The Evergrande Collapse and Global Stocks
Last week when I wrote about the “Red Light for Some Stocks” in this email, I didn’t mean for the markets to take it as a broad sell signal.
Major stock market indexes have been mostly declining since peaking on Sept. 2. The declines accelerated over the last week, and we had a big tumble on Monday.
Most of the media seem to blame the latest downturn on the fate of home builder China Evergrande Group, also known as Evergrande.
The company definitely is a problem. It engaged in widespread and highly leveraged home building during China’s housing boom. The boom caused real estate prices to surge, putting prices out of the reach of many potential buyers while creating excess supply.
Over at least five years, China’s government has gradually been imposing limits on the real estate sector, its use of debt and the lenders who made loans. The apparent belief is that the state would absorb any losses.
The government is willing to accept short-term pain if it furthers long-term goals. That’s what’s happening with Evergrande and other businesses in China.
Evergrande likely is insolvent. It probably will be unwound gradually. Some lenders and other businesses will be hurt, but the government will continue managing the situation to avoid systemic problems. Remember, this is part of a process that has been going on for at least five years.
The recent decline in worldwide stocks should not be attributed to Evergrande. The company simply isn’t important enough to the global economy or financial system.
As I pointed out last week, many stocks in the United States are at very high valuations. Their prices depend on meeting very high expectations. In such situations, investors start looking for an excuse to sell some stocks.
Investors are beginning to realize that conditions aren’t perfect. Supply chain problems are reducing revenues at many companies and increasing their costs. It appears that inflation is becoming embedded in the U.S. economy. The government also is aiming to reduce profits through regulations and taxes.
And while Evergrande itself isn’t important enough to cause systemic global problems, China’s policies that reduce its economic growth affect the rest of the world. Slower growth in China means slower growth for companies and countries that sell to China.
Commodity producers probably are the most affected and first affected. China’s Asian neighbors also depend a lot on exports to China.
China began slowing its growth earlier this year, and growth recently was down to its lowest level in at least a decade. The effects are spreading to the rest of the world.
As I said last week, the real question for investors is: When the air comes out of the bubble stocks, will other stocks be dragged down with them?
So far, it looks like when investors decide to sell, they won’t limit the sales to bubble stocks.
Who Owns Your Life Insurance or Annuity?
Insurance companies generally are among the most established and safest companies in the United States. They aren’t glamorous because they don’t take a lot of risk. They want to be seen as solid.
But changes slowly have been occurring among some insurance and annuity companies, as The Wall Street Journal recently reported. Of about 400 life insurance companies in the United States, about 50 now are owned or controlled by various investment firms, including hedge funds and private equity firms.
The investment firms see that the insurance companies have been around for a long time and steadily generate profits and cash. After all, Warren Buffett built his conglomerate Berkshire-Hathaway largely with a base of insurance companies. The insurers generated steady cash that Buffett could invest.
The other investment firms see the opportunity. But some of them also believe they can generate more cash and profits by managing the insurance companies a little less conservatively.
Insurance companies are regulated by the states. The states limit investment options and require a certain amount of liquid capital to be retained.
But some of the new owners appear to be looking to stretch the limits of those laws. They also don’t have long-term expertise in insurance.
In some cases, insurance companies are leaving segments of the insurance business and selling their existing policies to investment firms. The investment firms are supposed to pay claims and service the policies, while receiving any additional premiums owed.
Customer service could suffer in these situations, or premiums could be increased. It is a good idea to know who owns your life insurance or annuity. I mean, find out who is the ultimate owner. Was your insurer purchased by an investment firm?
An investigation of the owner of the insurance company might comfort you. Or you might decide it’s a good time to shop for a new policy.
The Fastest-Growing Business: Lobbying
Major proposed changes in the law are great for the lobbying business.
The lobbying business is easy to monitor, because people hired to lobby in Washington are required to register as lobbyists. Tax Notes Today reports that for the second year in a row, new lobbyist registrations are at their highest level since 2009.
Back then, the Affordable Care Act and some stimulus spending were the big issues before Congress.
Now, a number of big spending and tax bills are proposed. In addition to major tax increases, the majority party now holding the reins of power in Washington is proposing trillions of dollars in new spending and programs, including a big infrastructure spending bill.
In the previous decade, there was an average of 2,400 new lobbyist registrations per year. In 2020, there was a 30% increase in new lobbyist registrations over 2019. And so far in 2021, registrations have increased by 14% over 2020.
Remember, these are new lobbyist registrations. They don’t include the army of permanent lobbyists that already registered.
Despite the increases, the new registrations the last two years still aren’t eclipsing the 5,356 new lobbyists registered in 2009.
Most of the lobbying is done by companies, industries and associations formed to represent them.
But the biggest new registrant is an organization called Humanity Forward, which plans to lobby for direct cash benefits to people, such as the advanced child tax credit.
New unemployment claims rose by 20,000 to 332,000 in the latest week. That’s a modest jump from the new pandemic low established the previous week. The increase appeared to be due to the effects of Hurricane Ida.
Continuing claims set another pandemic low, declining to 2.67 million.
The number of people receiving some form of unemployment compensation increased by 178,937 to 12,106,727.
Sentiment among home builders held steady in September after declining significantly in August. The Housing Market Index from the National Association of Home Builders (NAHB) was at 76 in September, following a 75 reading in August.
Housing starts increased by 3.9% in August from the July level. Starts have advanced 17.4% in the previous 12 months.
But single-family home starts decreased 2.8% from July to August and are up only 5% over 12 months.
In August multi-family units under construction were at their highest level since 1974, after increasing 53% in the past 12 months.
Existing home sales declined 2.0% in August from July’s level. In the last 12 months, existing home sales have dipped 1.5%.
Existing home sales are hurt by rising prices and low inventories of homes for sale. The median sale price of an existing home in August was $356,700, an increase of 14.9% in the past 12 months.
The median price is skewed by a high level of activity among higher-priced homes. Recent price increases pushed many potential first-time home buyers out of the market. Sales of homes priced below $250,000 declined over 12 months, while there was a 40% increase in sales of homes priced over $1 million.
In addition, the pandemic distorted home buying patterns in 2020. The inflated number of sales 12 months ago is hard to match or exceed this year.
The Philadelphia Fed Manufacturing Index bounced up to 30.7 in September from 19.4 in August.
Growth in new orders and employment continued. Prices paid and prices received both remained at elevated levels according to the survey on which the index is based.
Retail Sales increased 0.7% in August. Economists were expecting a decline of 0.7%. But July’s sales number was revised lower by 0.7%. Over 12 months, retail sales increased 15.1%.
Excluding autos and gas, sales increased by 2.0% for August.
Retail sales now are 17% higher than their peak before the pandemic recession.
Consumer Sentiment, as reported by the University of Michigan, increased a bit in the first half of September. The Consumer Sentiment Index increased to 71.0 from 70.3 at the end of August.
That leaves the index only a little higher than the 10-year low established at the end of August.
Consumers appear to be concerned about both inflation and the potential effects of the Delta variant of Covid-19. Consumers said buying conditions for homes, autos and household durable goods were at their lowest levels since 1980, largely because of high prices.
The S&P 500 lost 2.06% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.92%. The Russell 2000 declined 1.15%. The All-Country World Index (excluding U.S. stocks) dropped 2.59%. Emerging market equities declined 3.51%.
Long-term treasuries lost 0.15% for the week. Investment-grade bonds fell 0.18%. Treasury Inflation-Protected Securities (TIPS) declined 0.37%. High-yield bonds dropped 0.19%.
However, the dollar rose 0.56%.
Energy-based commodities fell 0.80%. Broader-based commodities declined 2.33%. Gold lost 1.69%.
Bob’s News & Updates
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