Tuesday, August 25, 2015

View on a Sea of 'Mostly' Green

The financial press and media pundits are busy with one expose after another on the future of the U.S. equity markets.  The downturn in the market that really began in late June 2015, has been unnerving to say the least.  The successive ‘legs’ down that began in the third week in August have been especially worrisome for those who had just taken new long positions in U.S. securities.

Many had tried to blame the U.S. equity market declines on the China Central Bank, which had devalued its currency earlier in the month of August.  Yet it seems to be China authorities who have come to the rescue of the U.S. equity market by cutting interest rates and reducing the reserve requirements for China banks.  These actions were taken as some encouragement by European and U.S. investors, who finally began buying stocks.  Indeed, European markets ended higher in the first day of trading following the China monetary actions even though the China stock exchanged had experienced yet another day of steep declines.  The U.S. market opened the day higher, registering throughout the first trading day a consistent sea of ‘mostly’ green on traders’ computers.


It is clearly a time to be cautious and even wary, particularly of the China economy.  China’s economy is shifting.  Its commodity-driven, industrial complex is slowing down.  All of the commodity markets, beginning with oil and copper appear to have adjusted to that reality, but the equity market traders seem to have been slow in understanding the memo.  There are multiple impacts from this adjustment on both revenue and costs and analysts have needed to reconfigure estimates and valuations.  The valuation step appears to have been taken for them with a violent downward move in stocks across all sectors and industries.

It is also a clearly a time to trade opportunistically.  China’s economy is not growing at the pace that it had been, or at least at the pace government officials claimed it had been growing.  However, the Red Dragon still has a bit of fire in its belly.  There appears to be a strong entrepreneurial spirit in China that has brought some interesting company’s to the world, which have added value to China’s and the world economy with creative products or with innovative distribution.  Jack Ma with his Alibaba Group (BABA:  NYSE) is a high profile example.  However, there are many others that succeed in anonymity.

The U.S. economy is fragile, but not dead.  New home sales in the U.S. have been volatile, but overall home sales are near an eight-year high.  The housing market benefits by lower commodity prices.  Unemployment in the U.S. was unchanged at 5.3% in the last measure in July 2015.  The availability of lower cost commodity inputs is likely to create jobs and some individuals might take jobs further away from home if they can count on cheaper gas to get them there.

In the next two posts, two micro-cap ideas that prove life goes on after a market rout.      

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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