THE GREAT FALL OF CHINA

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BAM MARKET WRAP

August 28, 2015
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THE GREAT FALL OF CHINA

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WHERE WE HAVE BEEN

Wow! What a week it has been. It all began late last week with renewed weakness in China as the China bourses fell precipitously continuing the weakness that has been present since June. Just over the last week, China fell almost 30%! When US investors woke up Monday morning, stock futures were indicating losses of 3-4% but the actual initial sell off was 1100 Dow points and a 6% decline. There was a large amount of back and forth throughout the day before the markets settled into 4% losses for the day. A rally on Tuesday was foiled in the last hour and markets dipped further. Wednesday and Thursday saw impressive rallies that have many investors asking if the worst has passed. With the Dow traversing over 10,000 points in all of its gyrations, it has been a tumultuous ride. Despite the impressive run-ups, the markets have only recovered half of the losses suffered over the last month. From peak to trough, the S&P was down 12% over that period. Next week will tell us much about where this market is headed.

WHERE WE ARE HEADED

We will have a lot of Fed speak over the next couple of weeks, as the Federal Reserve is set to meet on September 16 and 17. A couple of weeks ago it was almost a foregone conclusion that the Fed would raise rates at this meeting but recent events have created a reason for the Fed to pause. There is no doubt that the Fed wants to raise rates but they also want to be careful not to short-circuit a weak recovery. In many ways, the Fed is in a no-win situation. If they raise rates, there is the real possibility that the added drag on the economy will further stunt growth. However, not raising rates would send the message that the economy is so frail that it cannot withstand even a very modest increase. It will be interesting to see the market reaction either way. China also will dominate the news over the next several weeks. Their markets show no sign of stabilization despite the efforts of the Chinese government to stimulate their way out of the weakness. We are entering a historically volatile time in the market. With all of the potential pitfalls ahead, a prudent investor should be wary and exercise extreme caution. While V bottoms have been the norm over the last few years, there is reason to believe this time will be different. There has been a tremendous amount of technical damage done to the market and many longer-term technical indicators have turned decisively bearish. We believe we will revisit the lows hit earlier this week. If they do not hold, then things could get really nasty, really quickly. The next decline (probably early next week) will be instructive, as we will see if the recent strength is just a reaction to the oversold market or the resurgence of new buyers into this volatile market. Extreme caution remains the favored and wise course.

HOW WE ARE DOING

With the erosion of market strength over the last several weeks, our portfolios had sold nearly all of our positions leading up to the market events of the last week. Accordingly, our portfolios were largely unchanged throughout the market weakness. We are not in a hurry to jump back in but will be watching carefully to see if the market can find a bottom. The recent decline and the potential for more weakness ahead, will set the stage for a great opportunity for those investors that missed the carnage of the last week.

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Tidbits
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TREADING WATER - It's a little-known but startling fact: The average buy-and-hold stock market investor spends 74% of his or her time recovering from cyclical downturns in the market (calculated from 1900 - May 2015 by Ned Davis Research).

AT THE BACK END - The highest closing value during the year for the S&P 500 stock index has occurred in the final 4 months of the year (i.e., September-October-November-December) in 10 of the last 12 calendar years (source: BAM Research).

STOCKPILE INCREASE - The inventory of crude oil in the United States was 456.2 million barrels as of Friday 8/14/15, up +25.8% in the last 12 months. The 456.2 million barrels are separate from any oil stored in the "Strategic Petroleum Reserve" which has a capacity of 727 million barrels (source: Department of Energy).

RISK OF RISING RATES - The average interest rate paid by the government on its interest bearing debt was 2.337% as of 7/31/15. The average interest rate paid by the government on its interest bearing debt was 4.382% as of 7/31/08 (7 years earlier) or 2% greater than today. Every 1% increase in the cost of debt on our nation's $18.2 trillion debt total is equal to $182 billion per year in interest expense (source: Treasury Department).

BIG DEBT - $7.1 trillion of the $18.2 trillion that the US government has in outstanding debt (39% of total debt) matures in the next 5 years (by 2020) and will need to be paid off or refinanced (source: Treasury Department).

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Actually, our tumultuous week started Monday a week ago as we braved a windy and rainy day to trek to Knoxville to move Carter into his off-campus apartment. It was a wet and busy day but, as a junior in college, it gets a little easier each year to get him settled and to know that he will do well. He was excited to see his old roommates and to get back to work. On Thursday we said goodbye to our baby as we drove to Clarksville to drop Sarah Beth off at Austin Peay. That one was a little more difficult for me to say goodbye to my youngest. She is a precious young woman and had the apprehension that all freshmen have. However, by all accounts she is doing great and had a wonderful first week of classes. She will be home this afternoon for the weekend to celebrate her birthday. Despite the whirlwind of emotions, Kelly and I are adjusting well to the empty nest. In a word it is great! We are loving having time with each other and having the freedom to do what we want on our schedule. It is the first time in 23 years that Kelly has not been a full time mom and she is loving it! However, I am sure we will have another emotion-filled weekend as we send Sarah back to school on Sunday afternoon. I am hopeful that this Monday is not as big of a rollercoaster as the last two!

With Labor Day just around the corner, we hope you are enjoying the last vestiges of summer.

Sam and Bo

Your financial partner for twenty years and counting because managing your money never gets old.

We continue to make posts to our blog throughout the week so check it regularly if you want to see our thoughts. You can access it by following the link below.

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Sam Bills - (865) 525-1329

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Bo Bills - (615) 371-5928

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BAM Market Wrap is produced and distributed regularly via email by Sam C. Bills, Jr. of Bills Asset Management 3001 Flagstone Drive, Franklin, TN 37069 Phone (615) 371-5928 Fax (615) 250-4903 - www.Billsasset.com

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