The Next Lehman? I Don’t think So

It was a tepid close Friday, and breadth was even on the NASDAQ, but the S&P 500 took it on the chin as declines doubled advances, and there was two million more down volume than up.

To see the chart, click here.

Portfolio Approach

There are no sector changes this morning in our Hotline Model Portfolio, however, nobody should be buying anything out the gate, as this is the biggest test for the market in 2021. This this is a flash situation, and we are keeping powder dry and suspending the new buy list this morning. 

Action in the bond market and commodities point to a different kind of concern emanating out of China and its giant home lender Evergrande.  It's being talked up as the next Lehman....I did a lot of work on this over the weekend, and while I do not think it raises to that level, it’s an opaque situation and will be talked up. 

This said, we are eager to buy weakness, but once key support is broken, we need to watch to see market resolve before forcing the issue. 

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Today’s Session

Lots of drivers this morning:

• China #Evergrande pressuring global market
• Morgan Stanley calls for 20% drawdown
• Progressive declare war against Democratic Moderates

The China Evergrande story is intriguing as its part China crackdown and part questionable business practices of this behemoth property developer with revenues equaling to two percent of China’s GDP.

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Scenes of homeowners protesting and army like figures pouring into the company’s headquarters on social media have added to the anxiety and concern. 

The question now is how far will China go to return to its Maoist roots as President Xi tried to reel in the nation’s wealthy and large corporations. A cynic would say this is all a ploy to shakedown these companies for billions of dollars, but I’m not so sure….understanding when he was reaching for the top job, Xi ignored critics that said he way would usher in massive income inequality.

If China decouples from the world to the degree hinted, there are a lot of pros for America and workers eager to go to work in futuristic factors and have access to emergency products and industrial metals.

The U.S. ten-year yield is lower by six bps and is the biggest daily decline in over five weeks.

Key support points

• 1.285
• 1.165

As for Morgan Stanley’s call of 20% drawdown, that would take the market to where it was when they initially began calling for a drawdown.  In other words, they have been making this call for a long time.  I don’t think it’s a big deal other than it will get a lot of air time with the market under pressure.