What are these people so terrified of?
Clearly the markets are not allowed to have even a normal correction before the Central Banksters leap in with more stimulus. This morning, China stepped up their game by directing their banks to "support" infrastructure projects (more empty cities and airports will fix everything!) with a new round of bond issues. The China Development Bank and Export-Import Bank of China have received additional funding from the State Administration for Foreign Exchange (SAFE) for the same purpose.
The Chinese Government is even showering love on the casino operators in Macau pledging to introduce more policies this year to support the city Government support could include allowing more mainland Chinese cities to offer individual visas, and introducing multi-entry permits to make it easier for people to gamble.
To support firms, the government will expand tax breaks and tax advantages now granted small firms to larger firms as well. In addition, incentives to engage in R&D activity will be increased and broadened. The government also hopes to increase foreign trade through cuts in certain import and export duties. Unfortunately, all this is just putting a band-aid on a severed limb as the Corporate Debt situation in China is in a full-fledged melt-down:
This week, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble, not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.
As noted by Zero Hedge: It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x. As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt ($3.6Tn or 30% of China's GDP), the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore,there has been a further deterioration in financial soundness among our sample."
China's mainland markets are closed until next Thursday but Hong Kong opened back up this morning and popped 3% on stimulus news because MORE FREE MONEY trumps a looming economic disaster - apparently...
We, of course, remain a bit skeptical and it should come as no surprise to our regular readers that we shorted the S&P this morning at 1,924 (with tight stops above) - which is the same place we shorted it yesterday (see post, see Tweet) for a fantabulous $1,700 per contract gain as we dropped back to 1,890 (you're welcome!).
This morning we're also long again on Silver (/SI) as it tests the $14.40 line - that's the easiest money you'll see all week next to the Micron (MU) trade idea I told you about yesterday which was our play of the week for the Options Opportunity Portfolio over at Seeking Alpha. The trade idea we published Tuesday morning was:
- Buy 10 Jan $14 calls for $1.95 ($1,950)
- Sell 10 Oct $15.50 calls for 0.50 ($500)
- Sell 5 Jan $13 puts for $1.17 ($585)
That's a net cash outlay of just $865 on a spread that is now, thanks to MU's earnings last night, $1,500 in the money above $15.50. We need $15.50 to hold, through October expirations but we feel good about that - especially with 6 Fed speakers lined up today to prop up the markets. Even at yesterday's close, we could have taken net $1,080 and ran for a very quick $215 (24%) gain in 3 days but we knew we could do much better than that!
All these Fed speakers should be great for our silver longs and those suckers pay $500 per penny, per contract - so very exciting if we get a big move but we'll take our money and run if $14.50 is rejected for "just" a $5,000 per contract gain. Above $14.50, we set that as a stop line and do it again (you're welcome in advance).
Obviously we're expecting a bearish Non-Farm Payroll report to trigger our index shorts (and we had several plays for our PSW Members) and that will both tank the markets, drop the Dollar and boost gold and silver as it puts the Fed firmly back in the easing camp. Also, we knew it was going to be bad BECAUSE they have 6 (SIX!) Fed speakers scheduled today to spin the disaster.
8:30 Update: TOTAL DISASTER!!! Not only are Non-Farm Payrolls only 142,000 (down from 203,000 expected by leading Economorons) but they have revised August down 37,000 jobs (21%) and that fake report is what rallied the markets back from S&P 1,910 at the beginning of the month! Fortunately, you all listened to me yesterday, and last weekend and on 9/4 (after the last BS NFP report) when I wrote "Hedging For Disaster: 3 Ways To Save Your Assets In A Market Collapse" with all sorts of ways to protect yourself from exactly what's happening.
Of course our favorite way to protect our portfolios is with CASH!!! and I wrote about that too in "Back To Cash, Back To Basics: Buying Stocks For A Discount" on 9/8 and, on 9/14 in "TGIF! Thank God We're In Cash." I do not point to old articles to brag or to say "I told you so" (though I did tell you so), but to allow you to go back and read what we saw at the time in retrospect so that, next time we're in a similar situation - you will know what to do. Isn't that the whole point of investing?
Wow, as I'm writing this, silver is skyrocketing over $15 an ounce and those /SI contracts are up $25,000 each. See how useful it is to understand these market dynamics? Happy Friday!!!
Obviously we're taking that money and RUNNING - greed kills.
Meanwhile, the S&P Futures (9:08) are down below that 1,890 line for the same gain as yesterday so that's our stop now. So far, the Fed's Rosengren, Harker and Kocherlakota have all swung and missed in attempts to forestall the sell-off though they have managed to drop the Dollar 1%, which is helping to prop up stock prices and, of course, our lovely metal longs.
What an exciting way to start our morning and, if you think things are bad now - just wait until we get the Factory Order Report at 10am! That one I told you about on Monday...
Have a great weekend,
- Phil