As of Wednesday July 8, 2015
As you are most likely aware - there is a lot going on in the equity markets today – both here and globally. So far, as volatile as it seems, the wild swings of the past few days here in the U.S. have been around 1%. The broader market index of over 8,000 stocks closed yesterday 2.96% below its all- time high on April 24th of this year. The S&P 500 closed yesterday at 2.5% lower than its all-time high on May 20th of this year.
Even with all this volatility, the market’s overall direction is still an uptrend – however there is no doubt that this trend is under pressure. It will take a few days for the markets to decide its next move or direction. Markets bounce around on news which we will discuss below, but the main market direction is determined by profits and today is the start of the reporting season for 2nd quarter 2015 profits, with Alcoa announcing late this afternoon. The real issue will be profits not Greece or China, or a trading glitch that has hindered the NYSE trading today and forced a halt in trading on that exchange.
Greece is a small country with a population that is approximately 1.5 million higher than the Chicago Metropolitan area with an annual GDP (Gross Domestic Product) (GDP) equal to about half of the Chicago Metropolitan Area. Greece had agreed to a plan to lower annual government operating deficits as a per cent of GDP in exchange for long term financing from the European Central Bank and the International Monetary Fund among others. The ECB and IMF hold around 70% of this debt. Greece was actually performing well and was very close to meeting the agreed upon requirements to continue to receive financing.
Recently, the people of Greece elected a new government on the promise that the new Premier would renegotiate the deal to obtain better terms for Greece. However, for the Euro member countries to grant special terms to Greece they would then have to do it for other countries including Spain, Italy, and Portugal.
The fact that taxpayers of the other Euro members are the ones backing a large part of these loans make them very unpopular and most likely- taxpayers would punish their governments by not re-electing them if they gave in to the Greek request. The fear that is roiling the markets is not really about Greece, but contagion from countries with severe debt issues around Europe and even beyond the Euro area will start to default to obtain better terms – which could become a big issue.
Greece is currently in default and not eligible for further funds from the ECB or IMF. The onus is on Greece to bring a new proposal forward in the next couple of days. Highly unlikely that Greece will prevail unless the proposal is very, very close to what they have already agreed to.
If Greece is forced to leave the Euro area and go back to the drachma, it will be very painful transition for the Greek people but have basically no effect on the U.S. or our economy.
China’s Shanghai Stock Exchange Composite Index is trading around 30% lower than its all- time high on June 12 of this year. However, the market has had an incredible run up over the past year rising over 250%. The market is still up over 180%. The problem is that much of this run up was accomplished with the use of margin (borrowed money). However, unlike the U.S., very few people but the wealthy in China invest in the markets. No doubt - this Index is in bear territory. The real issue is this just a correction due to the rapid run-up or a signal of further distress in the Chinese economy. As we have discussed before, China does have real estate, debt and shadow banking issues, but is it enough to put their economy in recession is the major question. If it is just a correction, then it will moderate and not be an issue. Unfortunately, it is too early to tell and causing some jitters overall.
As to the NYSE stoppage today – the question is – is it really a glitch or some kind of broader issue since United Airlines also had computer problems worldwide earlier this morning - grounding all their flights for most of the morning? Again, it is way too early to tell. Other U.S. stock markets continue to operate efficiently so market liquidity does not appear to be an issue.
We realize that this can be very scary as a lot happening at once. We will keep you informed as the 24/7 news is generating an extreme level of noise which can make it even more difficult to decipher what is really happening.
The Dorion-Gray Team
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