July 8, 2015

Sleight of Hand

At the risk of being too abstract this environment reminds of the sleight of hand maneuvers that one might experience close-up to a magician or perhaps a street card game table. One that underscores what I believe is a primary reason for the confusion fueled volatility being experienced in global equities. Namely, while the events in Greece play out the press, in its zeal to occasionally elevate a story above reasonable merit, draws attention away from the proverbial elephant in the room, and that would be China.

Not to suggest the Greek situation isn’t dire, but in my previous opinion, more dire for the citizens than for rest of the world. And not that China is the only bump in the road however, while all this has been playing out Chinese equities, for example as measured by the iShares China Large-Cap ETF (FXI) have declined by over 20% since April 23rd.  And while it’s important to remember that, similar to our markets, the need for a correction is even greater for the Chinese who have enjoyed equity appreciation on the back of vigorous growth over the last ten years. In short, unlike the Greek situation, the correction in China also comes with sizable current account surpluses with many western countries, including the US. Those surpluses will allow the Chinese government to defend the financial institutions and provide support for its widespread industrial resources. But to concur with the risk of being too optimistic, the surpluses also represent the complex inter-connectedness of the Chinese economy with its industrial partners creating a reasonable amount of fear on the global investing stage, and that includes us.

So in the recent correction in the US equity markets, and the race to find the cause to attribute it to, my message remains the same. Not to simply rely on the importance of patience, weakness in the Chinese stock market is important but it too will give way to the next exploitable crisis. Today the New York Stock Exchange halted trading of all stocks due to a technical problem. Important to consider that the NYSE is not the sole exchange for the stock market and therefore its problems are widely contained.

In the next few days the Federal Reserve Bank might speak about rates, the Chinese might increase its current programs to stabilize their markets, a solution might occur between Greece and the EU, and the effect of all these events on investing such as oil declining due to a strong dollar, interest rates declining in spite of a Fed that wants them to go up, might reverse. When it comes to the digital universe and the ability to see the entire world in a glimpse unique to our times it’s worth noting the obvious flaws in having too much access to information. In my opinion, having experienced many corrections in the past, including the recent watershed event, this is a correction, not a systemic crisis.

As is customary during past declines (and there have been a few) there will be some activity in most accounts to take advantage of both desirable risk opportunities and for taxable clients to harvest some gains at the same time. Please don’t hesitate to call me if you have questions or concerns, I’m available for everyone at any time.