I update each Saturday with my view of the stock market for the next few weeks. The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market. You can always scroll down a few weeks and find the latest “Long Term” update.
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Initial jobless claims were unchanged at 245,000 in the December 23 week.
It was a light week for statistics due to the Christmas holiday.
China is still in the transition from state sponsored infrastructure spending to fuel growth, to consumer driven GDP growth, but it appears the state is still carrying much of the growth by taking on debt. No telling when that could blow up, but just note it as a risk out there.
“Dec. 28, 2017 – China says it’s on a mission to curb high levels of borrowing in its economy — and it even aims to cut money supply next year. But people who watch the country closely aren’t sure that will happen.
Experts question whether the world’s second-biggest economy can kick its addiction to debt-fueled growth. While Beijing may want to slow the country’s growth, the risk is that a sharp deceleration may derail the entire economy.
“I think it’s very clear, and I think the leadership knows this. They have this very difficult problem of balancing financial risk — which is too much credit growth — against economic growth,” said Fraser Howie, independent analyst.
“It’s a problem of their own making. For too long, they allowed credit to expand. For too long, they focused on GDP growth rate,” Howie told CNBC recently.
Although the political commitment to cut debt appears strong at the top, there may be problems further down the pecking order. Performance by local and provincial government officials is often judged based on growth — which is boosted by debt, Howie said.
There are concerns about local debt levels among central government leaders, with Beijing officials detailing concerns about “hidden debt” to China’s Caixin magazine, as reported this week.
Major worries include debt related to trusts and shadow banking, which refers to lending that happens outside the formal banking sector. Such debt is subject to less regulatory oversight and higher risk. And that lending is often nowhere on the balance sheets.
Such debt is believed to have been taken by local governments trying to hit growth targets or fund infrastructure work.
There are fears that weak accounting practices mask the amount of risk that banks and other financial entities, such as insurance companies,are taking on. Those concerns have led some to claim that shadow banking in the Chinese economy could eventually lead to a financial crisis if the bubble pops.
However, it may be possible to head off a collapse now — if the government bites the bullet.”
All governments are loath to bite the bullet and deal with the resulting financial impact, usually a recession.
Consider the parallels in the US economy with the over-stimulation of the housing market in the early 2000’s, with very low interest rates and the failure to regulate the mortgage industry. Bills were presented in 2005 to regulate Fannie Mae and Freddie Mac, one passed the House of Representatives but its companion bill (S-190 if I recall correctly) was never even voted on in the Senate. Our government could not find the strength to “bite the bullet” and they just stood by and let the economy fall off a cliff.
China will try to deal with the situation with a gradual approach. I understand the motivation to try that, but one wonders if it will succeed if what is really needed is more forceful action now?
If China fails, it will have an impact on our markets as they are a major trading partner. I don’t expect anything imminently, but do not be lulled to sleep thinking there are NO risks out there. Not all of the risks to our markets have to be domestic ones.
The market moved sideways last week, down slightly. That’s not unusual for the week between Christmas and New Years, as most traders are off and volume is low. It looks like a small correction has started, but I will disregard the appearance because the backdrop is not a normal market period.
The real story will begin on Tuesday when everyone gets back to work. I’m expecting good things on the heels of improved corporate earnings, although this will be muted somewhat because the market is already moderately overvalued.
The risks to the market are overvaluation, international disruption from China (not near term IMO), and the next steps from the Mueller investigation, if any are to come.
Beyond that, corporate tax cuts and the repatriation of funds to the US bode well for the market. CEO’s have said the repatriated funds will primarily be used to increase dividends and fund share buybacks, both of which should raise stock prices. The year should be a good one, but there is always the possibility of a 5-10% correction.
With all that said, I expect a good January and I will be buying if the market heads up, but buying at a measured pace.
I added some OEUR which is Kevin O’Leary’s European quality dividend company ETF, which is yielding around 8%. With Europe in a long slow recovery, I am expecting share price appreciation on top of the dividends. There is a similar fund, IEUR from Blackrock, which has a much lower “fee”, but it only yields 2.5%. I’ll pay an extra .5% fee for an extra 5.5% yield. Price appreciation has been comparable the last 12 months, but nobody can guarantee the future.
Technically, RSI at the top of the chart has backed off a bit from oversold and reads 60, where 50 is neutral. MACD at the bottom of the chart is turning down, but I don’t lend much credence to it as it was a low volume week. What happens Tuesday and Wednesday will tell the real tale. Stay tuned.
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Rich Comeau, Rich Investing