chinese-hanziIt’s a cautionary tale…

Many Chinese investors were so optimistic about the prospects for Chinese stock markets they bought on margin, meaning they borrowed money to buy stocks. Borrowing to invest has been so popular that the amount of margin loans doubled in just six months to about $320 billion, according to Barron’s. Experts cited in the article said, “…margin financing in China is equal in size to Indonesia’s entire stock market valuation and as high a portion as it has been in any market at any time…”

The problem with buying on margin is repaying the loan if stocks move in the wrong direction. Since the middle of June, Chinese stock markets have lost more than $3 trillion, reported CNN.com. Barron’s explained how margin works:

“In China, a typical investor can borrow $1.25 for every dollar of cash she has, giving her what China calls a “guarantee ratio” of 180 percent, or $2.25 (cash and stock bought on margin) divided by $1.25 (loan value). But, as her stock loses value, the guarantee ratio also falls. At 150 percent, the broker will start to issue margin calls. When the ratio hits 130 percent, the brokerage will force the liquidation of the position to meet the loan.”

About 80 percent of the investors in China’s markets live in China. Many have suffered significant losses as markets have moved lower.

The BBC reported China’s market regulator responded to the market downturn by making it even easier for people to borrow money to invest. Apparently, the hope is small investors will put more money in stocks. Regulators also banned investors who hold 5 percent or more of a company’s stock from selling their shares for six months.

By the middle of last week, Chinese markets had stopped losing value. Only time will tell whether they have truly stabilized.

Closer to home, the New York Stock Exchange (NYSE) suffered a computer glitch that halted trading for several hours last week. The NYSE tweeted, “The issue we are experiencing is an internal technical issue and is not the result of a cyber breach.”


Data as of 7/10/15

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.0%

0.9%

5.7%

15.7%

14.0%

5.5%

Dow Jones Global ex-U.S.

-1.5

2.2

-6.7

7.5

4.3

3.0

10-year Treasury Note (Yield Only)

2.4

NA

2.5

1.5

3.1

4.1

Gold (per ounce)

-0.7

-3.3

-13.5

-10.1

-0.8

10.6

Bloomberg Commodity Index

-2.5

-4.8

-24.3

-10.3

-4.6

-4.5

DJ Equity All REIT Total Return Index

1.8

-2.3

6.8

10.1

14.2

6.9

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

*The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* “margin optimism”

Sources:

http://online.barrons.com/articles/margin-calls-threaten-shanghais-tottering-market-1435898134

http://www.cnn.com/2015/07/09/asia/china-stock-market-ground-zero/

http://www.bbc.com/news/business-33425353

http://www.bbc.com/news/business-33456768

http://money.cnn.com/2015/07/08/investing/nyse-suspends-trading/

https://twitter.com/NYSE/status/618818929906085888

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