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New Year, Old Panics

New Year, Old Panics

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Tuesday, 05 January 2016 10:18 AM Current | Bio | Archive


I expected that there will be more panic attacks in the stock market this year. Sure enough, yesterday morning, the New Year started with a panic attack triggered by a number of issues.

One was about the global economic slowdown, as evidenced by weak M-PMIs in China and the US. Another was about renewed tensions in the Middle East. Haven’t we done this before?

Can’t we find something new to panic about? The weakness in the FANG (Facebook, Amazon, Netflix, and Google) stocks seems to be a new development and a new worry.

Consider the following:
 
(1) China panic. The old news that seemed to trigger the panic attack during the first trading day of the New Year was that China’s manufacturing sector is weak. Yesterday, I questioned that widespread notion by observing:
 
“China’s official manufacturing PMI edged up to 49.7 during December. It’s been just below 50.0 for the past five consecutive months. While this has been widely portrayed as a sign of weakening production, the output component of the M-PMI continues to well exceed 50.0, with a November reading of 52.2! In fact, this component hasn’t been below 50.0 since January 2009. The weakest component has been employment, which has been below 50.0 since June 2012, suggesting that automation is boosting productivity and reducing the demand for factory workers.”
 
The official M-PMI composite averaged 49.4 during 2015. Its output component averaged 52.2, while its employment component averaged 47.9.
 
Yesterday morning, the market was spooked by the unofficial Markit/Caixan M-PMI, which edged down to 48.2 during December from 48.6 the month before. In recent months, this measure has been more volatile and weaker than the official M-PMI compiled by the China Federation of Logistics & Purchasing.
 
The market ignored the very good news on China’s NM-PMI, which rose to 54.4 in December, the highest since August 2014. The story was covered in a 1/3 Bloomberg article titled “China’s Two-Speed Economy Stays Intact as Factories Slump, Services Gain.” The story observed:
 
“The official purchasing managers index edged up to 49.7 last month from a three-year low of 49.6 in November, the National Bureau of Statistics said Friday. The Caixin China Manufacturing PMI index released Monday showed a drop to 48.2 last month from 48.6. Both factory gauges were less than the median estimates in Bloomberg surveys. The official non-manufacturing PMI rose to a 16-month high of 54.4. Numbers below 50 indicate deterioration.” 
 
The world’s second-largest economy is going through a long-sought transition away from investment and manufacturing toward consumption and services. The PMI data suggest that the transformation is on track. To smooth the transition and to maintain a 7% growth rate in real GDP, Chinese leaders recently signaled that they will take further steps to support growth, including widening the fiscal deficit and stimulating the housing market, to put a floor under the economy’s slowdown.
 
Of course, yesterday’s plunge in Chinese stocks was also driven by investors anticipating the end of a ban on share sales by major stakeholders at the end of this week. Bloomberg reported yesterday: “China’s CSI 300 Index had just tumbled 5 percent, triggering a 15-minute trading halt, and investors were scrambling to exit before getting locked in by a full-day suspension set to take effect at 7 percent. When the first halt was lifted, the market reaction was swift: it took just seven minutes for losses to reach the threshold for a second suspension as volumes surged to their highs of the day.”
 
It’s interesting to note that while the Shanghai-Shenzhen 300 index is down 35.2% from last year’s high on June 8, it is still 66.2% above its 2014 low on March 20.
 
(2) Middle East panic. The Saudi government and its staunch ally Bahrain severed diplomatic ties with Iran yesterday. Iranian protesters set the Saudi embassy in Tehran on fire over the weekend following the execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. Saudi Foreign Minister Adel al-Jubeir said late Sunday that his country would no longer deal with “a country that supports terrorism and sectarianism.” In an interview with Reuters on Monday, he said Saudi Arabia will cut air traffic with Iran, end commercial relations, and stop its citizens from traveling to the Islamic republic. Iranian Supreme Leader Ayatollah Ali Khamenei threatened that Saudi rulers would face repercussions for the execution of the Shiite cleric and that “the divine hand of revenge will take the Saudi politicians by the throat.”
 
This latest round of tensions in the Middle East might have contributed to yesterday’s stock market rout. Oil prices initially rose on the news, but then settled lower. This confirmed that the excess supply of oil is weighing so heavily on Energy stocks that even a serious escalation of geopolitical tensions between the Saudis and Iranians couldn’t provide any support.
 
(3) US M-PMI panic. The weakness in the Energy industry is depressing manufacturing activity in the US. Yesterday’s ISM report showed that the US M-PMI fell from 48.6 during November to 48.2 last month, the lowest reading since June 2009. It tends to be highly correlated with the average of the business composite indexes compiled by five regional Fed banks: Dallas, Kansas City, New York, Philadelphia, and Richmond. Interestingly, this regional composite index actually improved in December, though it averaged 0.0 following four months of slightly negative readings.
 
The problem with blaming low oil prices for the weakness in US manufacturing is that the Dallas Fed survey, which includes much of the Southwest’s oil patch, was mixed in December. The general business index sank, but the production and employment indexes were buoyant. It may be that the strong dollar and weak global economy are weighing on US exports more than the weakness in energy-related businesses.
 
(4) FANG panic. All of the above may represent good fundamental explanations for yesterday’s stock selloff. However, the main reason for the rout may be profit-taking by investors who had lots of gains in the FANG stocks last year and wanted to take their profits this year instead of last year for tax-reporting purposes. The “Nifty Nine” includes the FANGs and Microsoft, Salesforce, eBay, Starbucks, and Priceline. Both groups were up more than 60% last year.
 
Technicians have been warning about the divergence between the S&P 500 market-cap weighted and equal-weighted indexes since last summer. Last year, the former fell just 0.7%, while the latter declined 4.1%. Joe and I weren’t concerned, noting that the larger stocks in the S&P 500 have been underperforming the smaller ones since the start of the current bull market. So some catching up by the former ones made sense to us. Nevertheless, we admit that the breadth issue is a concern, especially seeing that less than 50% of S&P 500 companies are trading above their 200-day moving averages. Furthermore, the NYSE advance/decline line peaked at a record high last year during the week ending April 24, and has been declining since then.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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EdwardYardeni
I expected that there will be more panic attacks in the stock market this year. Sure enough, yesterday morning, the New Year started with a panic attack triggered by a number of issues.
stock market, investors, panic, attacks
1187
2016-18-05
Tuesday, 05 January 2016 10:18 AM
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