Friday Failure: China Data So Bad - It's Bad!

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 |  Includes: AAPL, XLF
by: Philip Davis

Wheeeeee - I told you so!

Had to get that off my chest because I certainly did tell you so. We've been "ignoring and soaring" on the way back to our Must Hold Levels (and those are only halfway to a real bullish breakout - to keep things in perspective) and while we have been able to put on a better show than we did last August - it's only the 10th and the volume that took us from 1,350 to 1,400 on this Bespoke Chart has been the lowest volume of the entire year - certainly not enough to break on through to the other side.

openingimageWithout volume, we're just building a house of cards that can collapse at any moment - not really the environment in which we want to be paying top dollar for stocks, is it? And think about what happened in the fall of 2011 - we began "Operation Twist" - yet another form of QE in which the Fed purchased close to a TRILLION Dollars worth of long bonds over the past year to plow down interest rates and create another massive stealth bailout for the financials.

And the financials have led the market higher with XLF flying from $11.50 last Fall to $15 this week - a 30% recovery in a sector that makes up about 15% of the S&P so about 4.5% of the S&Ps move from 1,100 to 1,400 (27%) or 63 points is the result of the financial sector's recovery. Tech is 19% of the S&P and Apple (NASDAQ:AAPL) is 20% of tech so, without doing a lot of math, let's give 60 points to AAPL as well - although maybe it should be more as AAPL is up from $360 to $620 - up 72%, while the entire Nasdaq (which AAPL is 20% of) is only up from 2,400 to 3,000 (25%).

That's why we call it the AAPLDaq - I mean really, what is the point of the rest of the index when all they do is drag AAPL down? In Stock World Weekly of July 15th, I was quoted as saying AAPL had become "too big to succeed" with their $600Bn market cap ahead of earnings and they are having tremendous trouble getting over that $620 line but also, they are holding up surprisingly well after a disappointing earnings report as investors seem to be willing to give them a pass. Still, if AAPL can't add $30Bn of market cap (+5%) - how are we going to expect the Nasdaq to get back to the March highs of 3,134? Where will these inflows come from? AAPL was $641 at that time and has been holding up the Nasdaq all month - God help us all if AAPL shrugs.

imageClick to enlargeChina is our Atlas, holding up the other side of the world, and we were up early this morning in Member Chat (3 a.m.) to catch Europe's open as we got some TERRIBLE import and export data from China at 1 a.m., which showed their trade surplus dropping 28% to $25.1Bn and, much, much worse, exports increased by just 1% year over year, vs. 8% expected by the usual, clueless Economorons.

"Deflation, not inflation, is the greatest short-term threat to the Chinese economy," says IHS Global Insight, following last night's report of accelerating declines in factory-gate prices. "This was the moment when stimulus was supposed to bite. It didn't." "We don't believe official data," says Charles Dumas, who thinks GDP growth slowed to 1% in Q2 (vs. government estimates at 7.6%).

Rather than adding stimulus, as the bulls are counting on, China made a big move to remove the punch bowl last night as they increased gasoline prices 4.3% - the first time in 5five months they've allowed prices to rise. That led us, in early morning member chat, to short the oil Futures (/CL) at the $93 line as well as the Russell (/TF) at 798.5 and gasoline (/RB) at $3 - all huge winners of course as Europe, as expected, opened weak - but we'll get to that tragedy later.

imageClick to enlargeBack to China. Chinese refiners will still need a further price increase of 600 Yuan for gasoline and 700 Yuan for diesel (about 6% more) if they are to produce the fuels profitably with international crude prices around $100 a barrel "At these fuel price levels, we believe that most Chinese refiners still are unlikely to break even," Scott Darling of BCS said. "We now see partial fuel price reform in China as a 2013 event, especially considering the upcoming premiership change and the country's economic growth outlook this year."

With everyone counting on China to save the global economy - there's a heck of a lot of evidence that agrees with Dumas' assessment (not to mention Hendry, Katsenelson and myself) that China is fudging GDP numbers grossly higher and may, themselves, be moving into a recession. Look at today's evidence - imports down, exports, down, housing off a cliff. Our own July Import/Export data shows ex-petroleum pricing on imports was off 0.4% (China doesn't sell us petroleum) while we ourselves are getting 0.6% less for the things we export. This is NOT a healthy global economy.

As you can see from the above chart - it's only the U.S. that's holding up Chinese exports at all. Europe and the emerging markets are in total demand free-fall - already as bad as the fall of 2008. WAKE UP PEOPLE - 2008 was NOT a good year to be buying stocks. These are the FACTS - we (well, not us) are ignoring the FACTS and speculating on stimulus to save us but how can stimulus save us when we can't even accept the fact that we need to be saved?

S&P 1,400 is not acceptance - it's DENIAL!

Hong Kong cut the top range of their growth estimates by 33% last night - aren't they part of China? Strangely they only see 1-2% growth for 2012 and even that may be optimistic after a Q2 print of 1.1% - but at least that was up from 0.7% in Q1. The only difference between Hong Kong and the mainland is that it's harder for Hong Kong, filled with International, audited companies - to cook the books.

Back over in Europe, former ECB Chief Economist Otmar Issing, who now serves as an economic adviser to Germany said: "Germany's guilt over the Second World War doesn't oblige it to write blank checks to eurozone countries that fail to reform their economies. Germany can't be blackmailed with its past," he said. This is especially true of aid for troubled euro zone states, "which does not solve the problems in these states."

So let the games begin.

Disclosure: I am short DIA, EEM, AMZN, XRT, QQQ.

Additional disclosure: Positions as indicated but subject to change.