WHY DOES THE STOCK MARKET ONLY BREAK ON DOWN DAYS?

By Pater Tanenbaum

China’s authorities are now finding out that one cannot have everything at once. If a credit bubble is to be deflated, asset prices cannot grow to the sky at the same time. Rising stock and real estate prices require “fuel” in the form of money supply inflation, and a slowdown in credit extension automatically brings about a slowdown in money supply growth in the modern-day fractionally reserved fiat money system.

As a result, even if the market should begin to bounce from here, it will very likely remain a “sell” until money supply growth has accelerated again for a while. This is however unlikely to happen anytime soon, as China’s banks are increasingly reluctant to add to their burgeoning credit problems (these don’t exist officially, but everybody knows they are simply masked by accounting tricks).

Prime minister Li Keqiang wants to reform China’s economy and is also unlikely to order banks to massively increase their lending again. He may of course eventually well be outvoted by others in the politburo, but at the moment, he remains in charge of economic policy. Note in this context that stock prices fell again on Monday after Li Keqiang failed to mention the stock market crisis in an official statement on the economy.

Conclusion

No bubble can remain aloft without a heavy dose of monetary inflation. The fact that China’s authorities, including its central bank, have been unable to stem the decline stands as a stark warning to the many Western investors who seemingly believe that central banks are nigh omnipotent entities run by magicians. This is not the case. Once an asset bubble begins to burst, there there is nothing central bankers can do to stop it – and we have plenty of bubbles awaiting their turn in the barrel.

China Soars Most Since 2009 After Government Threatens Short Sellers With Arrest, Global Stocks Surge

Submitted by Tyler Durden on 07/09/2015 06:57 -0400

Here is a brief sample of some of the measures the Chinese government and the PBOC have unleashed in just the past ten days to prop up the crashing market include:

a ban on major shareholders, corporate executives, directors from selling stock for 6 months
freezing more than half (1400 at last count per Bloomberg) of the listed companies from trading,
blocking fund redemptions, forcing companies to invest in the market,
halting IPOs,
reducing equity transaction fees,
providing daily bailouts to the margin lending authority,
reducing margin requirements,
boosting buybacks
endless propaganda by Beijing Bob.

But it wasn’t until last night’s first official threat to “malicious” (short) sellers that they face charges (i.e., arrest), as Xinhua reported yesterday:

[Ministry of Public Security in conjunction with the recent Commission investigation of malicious short stock and stock index clues ] correspondent was informed on the 9th morning , Vice Minister of Public Security Meng Qingfeng led to the Commission , in conjunction with the recent Commission investigation of malicious short stock and stock index clues show regulatory authorities to the operation of heavy combat illegal activities.

And SCMP confirmed:

China’s police will investigate clues pointing to potentially “malicious” short-selling of Chinese shares, state news agency Xinhua says on Thursday. The investigation will allow authorities to “punch back” against unspecified illegal activities, Reuters reports Xinhua saying on its official microblog, citing unidentified sources.

… that the wall of Chinese intervention finally worked. For now.

And since this is all about one thing, the stock, market, it is worth noting that the Shanghai Composite Index had dropped as much as 3.8% to a 4 month low before the news that the cops were going to arrest anyone who used a wrong discount rate in their DCF, when everything suddenly took off, and the SHCOMP closed a “Dramamine required” 5.8% higher, the biggest daily increase since March 2009!

“As China beefs up its efforts to rescue the market, with even the public security ministry involved, market sentiment is recovering slightly from a panicky stage earlier,” Shenyin Wanguo analyst Qian Qimin says by phone

This is how some other Chinese markets fared: CSI 300 +6.4% led by industrials, consumer staples; the Shenzhen Composite Index +3.8%; all ChiNext shrs trading today were limit up a day after virtually the entire market was locked limit down.

The best and briefest summary comes from China Southern Fund Management chief strategist Yang Delong, who said that the government efforts “hit the right spot.” Well, yes, when you threaten to arrest sellers, it does tend to have a short-term effect. The only escalation from there is arresting anyone who doesn’t buy which in turn would promptly lead to this.

Market opened up 250 and only finished up 32.

That is a really bad omen for the stock market. There are more violent down days dead ahead.