We know that only 5% of the people in China are directly involved in the Chinese stock market. We know that the market itself seems to be rigged by the government, and that stocks simply close down when sellers appear. We know that the government manipulates data and that its central bank has no transparency at all. Just last night, the bank mistakenly released some bullish comments about linking the Shenzhen exchange to Hong Kong that were five months old and it caused the Shenzhen to rally more than 3%. Talk about phony!
But for all of our derision of the Chinese stock market, it's pretty darned clear that its bottom on Aug. 26 is the bottom that changed the world. If you go back to that day you will see that the index bottomed at 2927 in what now looks to be a panic low.
If you recall those dark hours, we would spend much of the night watching what seemed to be the Chinese government battling beleaguered sellers, insider sellers and short-sellers, taking them all on with a series of new rules, penalties and tough talk about the patriotic need to buy and hold. It was enforced Warren Buffett-ism, and it was laughed at and scorned by so many smart people that you figured it was only a matter of time before this index really crashed into oblivion.
Forget that the index had kinda sorta crashed already, falling from 5166 on June 12 down to that once unthinkable 2900 level. What passes for intelligentsia in this business -- the hedge funds who buy puts and short anything that seems like it's in trouble and then blasts it out to everyone -- panicked badly at that level and we got a cathartic selloff in our markets, particularly the industrials.
Things got so bad at the really darkest hours of that Shanghai index rollover, that the Fed let it be known that it had to go on hold because of worries about China.
Not only that, but we got rumblings that we had found the next Long Term Capital, the next black hole or black swan or black Monday or whatever that would pull us all down: Glencore (GLCNF), the giant, secretive European trading firm that was into the banks for $50 billion -- or was it $100 billion or perhaps $200 billion? Every time I heard about it, the amount -- the exposure! -- grew. Glencore sounded like a made-up Bond villain: It was capable of bringing down the Western world on a copper bet, not unlike how Goldfinger was going to bring down the Western world on a gold bet, by tainting Fort Knox with nuclear waste.
Well, now, look back. The Chinese government won. They fought the good fight against the short-sellers, they arrested people for spreading truth about stocks, and they managed to shut down insider selling. They backstopped every stock that could take the index down and they calmed things to the point that we are now up 500 points from that bottom. Not only that, but the consumer has accelerated in strength since then. We know from Action Alerts PLUS charity holdings Apple (AAPL) and Starbucks (SBUX), from McDonald's (MCD), from Nike (NKE) and from Alibaba (BABA), that something's changed in China. Things are better with the consumer, something that's been buttressed by car sales, which have accelerated and are, in many cases, above where they were last year at this time.
And now we have learned, as of last night, that Glencore had a real good quarter. Its trading operations made more than $2 billion. Its debt reduction plan is right on schedule. Sure, the metals it mines aren't doing much better. But that hasn't stopped the companies involved in those segments -- think Freeport-McMoRan (FCX) or Caterpillar (CAT) -- from rallying, so why should it stop this one from going higher.
Now, remember, in this market, there are no all-clears. It looks like the Chinese government's global bond sales brought enough money home to stabilize the stock market, but it hasn't stabilized their manufacturing growth, just their consumption. We have no idea about how Glencore's really doing. But we do know that both China and Glencore seem to be off the critical list, and we know that because the Shanghai index and Glencore's stock are alive and well and exceedingly profitable vs. where they were back in those nasty late August days.
My conclusion? Sure, keep deriding that Shanghai index, but the truth is that when it bottomed we bottomed, and when it bottomed the black hole that was Glencore got filled in. The industrials and oils, which had been in a tailspin, were saved. And, with only scattered moments, we haven't looked back since then.