U.S. stock markets opened lower after Chinese PMI data came out last night. The number came in at 49.7 in line with expectations, but at a three-year low, the first reading below 50 since February, implying contraction.
Surprisingly, some traders are suspicious of this number. They note many factories near Beijing have been closed for weeks in order to clean up the pollution ahead of the Thursday military parade, and that the September numbers will be better.
Maybe. What's odd is that the prevailing wisdom has been wrong again on China.
The theory has been to go long China for the early part of this week because of the enormous military parades on Thursday celebrating the end of World War II, or at least China's war with Japan. Markets will be closed in China Thursday and Friday.
Yet the Shanghai Composite ended down 1.2 percent, and the Shenzhen fell 4.6 percent.
You really have to wonder at what is going on in China. Four regulatory agencies have issued a joint statement "encouraging" listed companies to take action to shore up their shares. These suggestions include:
1) Pay dividends, which very few Chinese companies do.
2) Buy back more shares. They will provide tax breaks to help do that.
3) Do more mergers. State-owned banks will be encouraged provide loans to companies to do those mergers and acquisitions.
4) Do more restructurings.
But the government says it will not be buying more shares in the open market. For now. This, after spending more than $200 billion to prop up the market since July. So the government is long a lot of shares; their investments are now well under water.
If this is not enough, the government has now begun arresting people on charges of manipulating the market, including, apparently, the head of London's Man Group, one of the largest hedge funds in the world.
The message: invest or perish. Stay long. Selling is a crime. Welcome to the new open market system.
Back in the United States, how out of position are traders? I noted on Friday that after that amazing two day rip up, a lot of shorts covered. So I expect the will spike big as traders again reach for protection, it was over 30 at the open.
How much selling pressure still remains? My bet is that there are others who might want to lighten up who didn't. Market on close (MOC) orders remain an issue, since this primarily represents retail investors buying or selling mutual fund positions.
The big debate will remain, how realistic is it to argue the U.S. has decoupled from China? Our auto sales from Chrysler and Ford were excellent today. China's data was not.