With new years comes new resolutions, and this year I am going to do my best to blog on a regular basis. I hope to often write a weekly post similar to “Up & Down Wall Street” which appears in my favorite weekly investment magazine, “Barron’s”. This weekly blog post will summarize what’s happening in the world in an effort to provide readers a concise understanding of current events and how they affect financial markets. Some weeks there may be many topics covered in one post, and other weeks, like today’s will mostly focus on one topic.
Global markets shed some holiday weight this past week with the main ignition of selloff in the United States coming from China – where in addition to new evidence that their economy is slowing down, traders sold in advance of a ban being lifted allowing large shareholders to liquidate their positions, a rule originally imposed by Beijing in the middle of last summer to stop the free fall of the Chinese market when it was apparent stocks were overvalued for a slowing economy. Since then, in an effort to live up to its command economy nature, the government installed circuit breakers that trip at a certain point and shut off the market when too much selling (or buying) occur. Unfortunately, government intervention often have unintended consequences, and the circuits were tripped only 29 minutes into trading on Thursday morning as the breakers only encouraged investors to dump their holdings before the market could fully shut down. Call me crazy, but when the market is in panic, the rational thing to do is sell sooner, rather than later, to get your money out. To put in bluntly: capital is fleeing from China. And that’s bad news for the Beijing government, who despite what Donald Trump claims, has been doing their very best to prop up the Chinese currency (Yuan or Renminbi) over the past several years. Indeed, in the month of December, the Chinese foreign-exchange reserves plunged almost $110 billion. While the value of the Yuan is indeed falling, Beijing is using their reserves to purchase their own currency in order the prevent it from falling further than it would in a free market.
The trouble with China is that it’s time for a fundamental change in how its economy works. Collapsed commodity prices, overproduction of goods, and a heavy reliance on infrastructure projects have all contributed to investment leaving the country. It should be known that these development cycles are normal. Economies regularly transition their production of goods and services. However, China and its command economy is a special case; the government can only do so much to remain in control and prevent a crash landing, although in cases of overproduction, it’s nearly impossible to avoid turbulence.
Back at home, the continued downward spiral of oil prices is a bit curious considering historically oil has been very geopolitically sensitive and the amount of current unrest in the Middle East would be sure to spike oil prices at any other time. But lower oil prices have boomed auto sales for domestic manufactures, Ford, GM, and Fiat-owned Chrysler who thrive on gas-guzzling SUVs and trucks. Additionally, companies that do business mostly within the United States have seen a rise in profits thanks to a strong dollar. One such company is Christian Brothers Automotive, which has noticed the effect low oil prices has had on consumer’s wallets. The Houston-based company plans to hire a dozen new staff members at its headquarters and open as many new shops in the upcoming year.
If one considers the traditional method of valuing securities (“the present value of all future cash flows discounted back at the required rate of return”) then it most certainly looks like the market is predicting a slowdown here in the United States as well. Fortunately, investors, like anyone else, can become prisoners of the moment and overreact. News unveiled Friday on the labor market is solid, with nearly 300,000 jobs added in the month of December and unemployment remained steady at 5%, which economists often call “full employment”. High single digit drops in the stock market may cause worry, but one must remember that the stock market isn’t the economy, and the economy isn’t the stock market.