exactly advance that goal!
Second, in Europe, officials ratcheted up their threats to let Greece go if the country doesn’t meet creditor demands for more aggressive reforms. Pierre Moscovici, a top European commissioner, said there probably won’t be a deal announced next week at a key summit.
He added that if Greece doesn’t take additional steps, it won’t get 7.2 billion euros in aid it desperately needs to pay back the International Monetary Fund and pay pensions and salaries. A separate European official, the finance minister of Slovakia, warned that “Greece is moving ever closer to the abyss.”

“Greek 10-year notes are now yielding around 13.2 percent, compared with 1.9 percent here in the U.S.”

Today, Greek stocks tanked more than 3 percent. Government bond yields soared at the fastest rate since the current prime minister Alexis Tsipras got elected in January. Greek 10-year notes are now yielding around 13.2 percent, compared with 1.9 percent here in the U.S.
Officials from Germany, Greece, the U.S. and elsewhere are currently gathered in Washington, D.C. for World Bank and IMF meetings. The tone remains testy, with officials trading barbs and frustration over Greek reticence rising fast.
We’ve seen this movie before, of course. Then everyone gets together and finds a way to kick the can down the road further. Markets rejoice, and we’re off to the races again.
So will something similar happen again in Europe? Will this Chinese stock decline prove to be nothing more than a minor correction? Or are the problems overseas much worse this time? If so, does that mean we’re in for much more than a garden-variety dip?

Our Readers Speak

With the weekend right around the corner, I thought I’d do a little “clean up reporting” of various comments on different topics that were posted over at the website. They may spark some of your own thoughts, and help everyone figure out where the markets are headed next.
Reader Dennis M. shared an optimistic view of the latest crop of public stock sales, saying: “These IPO offerings are the future! Some will be super stocks, some not so super. Yet, I feel that perhaps a new era approacheth?”
Reader Chuck B. weighed in on the ultra-light gyrocopter landing in Washington, D.C., saying that too many people will focus on what the man did, rather than why he did it. His take: “The media seems to focus not on the message to Congress, but on the way he snuck in under the radar, and maybe how that could give ideas to terrorists.
“He has, of course, done the security people a real favor in showing them a weakness that needs to be addressed. But his real message of how companies and individuals with deep pockets unduly influence who gets elected to office will again be ultimately ignored. After all, the media companies and personalities want to keep whatever power they have in this.”
Reader Jim noted that Bill Clinton wasn’t responsible for the strong growth we saw in the 1990s, and that he’s hoping his wife Hillary won’t have a shot at the White House. The comments:
“He was the unwitting recipient of the economic boom set off by Reagan’s tax cuts, deregulation, and winning the Cold War. His behavior in office was nothing less than disgraceful. Hillary earned her shot by silently putting up with it all. It is beyond me how anyone with a memory would want eight more scandalous years of the Clintons of Arkansas.”
Finally, Reader Robert C. offered a very cautious take on the stock market overall. His view:
“I have sold most of my stocks. I believe that the market is overvalued. Based on what I have read, the market’s adjusted price-earnings ratio is 27.9. There is agreement in some circles that there will be a market correction soon. The problems in our economy are structural in nature, not cyclical.”
Once again, I appreciate all of your input. We’ve seen mixed performance from the recent crop of “hot” and big-name IPOs, Dennis. Shake Shack (SHAK) has risen sharply from its IPO price, while GoDaddy (GDDY) has been sinking in the last couple of weeks.
Meanwhile, last year’s Alibaba Group (BABA, Weiss Ratings: C) has been a disaster following a brief, post-IPO surge in October and November. So you really do have to know what you’re investing in before committing your hard-earned money to a new stock.
As for the broad market, we’re clearly having a hard time making much progress here, Robert. But the indicators I’m following aren’t flashing red just yet, and that’s why I am continuing to focus on select stocks with strong Weiss Ratings in powerful sectors wrapped up in their own bull markets. That approach has worked for the past few years, and I’m sticking with it for now!

Other Developments of the Day

Bloomberg data terminals are used throughout the investing world, including here at Weiss. But overnight, those terminals went dark worldwide as part of a major outage. Service was largely restored early this morning, but the disruption managed to delay some bond deals and screw up some traders’ plans!
The Obama administration is continuing to push for a Trans-Pacific Partnership trade deal with 12 Asian countries, and approval got a little closer yesterday. That’s because the Senate passed a piece of legislation that will make it easier for Obama to pursue a deal over the objection of members of his own party.
Supporters claim it will open up more markets to American exports, but critics say it will cost ordinary Americans their jobs.
The list of European debt securities trading at negative yields just keeps getting longer. Benchmark 10-year German notes may soon cross that threshold too, with yields sinking to a record-low 0.06 percent earlier today.
The Wall Street Journal confirms what I’ve been forecasting for months — U.S. oil production is starting to peak. The paper cites reports from OPEC, the EIA, and other sources noting that shale production is topping out, and that this should help support prices.

 

Source:Money and Markets
            Mike Larson