Evergrande may become Evertiny - Your Money September 24th 2021

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Emotions ran hot this week as investors panicked over a perfect storm of bad news that sent the bulls to the sidelines. It started in Asia on Monday as rumours swirled around beleaguered real estate giant Evergrande and its nearly $300 Billion dollar debt. I imagine angst riddled  Bankers from here to Beijing were madly scrambling to check the covenants on their debt instruments in the event Evergrande decided to default on interest payments.  For some it probably evoked memories of the toxic debt crisis of 2007. Remember the old adage: When you owe the bank a million dollars you are in trouble. When you owe the bank $300 billion dollars, the banks are in trouble.  Bottom line, bankers are fretting over the prospects of the Chinese government not bailing out their real estate darling and it set the stage for a possible major negative event. Having said that, I read a lot of reports suggesting most of the biggest banks in the world can weather the storm. The real fear is the possible domino effect to suppliers, customers and joint venture partners.

To make matters worse, we started the week with a bit of a taper tantrum. You may recall the last time the US Central bank began to ease off on its monthly bond buying program, interest rates spiked and stock markets tailed off. The risk of course is the longer central banks pump money into a financial system the greater the likelihood of inflation setting in like concrete and we all remember what happened in the 1970’s. As an example, Fedex reported earnings of $4.37 per share well below the street estimate of $4.92. Furthermore, the company refused to provide investors with an outlook for 2022. No surprise the miss was due to rising wage and transportation costs and of course they further announced a 5% increase in domestic shipping rates. That’s inflation folks.

And last but not least, Congress continues to grandstand and push for a laundry list of what I believe will be unattainable grandiose spending plans rather than passing the trillion dollar infrastructure spending bill that has already been approved by the Senate. It boggles the mind that Democratic Congress members are standing in front of an empty net and arguing for a second penalty shot before they take the easy shot. Pass the Bill, raise the debt ceiling and then negotiate more social spending bills.

No surprise then that equity markets sold off on Monday morning followed by light losses on Tuesday. Fortunately on Wednesday Jay Powell gave another dovish outlook on interest rates but acknowledged there is a strong possibility that a reduction in their monthly bond buying program (The US Federal Reserve is currently purchasing $120 billion in bonds per month and as it does so, the sellers are given a big fat cheque for their bonds and in turn must invest it someplace else like stocks and real estate) will likely start sometime around November or early December. This is predicated on the continuing economic recovery and the passage of an infrastructure spending bill. If politicians fail to pass the necessary Bills (one Bill to increase the debt issuance by the US Government and the other to increase infrastructure spending), he stands ready to defer his commitment to reduce bond purchases. US investors bought the dip and stock prices recovered…well some of them, aka what we call the “back to normal” stocks like financials and industrials, while some of the big name tech stocks could not find a solid bid. Facebook, Amazon and Microsoft struggled a bit this week.

Of course in Canada, while we were not standing in line to vote, we watched a knee jerk reaction by investors selling stocks and jumping into bullion on Monday and then erasing all the gains on Thursday. Copper made a similar pattern while crude oil dipped slightly to start the week and then steadily gained through the rest of the week. Also of note, China has increased its pressure to eliminate crypto currencies which hit most if not all of the cyber currencies include Bitcoin. And last but not least it seems the US Government has approved a deal that permits Huawei’s Chief, Financial Officer to leave Canada in exchange for a deferred prosecution agreement. Hopefully once she returns to China, two Canadian citizens will see their prison sentences lifted and returned home.

Turning to next week, investors will need to digest US GDP, pending home sales, consumer confidence and inflation, plus a smattering of corporate earnings. Nothing that looks like it will upset the apple cart. In corporate news, Intel breaks ground on a new chip factory.

Stay Safe and Happy Trading.

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Steve Bokor

Steve Bokor

Portfolio Manager