China Sets the Tone, FDIC Falters, Fed Makes a Profit, India’s Surprise and More!

by Addison Wiggin & Ian Mathias

  • Chinese stocks plummet, worldly markets follow… what’s behind today’s sell-off
  • Dan Denning on taking profits in the twilight of the U.S. stock rebound
  • India reports better-than-expected GDP growth… why our Mumbai partners are still hesitant
  • Another compelling argument against U.S. banks… Dan Amoss serves the cold, hard data
  • Plus, signs of the times: American’s vote to throw the bums out while the free market backlash hits Hollywood


  China has once again set the tone for our Monday market forecast. Roll the videotape:

Chinese traders dumped shares early this morning after a popular magazine rumored that the booming Chinese loan market is cooling off. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down.

Thus, as we charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August.

But still up around 50% for the year, is this the time to pile back into China — the great hope of the global market rebound? With the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings.

If you’re debating buying this dip, you should check this out: Earlier this year, Addison Wiggin penned a report that spelled out a “triple timebomb” that would derail the global rebound… one of which was a faux boom in Chinese stocks.

  China’s sell-off has hit just about every asset class today, especially commodities. You know the drill by now: Commodity traders of the world have pinned hopes on China’s rise, and every time they falter, oil and copper hit the bid. Light, sweet crude is down over 3% as we write, to $69 a barrel. Copper shed about 3% as well.

  Gold took a little hit this morning. Traders raced out of stocks and into the dollar. Thus, the spot price shed about $10 at the New York open, and now rests just below $950 an ounce.

  China frazzled the U.S. market too. The S&P 500 opened down 1%.

“This rally is on borrowed time,” opines Dan Denning. “We don’t know when. We don’t know why. But we do know what. And the what is that stocks are going to price in much lower earnings and investors are going to pay less for those earnings. Expect a lot of fall volatility.

“Energy investors ought to take heed, as well. Lately, there’s been a nice correlation between the oil price and stocks. The better the economy, the better it is for oil and earnings. Both have gone up.

“We’re still bullish on energy for a lot of reasons. But if the party ends sometime in September/October/November, you can expect lower oil and energy prices. That means if you have gains in energy stocks, you’d want to think about trailing stops and profit taking. In fact look for profit taking on the share market as a precursor to a new move lower.”

  Oil service giant Baker Hughes bought fellow oil field tech company BJ Services today. The transaction will cost BHI about $5.5 billion.

“I’ve said over and over that there are only a small number of world-class firms that have the technology to find, drill and extract the world’s hydrocarbons,” says Byron King, who holds Baker Hughes in the Outstanding Investments portfolio. “Now there is one less.”

“BHI’s goal in this deal is to expand its international presence, and to leverage on BJ’s pressure pumping expertise. Now BHI can compete for the growing market for large integrated projects, by incorporating pressure pumping into the firm lineup.


“I expect that this acquisition will be good for the long term prospects for BHI. And it illustrates that there are other opportunities out there, smaller firms that are candidates for a takeout.”

  While the Chinese growth story is faltering today, India is forging ahead: The Indian government said this morning that its economy grew 6.1% in the second quarter, narrowly beating Wall Street estimates. That’s really pittance compared to its typical 9% or greater growth over the last three years… but hey, we’ll take 6% these days.

“However, in light of the poor monsoons, the possibility of the growth of this magnitude continuing for the rest of the year looks remote,” write our Indian partners at “There are some who argue that manufacturing and services are fully capable of filling in the void left by agriculture, and hence, growth may not be as badly impacted. With rural India accounting for half of India’s consumption, such an assumption for the time being looks a bold one, indeed. Furthermore, if the central bank starts tightening monetary policy in the wake of high inflation that food prices are likely to bring, it may hurt growth prospects further. All in all, things point to a growth in the region of 6% with a downward bias.”

  It’s Monday… time to find out which banks kicked the bucket over the weekend: With failures in California, Minnesota and our home state of Maryland, the FDIC has bumped the yearly total of failed banks to 84. The three shuttered banks had about $1.9 billion in assets, which ended up putting a $446 million dent in the FDIC’s deposit insurance fund.

  “More than one in four banks announced an unprofitable quarter,” notes Dan Amoss, referring to the FDIC’s latest quarterly report, which we mentioned Friday. “There is still a long road of pain ahead for bank shareholders… here’s the crux of the FDIC report:

“Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

“The FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in an Aug. 14 Strategic Short Report alert. The new figures — the moves from December 2008 to June 2009 — are highlighted in the dotted lines at the far right of this chart:

“You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.”

  The FDIC has put the government (read: taxpayer) on the hook for another $80 billion in potential future losses, The Wall Street Journal reports today. That sum is the totality of the FDIC’s “loss share” agreements — in which the FDIC promises to take a huge amount of possible future losses if another bank agrees to take on a failed financial’s assets.

The FDIC currently predicts the $80 billion in backstops will end up costing the insurer “just” $14 billion… $4 billion over the present balance of its deposit insurance fund. We’ll keep an eye on this one.

  The Fed has made $14 billion in paper profits from emergency loan programs, the bank quietly announced today. Since the start of their unusual programs about two years ago, itty bitty interest rates and fees on loans worth hundreds of billions of dollars have actually netted the private/public bank an embarrassment of riches. 

So where’s the money? Which banks owed what? What about the other programs, like the AIG bailout? Who knows… no one can audit The Fed. They just wanted you to know this morning that they’ve made a freaking killing bailing out the risky bets of their Wall Street buddies.

  While it’s a little off our beat, we’d be remiss not to mention this: If given the chance, 57% of Americans would vote to remove every single member of Congress. A Rasmussen poll released yesterday gave participants two rhetorical choices: Either let ’em all stay or throw the bums out. When the dust settled, 25% said they would maintain the status quo, 57% would want a clean slate and 18% weren’t sure… or perhaps afraid they would end up on some “dissident database.”

  Last today, another sign of the times… looks like capitalism will remain an easy target for a while. Here are the two feature films at this year’s Venice Film Festival:

Capitalism: A Love Story — Michael Moore’s new flick. While we trust this guy as far as we can throw him, the trailer looks like he spends a bunch of the movie making Wall Street execs and Congress people squirm, which is usually fun.

The Informant! — Matt Damon plays Mark Whitacre, the Archer Daniels Midland exec who exposed the companies lyin’ and cheatin’ in the ’90s.

  “I agree with Bill Bonner,” a reader writes, referring to our issue on Friday, when we suggested, with Bill’s help, that many depression hurdles are still ahead. “We will be going through a lot of suffering and adjustments. My expectation is that we’ll probably come out of this crisis around 2016. This is based on the 17-year economic cycle.

“With 84 bank failures and 416 banks on the list about to go kaput, and the TBTF zombie banks, we have a long way to go. BTW, check out the’s star ratings on banks. They have replicated the FDIC’s CAMELS rating very successfully. All the three banks that failed last Friday already had a 1-star rating (the lowest rating).

“As we all know, we will see more banks, retailers, restaurants and companies catering to conspicuous consumption fail. I have started, a site where you can predict which company is going to implode next and when. Heck, this may just be Monopoly 2.0… at least trying to have some fun with the destruction all around us.”

The 5: That’s the spirit.

  “Robert Prechter’s analysis indicates that we are in for a major retracement similar to what your graph shows,” writes an Elliott Wave fan, responding to the same edition of The 5. “He is also predicting deflation, instead of inflation, which will affect the prices of oil, gold and silver to the downside. The other contrarian prediction is the dollar will strengthen through all of this mess.”

The 5: Not a bad forecast at all. Bill Bonner shared a similar sentiment during his presentation this year at our Investment Symposium. To paraphrase him: Betting on inflation is starting to feel too easy.


Ian Mathias

The 5 Min. Forecast

P.S. Have you checked out Chris Mayer’s latest report yet? He’s calling this investment the “biggest opportunity of the new world economy.” Be among the first to read it, here.


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