This morning’s shot across the bow came to us courtesy of China on reports that several Chinese banks have been told to curb their lending for the remainder of the month. There is a growing sense of concern about the Chinese markets. With property prices surging and a stimulus package that is still running hot, the Chinese might have added too much gas to their own fire. Market participants are very aware of the importance of the Chinese markets to the global recovery. Losing Chinese growth would certainly cause a massive relapse in the global economy. If China sneezes the world will catch a cold….
Making matters worse is the growing concerns in Greece. As we mentioned earlier today the term structure in Greek sovereigns inverted – something we saw in Merrill and Lehman CDS just months before they went bust. This puts global leaders in quite a quandary. I view last nights vote in Massachusetts as a sign that bailout nation is over with. Any politician that votes for a bailout going forward will be tarred and feathered. While Greece is likely to receive some form of aid this growing negative mentality could create future problems should another U.S. corporation (or state) require assistance from the Federal government. We tried to kick the debt can down the road and it’s looking like we’re going to need to kick it again (or heaven forbid – deal with it!).
Earnings were a bit mixed this morning, but generally better than expected. Aside from misses at Coach and Bank of America, the numbers were fairly strong. The banks continue to report better credit trends, but a cautious tone has many analysts scratching their heads over the true strength of the bank balance sheets. I agree with Felix Zulauf who thinks the banks are dead money from here.
The Redbook and ICSC data were both robust again and showing signs that the consumer is willing to spend despite continued de-leveraging. ICSC reported a 2.6% climb in year over year sales while Rebook reported a 0.9% climb.
In other news, PPI came in fairly benign at 0.2% and housing starts disappointed to the downside. Neither were major market moving news as the headlines have been dominated by the Republican victory and the concerns in China.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.