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Unusual things that happen in public markets


kiwing100
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So, would this be a recognition of panic selling at the highest levels? Or just an acceptance of the idea that interference in the markets is quite acceptable (on the downside that is. No one ever moves to end the partying on panic buying.)

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The figures just got bigger ...US$2.2trn of market cap affected or 33% of the market cap of the entire market ...

 

This news itself could be fueling sales by investors / speculators for fear of being unable to sell their shareholdings in case their stocks are halted in trading ... (akin to a bank run where you fear that you are unable to get your money out of your bank, so you take it out in case)

 

 

http://www.bloomberg.com/news/articles/2015-07-08/china-trade-halts-hit-2-2-trillion-as-state-intervention-fails

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Also I suppose if you own shares in a company that has halted trading, then you sell your other shares that are still trading. 

 

If you have a margin call, and need to put up more cash to maintain your position, and you don't have any spare cash and the only way to raise cash is to sell your shares, then this is even more urgent to sell your shares.

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Someone supposedly highly educated I know of (overseas graduate degree, works at a Fortune 100 company in a senior manager role) was happy that shares of companies she owns were halted for trading. She thought this was good, as it meant they couldn't go down, at least for now.

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Just heard on Bloomberg

 

There is a restriction on the number of index futures which can be short sold in China.

 

This has the impact of long selling of stocks by hedge funds as they can no long hedge out their market risk ...

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If you look at the 1929 to 1931/32 period there was ample opportunity to calm down, but that didn't stop the markets from swinging wildly and plummeting much further over time. So I don't know if these actions will change much. If the market is seen as overvalued when these interventions occur, people will still want to bail asap whenever trading resumes.

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It seems to me that this should have the effect of making things worse when they eventually reopen full trading. I'm a big fan of buying after huge panics, and I still might buy something here. However, if the government of China has a recent history of freezing investments, that increases the discount that I would need to feel I was being adequately compensated for the risk.

 

If the marginal buyers are willing to pay lower prices after a freeze, then prices will be lower.

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The key is to look at hong kong stocks. It spreads out to HK, but the other stuff doesn't. I wouldn't touch (or even know) how to buy those Chinese listed stocks.

 

Economist take on it:

The plunge of nearly one third over the past four weeks has left the dream in tatters. Although the market is still up by 75% over the past year, many mom-and-pop investors were late to the party. Less than a fifth of respondents to a large online survey by Sina, a web portal, reported making any money off stocks this year.

For the government, the fall is damaging. Officials are seen to have promised the population a bull market, only to lure them into a bear trap. A flourishing of gallows humour in mobile-phone chat groups captures the sentiment. “Friends, don’t run, we’re here to save you,” cry the valiant soldiers in one joke, representing the state coming to the aid of the beleaguered market. Their refrain soon turns to, “Friends, don’t run, or we’ll shoot you.”

The warning signs had been flashing for some time. ChiNext, a board for high-growth companies, reached a price-to-earnings multiple of more than 150 at its height in early June, in the same region as American tech stocks during the dot-com bubble of the late 1990s. When share prices started falling, many assumed that regulators would stay on the sidelines and let the necessary correction unfold. But they lost their nerve after the market fell nearly 20% and negative headlines started to pile up, even in the domestic press.

Attempts to steady the market have been frantic and futile. Interest-rates have been cut; short-selling capped; IPOs halted; share-buying schemes, backed by central-bank cash, hatched. “We have the conditions, the ability and the confidence to preserve stockmarket stability,” blared the People’s Daily. Still the rout has continued.

The CSI 300, an index of China’s biggest-listed companies, fell 18% in the eight trading days after the rate cut. Some $3.5 trillion was erased from China’s stockmarkets, more than the entire value of all listed firms in India. By the end of July 7th trading in over 90% of Chinese stocks had been suspended, either at the request of the firms concerned, or because they had tumbled by the daily limit of 10%. “The government won’t let us take our money out of the market, and we don’t have the confidence to put any more into it,” said Wei Xinguo, a chef at a noodle restaurant in Shanghai and one of the country’s 90m stockmarket investors.

The sharpness of the slide has raised worries that Chinese growth itself is about to fall off a cliff. Mercifully, the stockmarket appears to be as disconnected from economic fundamentals on the way down as it was on the way up. At the same time as shares nearly tripled from the middle of 2014 until early June, China slouched to its slowest year of growth in more than two decades. In the past couple of months, the economy has actually started to improve. A burst of fiscal spending on infrastructure looks to have stabilised the industrial sector, while property prices, long in the doldrums, have started to tick up again.

The stockmarket is still just a small part of the Chinese economy. The value of freely floating shares is about 40% of GDP, compared with more than 100% in most rich countries. Stocks account for just 15% of household assets, so their slump should have a limited impact on consumption. The systemic consequences of the margin debt are also limited. The funding has come from brokers, not banks, and equates to less than 1.5% of total bank assets.

There will undoubtedly be some spillover from the panic. Futures contracts for raw materials from lead to eggs fell by their daily limit on July 8th as investors rushed to get their hands on cash. On international markets, the price of iron ore, which China consumes the bulk of, slid. Yet risks of a systemic nature remain remote.

The longer-term consequences could be severe, however. Like any big, sophisticated economy, China needs a healthy, functioning equity market. For investors from households to pension funds, stocks should, in theory, provide a better return over time than low-yielding bank deposits. For companies, equity financing would be an alternative to borrowing from banks, helping reduce their reliance on debt. The scrutiny and rules that come with a share listings should also help improve corporate governance.

Before the crash, China was inching towards reforms that would fix at least some of the distortions in its market. A programme launched last year connected markets in Hong Kong and the mainland markets. Though subject to strict quotas, it promised to introduce more of an institutional presence on China’s exchanges. Regulators had stepped up supervision of insider trading and had also planned to change the way initial public offerings work, giving companies more control over the timing and size of their listings. But as the government’s all-out, if ineffective, response to the crash shows, it is reluctant to cede control.

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This is a potentially bigger issue than the Greek drama.

 

 

It's also another barrier to investing in Chinese equities.

 

Potentially? It's already several times the size of the worst case scenario in Greece. The only reason Greece matters is for the precedent it sets for larger countries like Spain and Italy, but that's all based on rumor and speculation as there hasn't been much said on the appetite of Spain or Italy to exit the euro.

 

The loss in Chinese equities is already measured in trillions.

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The loss in Chinese equities is already measured in trillions.

 

Shanghai's still up 70% TTM, so I guess the gains are in the trillions too.

 

No idea how it'll all end...

 

Badly one might guess...  The whole thing is ludicrous.  It seems very similar to 96-01 in the US only alot dumber. 

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Guest Schwab711

China is interesting because it's equity ownership is so insulated. It is Chinese citizens and local governments who are over-leveraged and likely to experience nearly all of the losses. Will there really be a national recession/depression? I'm guessing there will be pockets of severe depression in China while most of the country sees a small setback. I doubt we'll ever see reliable statistics to know for sure.

 

I wouldn't change my investing habits based on this, but I think the US is setup to be the largest beneficiary of the global issues at the moment. A collapse in Chinese markets would finally bring the Rnembi closer to fair value (it is so overvalued and China uses it like overvalued stock) and make the US more competitive in manufacturing (more accurately, China would become less competitive as they should be). I think China has made a lot of decisions to artificially boost their competitive advantages. All that pull-forward demand is going to cost them for a significant period of time. Similarly, Greece leaving the Euro will cause the Euro (and other European currencies) to increase due to the improved fundamentals. However, most of Europe is already struggling competitively at their current FX levels so further increases are going to truly hurt. The US dollar seems to have a long runway for appreciation and the US economy is relatively growing so it can absorb it. This tremendous dollar appreciation is creating an unimaginably large cushion for future issues. To give you an idea of the magnitude of the dollar appreciation, the dollar has appreciated 20%-25% since 2011 lows, representing an increase of ~$10T in wealth purchasing power and ~$500b - $750b in annual demand, if it is sustainable.

 

I think Singapore, India, and Brazil are nicely set up to absorb much of the demand previously aimed at China. I am probably more pessimistic on China than most. I have talked to dozens of Chinese ex-pats who lived on the mainland as recently as 1-10 years and nearly all of them have concerns of stability (anecdotal evidence representing a whopping 0.00001% of their population haha).

 

China is a much bigger deal than Greece in my opinion. I feel like Greece is a minor issue outside of Euro appreciation concerns (and the effect it would have on exports).

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Didn't the 1920s Wall Street, etc. see a massive new retail interest in stocks.  Seems like China has been a roaring twenties style environment for years now. An unshakable faith in government intervention and markets being able to master all economic problems sort of replaces fear and trepidation and considered second thought. 

 

In China I imagine that eventually reality will hit and people will realize that they may be in trouble and that the higher-ups will only be bailing out their friends (strategic alliances) and not the little guys.

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In China I imagine that eventually reality will hit and people will realize that they may be in trouble and that the higher-ups will only be bailing out their friends (strategic alliances) and not the little guys.

 

People already realize this. They just thought they could front-run the other suckers.

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Didn't the 1920s Wall Street, etc. see a massive new retail interest in stocks.  Seems like China has been a roaring twenties style environment for years now. An unshakable faith in government intervention and markets being able to master all economic problems sort of replaces fear and trepidation and considered second thought. 

 

In China I imagine that eventually reality will hit and people will realize that they may be in trouble and that the higher-ups will only be bailing out their friends (strategic alliances) and not the little guys.

It's interesting how the mood has changed in the last month or so - I remember being in China in May/June this year and my cousin who works at GSAM in hong kong mentioned that it was probably a good time to buy stocks since "so much money had flowed into real estate people began to realize that stocks were relatively undervalued" (to me it could also suggest that real estate was relatively/absolutely overvalued lol).

 

Then today when I asked her what it looked like on the ground over there she replied via wechat (copy and pasted below):

 

People are fainting in the street. the big boys took off with all of the money, left all of the aunties and uncles holding the bag. its so disgraceful.  its not even close to being over.

 

I did not remind her she had not 30 days ago suggested an entry into equities  ???

 

 

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Guest longinvestor

Didn't the 1920s Wall Street, etc. see a massive new retail interest in stocks.  Seems like China has been a roaring twenties style environment for years now. An unshakable faith in government intervention and markets being able to master all economic problems sort of replaces fear and trepidation and considered second thought. 

 

In China I imagine that eventually reality will hit and people will realize that they may be in trouble and that the higher-ups will only be bailing out their friends (strategic alliances) and not the little guys.

It's interesting how the mood has changed in the last month or so - I remember being in China in May/June this year and my cousin who works at GSAM in hong kong mentioned that it was probably a good time to buy stocks since "so much money had flowed into real estate people began to realize that stocks were relatively undervalued" (to me it could also suggest that real estate was relatively/absolutely overvalued lol).

 

Then today when I asked her what it looked like on the ground over there she replied via wechat (copy and pasted below):

 

People are fainting in the street. the big boys took off with all of the money, left all of the aunties and uncles holding the bag. its so disgraceful.  its not even close to being over.

 

I did not remind her she had not 30 days ago suggested an entry into equities  ???

Folly is the same world over!

 

Saving habits are much more entrenched in Asia than elsewhere, hopefully this newfound frenzy for speculation is a bad memory. As reported recently, more Chinese are following Buffett and Munger. That's a good thing and I believe will be absorbed broadly there.

 

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The one constant in an ever-changing world - human nature.  People's desire to get rich quick trumps rationality.  So the Chinese stock market lost over $3 trillion in value over the past few weeks or so.  But yet the academics will still argue that the market was "efficient"  . . .

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The loss in Chinese equities is already measured in trillions.

 

Shanghai's still up 70% TTM, so I guess the gains are in the trillions too.

 

No idea how it'll all end...

 

Sure, but 1987 was similar though U.S. stocks weren't up nearly as much as China is now. The stock market ended in the green, though it took it more than 2 years to regain its highs. I guess a one day drop of 22% is still enough to put you up there with the best of financial crisis regardless of that the 12 month rolling return was.

 

That being said, stock markets all around the world crash on that day. Many by more than the U.S. I wouldn't have expected that type of market correlation back in the day, nor am a familiar enough to know what caused it, but I certainly don't think world equities will be insulated this time around either.

 

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