Market Roundup
Dow -49.71 to 17,082.15
S&P -13.77 to 2,003.69
NASDAQ -42.03 to 4,796.61
10-YR Yield -0.04 to 2.05%
Gold +$0.60 to $1,165.00
Oil -$0.61 to $47.00
You remember 2009, don’t you? That’s when the global economy was coming apart at the seams, banks were failing left and right, and the Dow Industrials was trading for around 8,000.

Well, take a look at this mystery chart. You can see it’s absolutely collapsing — and within a whisker of plumbing the depths set during the Great Recession in 2009. You can also see that it has NEVER been this bad (outside of that recession) in the 24 years for which we have data.

The distressing numbers …

I won’t keep you in suspense any longer. This shows the year-over-year change in Chinese imports in U.S. dollar terms. We have now seen 11 straight declines in a row, one of the worst negative streaks on record. That shows China is consuming much less of the world’s output than it has in several years — a sign of lackluster domestic demand.

That also fits with other data out of China, including information on retail sales, fixed asset investment, manufacturing activity, and so on, that suggest the second-largest economy in the world is continuing to decelerate … and not in a small way. It also suggests we’ll see more “QT” — Quantitative Tightening — out of China in coming months.

Why should you care? Well, there’s been a lot of claptrap coming from Wall Street about foreign economic weakness. The party line is that what happens in China (or Brazil, or Russia, or pretty much the rest of Asia, South America and Europe) doesn’t matter too much to us here at home. Our economy will just keep humming along despite those global problems. Personally, I think that’s the same kind of “the problems are well-contained” garbage we heard back in the housing and mortgage meltdown. We’re already seeing large multinationals like Caterpillar (CAT) and FedEx (FDX) warn that foreign weakness is hurting sales and profit. And we’re hearing from companies like them that layoffs are on the rise as a result.

China is importing and buying less of what the world is producing.

That’s just one mechanism by which the global weakness will wash up on our shores. Look at the lousy September jobs report I wrote about several days ago; I expect that will be only an appetizer, and that even worse readings will be coming down the pike in the months ahead.

So sure, we had a strong rally in stocks last week. But it isn’t being confirmed by the economic data. It isn’t being confirmed by the earnings data. It isn’t being confirmed by the credit markets. And for all those reasons and more, I believe you still have to err on the side of caution/bearishness here.

Do you agree? Does it really matter here what happens in China? Can our economy keep humming along even with imports, manufacturing, retail sales, and more collapsing over there? Are you adjusting your investing strategy based on the latest foreign news, or the big rally in stocks last week? Let me hear about it either way over at the Money and Markets website.

Our Readers Speak

Earnings season is underway … and many of you weighed in my piece yesterday about whether the news will be good, bad or ugly. You also shared your opinions about what to expect in markets as a result.

Reader D. said: “The bears are on solid ground but don’t fully know it yet. No major index has regained its 2011-2015 trendline, and it’s increasingly unlikely they will.

“On the other hand, there’s still a lot of hype about the economy that lingers. That will change as the revisions for GDP and jobs keep coming in with significant downward changes. View the economy as being on recession watch.”

Reader Chuck B. said: “I just read something another analyst said: ‘Cash is like a no-risk call option that never expires.’ That’s a very interesting observation. In a deflationary economy, it might even gain a trifle in value — my own addendum.

“Also, when you sell a stock or bond, you are, in a sense ‘calling’ that cash option, and you either gain or lose. Think of cash like you do stocks, etc. It is a kind of investment.”

Reader H.C.B. added: “I agree with you that technology looks doubtful as a driver of higher stock prices this year, as does health care (After Hillary Clinton took a shot at pharmaceuticals overcharging last week).

Apple (AAPL) looks like a slow mover, slowly increasing earnings at the margin, but no great momentum. It’s acting like a value stock, and has remained stuck around $110.00/share since the August 24 correction. Jon Markman was correct in predicting the initial Apple Watch would be a dud. If China sales of iPhones slow, Apple stock is going to have a hard time moving up much.”

On the other hand, a couple of you suggested U.S. stocks would continue to hold up relatively well vis-a-vis foreign markets. Reader Tom R. said:

“While the U.S. might have some serious problems, take a look at the rest of the world. Where would you rather put your money if you were a person of wealth from China, Syria, or even Europe? The U.S. is the prettiest girl in the brothel. Investing in America has been a safe haven for many years and will continue to be.”

Finally, Reader J.H.M. said: “Buy good stocks that pay dividends, maintain ample cash so downturns can be ridden out without needing to sell to survive, avoid margin borrowing that requires the sale of stock to cover, and remember Will Roger’s advice: ‘Buy low, sell high, and if it don’t go up, don’t buy it.'”

Thanks for the observations. I still remain very concerned about the earnings and economic outlook this fall, and I don’t believe central banks have too many more fingers they can plug in the dike. So that’s why I remain positioned very cautiously — a position I adopted BEFORE the markets started cracking in August.

Don’t hold back if you haven’t shared your opinions yet though. Here’s the link where you can get in on the action.

Other Developments of the Day

● Anheuser-Busch InBev NV (BUD) sweetened its offer for SABMiller Plc (SBMRY) to $104.2 billion … and that was good enough for the beer firm to accept the deal. But now the long, arduous process of trying to get regulatory and antitrust approval around the world begins. It could take a year or more to go through the steps, and no conclusion is assured.

● Not that there was much doubt. But a 15-month-long investigation by Dutch authorities has concluded that Russian-equipped rebels did in fact shoot down Malaysia Airlines Flight 17. The July 2014 crash in eastern Ukraine claimed 298 lives.

● The Republican party has held a handful of debates already. Now it’s the Democrats’ turn. Hillary Clinton, Bernie Sanders and a handful of other candidates will take the stage in Las Vegas. Five more Democratic debates will follow in coming months.

So will you be watching the debate? Will you crack a beer in honor of this latest mega-merger? Or are you more worried that China’s economy continues to go flat? Share your thoughts over at the website when you have time.

Until next time,

Mike Larson