The State of the Market, Sentiment and Long Term Positioning

 

Back in Feb 28, 2015, we wrote “China Rate Cuts will likely hurt China”. Yesterday the China foreign reserve was down $93.9 billion. If we count its trading surplus $60.2 billion, the wealth exodus is staggering $154.1 billion. We don’t believe such bleeding can support a neutral case.

 
Market is in scared and panic state though. VIX skyrocket and still high:
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Index P/C is also extreme:
sp500-vs-put-call-ratio-index-1d-sma-params-x-x-x-x
 
But we see individuals are not scared than professionals:
sp500-vs-put-call-ratio-equity-1d-sma-params-x-x-x-x
 

US market commentators are mostly positive that China, They believe China, as it did many times in the past, will stimulate and save the days. e.g.: “Stocks Goosed by Hopes China’s Sagging Numbers Will Trigger Stimulus“.
 

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Will China do the magic as it did dozens of times before? We believe NOT this time. For most of the reasons, We don’t want to repeat here and please refer this article.  Here some new insights:
 

1. When a currency turned from long-term appreciation from strong devaluation, and the hot money flow out at $120~140 billion USD a month(93.9+trade surplus). That tells business people are strong-believed in transferring cash and stocks, then following by selling houses, factories and less liquid assets. That trend will re-enforce itself as more money flow out and more devaluation of RMB, a vicious cycle will lead to panic rush to banks/USD.

 
2. China’s banks have branch in each local cities and the branch director are often promoted by local mayor or bank director need to report to and follow the direction of mayor. local government and its investment are more or less agreed between mayor and bank director(Mayor has more leverage on bank director). China has double its total debt increased from 158% to 282% of house-inflated GDP from 2007 largely due to huge infrastructure spending by local gov. 300 local government land sales down 37.6% in first 8 months of 2015 (more recent month). and local government debt is hardly payable once local government loss land sales income and its industry has low profit margin and shrinking constantly, the wealth exodus will pull down house price quickly. Land sales may go to zero. Thus China’s national banks’ debt quality is much, much lower than private banks in other countries. We think most government debt will not be able to be paid and China is allowing local gov to issue debt to COVER that now(shocking moral harzard).

 
But when you have strong currency devaluation, cut interest rate, cut reserve, issue local debts, pop stock, discount on house loan, launch bigger stimulation……..All adding to more devaluation pressure to RMB. Devalued currency is like the lowest bar on the water reservoir: powering more water AND lower the bar, will only accelerate water to flow out. and will accelerate the wealth exit, when you consider about 60~70% Chinese business man has foreign passport. that risk is enlarged. When you combine the 93.9 Billion USD reserve decrease, 13% import down, manufacture PMI quickly go to 47.3. We think any print or stimulate will only accelerate the economic collapse.
 

Additionally, China companies own about 1.5 Trilion USD to foreign creditors; its factories need 1 Trillion to buy raw materials. that left only about 1 trillion USD for exchange. while China’s M2 account for 59% of world’s total M2 in 2011. It is just for about each Chinese to get $1000 dollar, or 1/500th of their house price. I see a rush to exchange USD very soon and RMB will lead to panic in a matter of months if not weeks.
 

We suggested to buy YANG at Yang 87.6 at this forum on Aug 13 and told them to sell at 143.9 Last Friday here https://www.facebook.com/groups/bigwinner/  , we retake small YANG position at 114 today. We think this bounce is mainly due to high VIX and P/C and last no more than a few days. We see crisis coming very quickly, within a few weeks to a few months.
 

TopCools Editorial.
Sep 8, 2015, 6pm PST.
Editor@topcools.com
Disclaimer: We are not interested in any politics other than making money from sharp economic analysis.
 

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