China’a Shanghai composite index was down by 6.7% last night and for the month of August declined by 22%.  The Chinese index closed at a three-month low and the loss last night alone was its second single biggest one day loss over the last 15 years.  Many pundits are saying that the stock market action in China has little influence on the U.S. and other major global indices and markets.  I disagree. 

All one has to do is to look back to August 2008.  After trading in a sideways pattern between the Spring and late July of 2008, China’s Shanghai Composite index began a slide that would culminate with a 16% decline from 2844 on July 30, 2008 to 2380 on September 1, 2008.   By September 12^th, which was before Lehman announced its bankruptcy the index had declined to 2077, representing a 27% decline.

Many blamed the sub prime credit crisis for the bankruptcy of Lehman and the meltdown of the U.S. capital markets between the middle of September of 2008 and March of 2009.   I believe that the real culprit was significant decline in the Chinese stock market between the end of July 2008, through September 12, 2008.  The sell off in the Chinese market ignited wide spread fear for other markets and this resulted in the panic selling of the Euro and buying of the U.S. Dollar because it is the predominant safe haven currency.  The move down in the Euro versus U.S Dollar created only more anxiety because it created havoc for those U.S. companies who had been reliant on a week Dollar to generate revenue and profit growth.

The bottom line is that if the Chinese index does not recover and continues its sell off investors should expect a sharp decline in the U.S. and other key stock markets in September and October.   

Merkel losing ground to the left in Germany’s early regional elections

German Chancellor Angela Merkel and her political party experienced some weakness in the recent German elections as leftist political parties gained ground in the weekends regional elections.

Comment:      One of the reasons why all previous super or secular bear markets dating back to 1802 have lasted for between eight and 20 years is because of political moves to the right or the left.  This move by Europe to the left will become more of an issue because there are many former European countries, which have very high unemployment.  The citizens of these countries have not experienced unemployment before because they were members of communist countries.

US Consumer confidence hits 4 month low 

Comment:  Consumer confidence numbers have continually disappointed.  This is a major reason why I believe that deflation and not inflation is the biggest risk to the U.S. and global economies.

Merger and acquisitions activity hits 15 year low in August

Thomson Reuters data showed announced U.S. M&A for the month totalled $13 billion, its lowest since February 1994, while global M&A stood at $72 billion, the lowest since February 2003.

Year-to-date, however, European M&A has suffered even more, with total deal value halving to $378.4 billion. U.S. mergers, at $441.5 billion, have fallen 40 percent from a year ago.  Fees for completed deals stood at $694 million in August, the lowest since records started in 1998.    

Comment:  A fall off in Merger and Acquisitions activity is very telling because the theory is that a downturn in share prices and market cap valuations should increase merger activity as larger companies should want to take advantage of compelling low prices.  Before the Super Bear is over many companies will use stock swaps and not cash to make acquisitions.  This would be very negative for the world’s large investment banks including the U.S.A.’s J.P.Morgan, Goldman Sachs and Morgan Stanley.