Wednesday, July 8, 2015


CHINA ‘BLACK TUESDAY': STOCKS FALL 5%, DESPITE SUSPENDING 25% OF ISSUES

Despite the Chinese communist government’s efforts to hide the severity of the “Black Tuesday” stock crash by indefinitely suspending trading in over a quarter of the nation’s weakest stocks, the Shanghai B Share Index suffered a 9.1 percent loss, while the  Shenzhen Exchange plunged 5.8%.
With retail customers accounting for 85 percent of Chinese stock trading, there are reports in social media that a number of China’s “equity citizens,” who have suffered $2.9 trillion in losses over the last three weeks, are now committing suicide. 
The crash would have been epic, but suspensions in trading were called in what appeared to be the weakest 702 of the roughly 2,800 firms listed on China’s main Shanghai and Shenzhen stock exchanges. Officials said the “temporary suspensions” were linked to restructuring, planned share placements or the pending release of a “significant matter.” But they also acknowledged that the ten-day suspensions can be extended for three months. 
The market crash has fed doubts about the effectiveness of $200 billion in credit and price support measures unleashed by Beijing’s communist leadership to halt a waterfall in stock prices that have seen a 31 percent decline in major indexes since June, and a worse price drop for the average stock. With Tuesday’s painful loss, China’s stock crash has erased about $3.4 trillion of China’s wealth. 
The initial 150 percent straight-up move in prices through June 12 reinforced the public’s confidence in the “Party” and the “Leadership”. But the severity of the stock market crash and the government’s inability to stabilize the situation has now become a huge threat to the supposedly all-powerful China Communist Party.
DYI Comments:  China watchers such as myself have been anticipating a huge debt blow off that would spin off major parts of China especially their autonomous regions.
 
So far not enough damage has been done for China to fly apart only time will tell if this is the beginning of their 1930's style economic tsunami.

DYI 

Here is How The Next Crisis Will Play Out

In contrast, the current Crisis that we are facing involves bonds… the bedrock of the financial system. 
Every asset class in the world trades based on the pricing of bonds. So the fact that bonds are in a bubble (arguably the biggest bubble in financial history), means that EVERY asset class is in a bubble. 
By the time it’s all over, I expect: 
1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value. 
2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar). 
3)   Japan to have defaulted and very likely enter hyperinflation. 
4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500. 
5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.
DYI Comments:  My model portfolio until July's update only invested in gold/precious metals mining companies.  Now that interest rates are moving up slightly DYI's long term bond portion has added a 2% position.  Higher rates go the bigger our position will grow and the faster you can compound your money plus your duration shortens reducing your risk.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  7/1/15

Active Allocation Bands (excluding cash) 0% to 60%
83% - Cash -Short Term Bond Index - VBIRX
15% -Gold- Precious Metals & Mining - VGPMX
 2% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
[See Disclaimer]

This is a very awkward time for value investors as every of measurement for stocks and bonds have been shown to be very overvalued.  However, with oil prices way down this has embolden the Fed to goose the economy and financial markets.  The reflation trade was back into effect.  The past two years stocks and bonds have been way overvalued only to be pushed up higher.  As value investor those gains will be seen as transitory, as a trail of tears for those investing heavily during that time period.

Precious metals have come off a 70% decline and for those who need to rebalance this is a good time to do it.  Gold is pricey but NOT overvalued historically as shown by the DOW/GOLD RATIO.


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As you can see above the ratio is now at it's mean.  Based upon our weighted average formula DYI arrives at 15% of the portfolio.

My sentiment indicators show how up side down (except gold) every thing has become.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency
Max-Pessimism *Market Bottoms*Short Term Bonds
Depression MMF
Hope
Relief *Market returns to Mean* Gold

Smart Money buys the Dips!
Optimism
Media Attention
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional
Max-Optimism *Market Tops* Long Term Bonds
Denial of Problem U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

The Great Wait Continues

DYI

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