The relentless dumb bid.
The Chinese move, ranging from individual investors to corporate entities, into overseas real estate, particularly in West Coast cities in the US, in Vancouver and Toronto in Canada, but also in trophy cities in Australia, New Zealand, and some other countries, has become legendary.
More recently, Chinese companies, supported by state-owned banks and PE firms, have pushed into global M&A on a large scale, including in the US, buying companies lock, stock, and barrel.
But at the same time they’ve been dumping US stocks and bonds.
They’re following the Chinese government, which unloaded $510 billion of foreign exchange reserves in 2015, including $292 billion in US Treasuries, the first ever annual net sell-down, after having religiously piled them up year after year. China still holds about $1.4 trillion in US government debt. So it has a lot left to sell.
That can no longer be said for Chinese holdings of US stocks. From 2008 through the first quarter of 2015, China bought $117 billion of US stocks, riding the big Fed-induced bull market to its peak. Q1 of 2015 was particularly strong, with $20 billion in share purchases.
But in Q2, Chinese investors dumped a net of $14 billion of US stocks; in Q3 $34 billion; and in Q4 they threw another $68 billion out the door, according to a note by Goldman Sachs, reported by MarketWatch. In total, they sold $116 billion in shares over the last three quarters of 2015!
Is this why the market peaked in May 2015? Because by that time, Chinese investors had switched from buying to selling?
From all the stocks they’d accumulated since 2008, a total of $117 billion, they’re now down to their last $1 billion. Of all the purchases since 2006, they only have $25 billion in US equities left. To top it off, they also sold $130 billion of US corporate bonds last year.
Not exactly a vote of confidence in US stocks and bonds, especially since the Chinese are moving so much money into the US to buy real estate and entire companies.
Other foreigners too lost confidence in US equities. And oil producers – budgets mauled by the oil price plunge – also unloaded US stocks:
- Canadian investors dumped $80 billion in US stocks after having been loyal buyers for many years. They still have $102 billion left to sell.
- The Middle East unloaded $39 billion in US stocks, after having already dumped $20 billion in 2014 and $22 billion in 2013. Their holdings are down to a measly $33 billion.
- Europe sold $24 billion, and still has $556 billion left to sell. If Europe gets more nervous about US stocks, watch out!
In total, foreign investors unloaded a net $171 billion in US equities. And they may lose whatever is left of their appetite for US stocks if China continues to rattle everyone’s nerves, and if the dollar continues to rise.
When the dollar is rising – as measured against the largest trade currencies, such as the euro, the yen, and a few others – foreign investors reduce their net purchases of US stocks. When the dollar is falling, they accelerate their purchases. The average annual purchases going back to 1980 under a rising dollar worked out to be $37 billion, according to the report, versus $82 billion when the dollar is falling.
So a falling dollar is good for US stocks because it lures foreign money into the market. And a jumpy dollar, like last year, causes foreign money to flee.
So what’s the outlook for stocks?
Um, despite taking some pretty good licks recently with its bet, Goldman remains a dollar bull. If the bet proves correct, it would send foreign money fleeing. And that’s bad for US stocks.
Goldman forecasts that over the next 12 months the trade-weighted dollar would rise 8%, including 8% against the yuan, 16% against the euro, and 20% against the yen. So this could get ugly for stocks: According to Goldman’s estimate, foreigners would unload another $50 billion!
That scenario doesn’t include European investors getting spooked. They’re still sitting on $556 billion in US stocks that they can unload. Even 30% of it would work out to be quite a number. And that would be even worse for stocks.
But don’t worry! We’ve got a corporate hocus-pocus machine, a little worn-out perhaps, but still functioning. And at its core is Goldman Sachs itself!
Goldman estimates that US corporate buybacks will total $450 billion in 2016 – way more than its estimate of foreign selling. Yes, our trusty financial engineering hocus-pocus machine, the relentless and dumb bid that purposefully buys high to push share prices up. That companies prop up the market by buying back their own shares mostly with borrowed money is, as the report put it, “a means of generating shareholder value.”
While that would be down from $561 billion in share buybacks last year, and nothing to write home about, it would still be head and shoulders, so to speak, above the five-year average of $360 billion and the ten-year average of $240 billion. But it would not measure up to the all-time record of $710 billion in 2007, a huge and final bout of “generating shareholder value” just before it all collapsed.
So Goldman is betting that corporate buybacks will come to the rescue as foreigners are fleeing – just when this sort of financial engineering has begun to backfire against the very companies doing it. Read… This Also Happened the Last 2 Times before Stocks Crashed