China's visible hand

As you probably know, China's government has made numerous moves to open their markets internationally in an attempt to boost their markets.  It's worked fabulously.  In fact, it's worked too well.

Wednesday, Business Insider notes the belief in China that the government will prevent or backstop any crash.

"China has been through the planned economy model for decades. This is especially ingrained in the generation of my parents, who make up the bulk of individual investors,"

So the Chinese people have this thought in their minds.  Then they see the government implementing new measures weekly for a year.  A year in which the Shanghai Index rises non-stop nearly 160%.  While this is happening the government is telling you to get involved and encouraging market participation.  As a citizen, how do you not feel the government has major control over the markets?

The question that probably matters most is do just the Chinese people think the government can control the market?  Or does the Government think that as well?

It's pretty clear to us that the government doesn't have any long term control, and their numerous measures just continually get priced in.  The market/regulation easing apparently won't slow down.  They're cutting rates and implementing measures more aggressively as the market now falls.

The other thing that's clear is the government doesn't give a rats ass about it's citizens.  Just today the government allowed people to leverage against their homes to buy stocks.

At some point, the long China trade became about getting foreign investors to buy into their markets.  Maybe that was the idea all along, who knows.  Two trading days after MSCI declared they wouldn't add China A-shares to some major indices, Shanghai topped.

For whatever reason, China's communist government is acting desperate.  It seems they want to rip off anybody and everybody they can.  The million dollar question is why.  The simple answer is because of debt issues that have built up in state owned enterprises over the last decade.  Of course, things aren't always what they seem.

The bottom line is: China is much more of a threat to global economic stability, than a threat of replacing the U.S. as a global economic leader.

This story isn't close to over and it'll be something to watch in the rest of the year.

Trade 'em well!

Greece and the contagion scenario

The EU doesn't want Greece out of the eurozone (Grexit).  They just can't have it at this point..they want Greece to play ball like they have for X number of years.

In this globally competitive world, we've seen over 50 interest rate cuts across the globe in the first half of 2015.  Why?  To devalue currencies and keep economies competitive.

If the EU suddenly kicked Greece out of the EZ, the fundamentals of the Euro would notably improve.  That would likely strengthen the Euro and hurt the competitiveness of the U.K, Germany etc.

Where that gets interesting is that would make Italy and Spain's debt all that much more expensive while taking a wrecking ball to their economic competitiveness.  

Let's not forget all the new debt opened this quarter in euro denominated terms by foreign entities.  THAT is where the contagion comes in.  THAT is where things can go from whatever, Greece to YO!(important). 

This isn't about doing what's best for Greece and since the creation of the Euro zone, it never has been.  Odds of a Grexit are low, but if that happens, uncertainty increases significantly until the next ECB press conference.

Why won't 'sharing economy' companies go public?

Andreessen Horowitz recently shared their bull case on the Venture Capital Tech market.

The presentation of information is slanted, but it's still worth a view.  One of the key points made is this big shift to VC funding as opposed to IPO'ing.

Sharing economy companies are one of the largest growth stories in VC land.  With that, comes the perception the public markets just aren't as attractive as they used to be.  Is that true?  What's less attractive about the public markets?  Why is that?

Private markets are still nowhere near as efficient or liquid as public markets.  That said, it's seemingly becoming easier for private companies to access capital.

Then of course there's the glaring major downsides to being public:  being more in the public eye and having your financials open for the world to see.

Seemingly every week Uber or AirBnB or Instacart are getting higher private valuations. Every now and then, we get a peak at the underlying financials.  The latest provided by Uber's term sheet in a recent bond offering noting hundreds of millions in operating losses.  Which leads us to a meaningful quote.

"The ride-sharing company co-founded by Travis Kalanick remains fiercely secretive about its financial performance, even with prospective investors."

First off, everybody should be secretive about their financial performance as it builds the allure to potential investors.

Second, the name of the sharing economy game is fast expansion.  Thought leaders in the industry suggest customer loyalty will be won locally across the country and globe.  It's going to take years of massive losses to even compete, let alone win.

So you wonder...are these business models sustainable with the immense competition out there?  Is the idea to just create broad economic value and produce just enough cash flow to get by like Amazon?  Can that even be replicated in various businesses?

What's wild is we haven't even gotten to the fact that eventually these companies (in numerous cases) built largely of 'independent contractors' are going to face regulation at some point.  If history is any guide, they'll be largely over-regulated at first.

Shielding themselves from the scrutiny of the public is so important for the industry.  That combined with the incentive to keep things on the down-low outweighs everything else at this point.  We'll see how long it takes before that changes!

Rotation Report: Q2 Macro vs Micro

It's worth keeping in mind how these last two weeks have played out.  In this week's See It Market Linkfest, I noted this sense of calm in the blogosphere.  It's weird.  All quarter there was a prevalent sense of caution in that just kind of disappeared post Fed.

That tied in quite interestingly with this fear that built up on a micro level while the S&P 500 had it's second tightest quarterly range since 1950.  Something's got to give...eventually.  Economically sensitive sectors like the Transports and now Semiconductors have traded poorly while the speculative biotech group trades off sentiment and has blasted to new highs.  We'll see how long this can continue, maybe this is just the theme of the year.

Greece is what it is.  The apathetic sentiment towards it leads one to think the market has some pricing in to do.  We'll have to see if this has some affects on heavily indebted parties, but that'll be down the line.

Moving to the charts...

MACRO

Bounces in treasuries continue to fall short of technical targets, suggesting weakness.  We've got one giant piece of evidence to watch in the treasury market.

The 10 year treasury yield is testing a MAJOR resistance line

Also, High Yield Corporate Bonds are testing  the 200 day moving average.

The NASDAQ to 30 year treasury bonds ratio is testing a major boundary line.  It'd be shocking if stocks outperformed bonds this week.

China via the Shanghai Composite has dropped roughly 20% in less than two weeks as it tests the May low.  Even though we're at a support area, there are no signs of a sustainable low.  This could make for a pretty disgusting outside month.

Is this a topping pattern in the S&P 500 at the major Fibonacci extension level?  Yeah, yeah -  there's never a way to know the future, but that hasn't been necessary with an excellent level to trade against.

Breadth in the S&P 500 continues to deteriorate.  Upside moves still seem quite limited.

Checking in on the NYSE Dashboard we see the Advance-Decline lines still inline with price, but volume notably deteriorating.

Commodities: signs of life

The Ag commodities had a statement week.  It always happens after the market bores us to death and/or squashes all hope.  This kind of reminds me of the current action in the S&P 500 except the opposite (toppy).






Cotton may be completing it's bottoming pattern at this major low.

Oil failed to break below the 50 day MA Friday.

Groups

Consumer Discretionary relative strength is hitting new highs.

Biotech well tell us a lot about the market early in the week.

Regional Banks are a place to fish as the market corrects.

Industrials are testing the 200D MA

Apparel Retail is trading well

 Dana Lyons has noted this key level test in the rails.  Trucking is testing trend support from the 2009 lows once again.

It's looking more and more like the semi deal frenzy marked a climactic top in the group as SOX has started to lag the market and sell-off aggressively. The Rising 200 D MA is only 3% away.

Groups standing out: publishing, steel, restaurant, tourism, water.

Trade 'em well!

NEXT Series: The intersection of Playmation and Virtual Reality

Whenever I come across a new exciting investment theme, I'll tag it and include it in the NEXT Series (eventually it'll be a site page)

Earlier this month Disney and Hasbro announced this new playmation toy initiative.

Fortune with details on Playmation 

This seems like it'll be a big hit with millennial parents; who want their kids to be active and use their imagination.  

The question for the near term is of course, will the kids like it?

The question worth asking for the long term might be:  How does the bridge into virtual reality?  Does V/R become part of the playmation experience?  Which got me thinking...

Is the biggest misconception of virtual reality detractors the idea that oh we'll just slap a headset on and sit there? 

It seems until Virtual Reality headsets can plug into our brains. V/R would be a much more immersive experience if it were an activity.  How do we reach that point?  Who knows, but there is a TON of investment opportunity here in the whole complimentary system around virtual reality.

Check out this cool contraption Hyve made to compliment V/R and physically exhaust us.

Thanks for reading!