#48 S2N: Property only goes up?

Today’s Spotlight

In 2018, Evergrande Group was listed as the world’s most valuable real estate company. Today, it is bankrupt. The stock is down 20% today, a total of 95% from its highs. The reason it went bankrupt is because it had access to very cheap debt and took full advantage, building like there was no tomorrow. However, there was a limit to the demand, and they could not restructure the $300 billion they owed. One of the more dodgy practices bankers deployed was called ‘Hole-digging.’ Developers would set up shell companies that would borrow money guaranteed by the parent company. However, there would be a clause in the guarantee that said it was valid for the whole year except on June 30 and Dec 31. You can’t make this stuff up. Everyone was in on it, including the likes of Pimco, BlackRock, Fidelity, etc…

We can see how this weakness in the property sector has spilt over into the Chinese economy. The Hang Seng has felt it deeply. I am not quite sure that it has reached a bottom yet. I think there is another leg down before this index starts to come to life.

S2N Observations

The SP500 recently broke below its 50-day moving average, ending its 10th longest streak (since 1950) above the 50-day moving average of 162 days.

If you look at the gross exposure according to the NAAIM Index (green), it has dropped sharply from 100%.

I also note the put/call ratio dropping sharply yesterday, another sign that bullishness is fading.

The Yen is getting whacked at the moment. This is a very precarious position for Japan.

US interest rates continue to climb, the 10-year gets closer to that 5% level.

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