Stocks weaker on China "growth scare." We are in a bit of a global "growth scare" as China has decided to put the brakes on its property market. While there is no evidence that China is going to restrict liquidity in other sectors, it is nonetheless spooking markets.
China's cabinet, or State Council, said Friday that it plans to enforce a 20 percent capital gains tax on the sale of second-hand homes, as well as higher down payments and interest rates.
Huh? The markets drop because of restrictions on secondary homes?
I know it sounds baffling, but consider this: according to Jefferies, the secondary property markets account for a significant share of all property in the Tier 1 cities: 57 percent in Shenzhen, 52 percent in Shanghai, 43 percent in Beijing, and 39 percent in Guangzhou. And prices of those second homes have been rising much faster than primary homes.
Remember, a lot has been rising on the "China improving" bid, and that has been working. Raw material prices have been up, and China has been restocking essential supplies like iron ore and copper. Steel prices have been up.
But recently, there have been reports that the restocking is coming to a close. If China tries to slow its property market, that will have a significant effect on commodity inventories, which will grow.
This is a critical issue because with Europe still in recession, and the U.S. stuck in sub-two percent growth, China is one of the few areas of the world with growth anywhere near eight percent.
Bears make an even larger argument: too much commodity supply has been brought online based on growth rates people saw in 2003-2008. Bearish traders note that having that supply coming on line while demand is being constrained is not good.
If demand in China is being constrained, and U.S. growth is sub-two percent, with recession in Europe continuing, than companies like Alcoa (AA), U.S. Steel (X) or Cliffs Natural Resources (CLF) may be seeing sales as good as it gets for this cycle. That's not good, since their earnings are significantly lower than people expected and balance sheets are highly levered.
Commodity-rich countries like New Zealand, Australia, Brazil, and South Africa are down one to two percent. Commodity stocks started weakening in the middle of February and are down again today.
Stocks: it's not "all about the Fed."
I heard it all last week, as we were approaching historic highs on the Dow Industrial Average and S&P 500. The idea that the stock market rise has been all about the Fed and nothing but the Fed is popular in some circles, particularly among those who are engaged in an ideological war with the Fed over the wisdom of QE2 and QE3. Don't believe it.
There's no doubt in my mind that the markets would be lower without the Fed's involvement, though how much lower is unclear.
But while the Fed is a major factor, it's also about earnings. And that's perhaps the main reason stocks are moving forward: we are sitting at record earnings.
That's right: record earnings. 2012 saw earnings of over $103 for the S&P 500, an all time record and up about four percent from 2011...I know, everyone is frustrated that there has not been much top-line growth, but corporations are still finding ways to increase productivity.
This happened despite two percent GDP growth!
And there are expectations that earnings will hit $111 this year, a gain of about seven percent. All of that could change if we get a growth scare out of China, as I discuss above, but my point still stands: it's still very much about earnings.