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DOW – 204 = 15,666

SPX – 25 = 1867

NAS – 19 = 4506

10 YR YLD + .14 = 2.13%

OIL + 1.07 = 39.31

GOLD – 14.50 = 1141.40

SILV .10 = 14.80



Earlier this week, leading Asian markets fell with the Shanghai Composite Index closing with a 7.6% loss and the Nikkei down 4.0%, while other key Asian markets closed with milder losses and Hong Kong ended up in positive territory. European markets were broadly higher, led by the first rise in the FTSE 100 in 11 sessions; the FTSE closed up over 3%; the Euro Stoxx 50 closed up 4.7 percent.



China’s stock market has dropped 22% in the past 4 sessions. Their central bank responded by cutting interest rates for one-year lending by 25 basis points to 4.6%, while the one-year deposit rate will fall a quarter of a percentage point to 1.75 percent. The required reserve ratio will be lowered by 50 basis points for all banks to cover funding gaps. China’s surprise yuan devaluation on Aug. 11 led to a tightening in liquidity as the PBOC subsequently bought its currency to stabilize the exchange rate and curb capital outflows.



Roughly $4.5 trillion has evaporated from the Chinese markets since the middle of June – real, tangible wealth that no longer exists. Equities on mainland Chinese exchanges still trade at a median reported earnings multiple of 60+ times. The yuan may face more downside pressure as a result of the latest monetary easing, making it harder to keep depreciation in check. The US dollar rallied for the first time in 5 days.



Against that backdrop this morning, stocks on Wall Street rallied. The Dow Industrial Average gained over 441 points yesterday; and for a fleeting moment it looked like the carnage of the past week was but a blip on the screen. It turned out to be a classic dead cat bounce. The Dow lost 646 points from the intraday high to the close; the biggest reversal to the downside since October 29, 2008.



The Standard & Poor’s 500-stock index closed down 1.4 percent, to 1,867, after earlier rising almost 3 percent from Monday’s close. The S&P 500 closed down 12.5 percent from its May high; the Dow ended down 14.6 percent from its May high. Not as bad as Monday, but still plenty ugly. And the final hour of trading was just nasty, panicky stuff, about a 500 point loss on the Dow in one hour.



So it begs the question: what spooked the markets in the final hour? There are many catalysts in play in the market’s turn, from fears about China to corporate earnings and commodity prices, toss in concerns about emerging market credit. But at the core, much of this plunge is about a loss of faith in cheap money stimulus. In China, the concern is that the people’s Bank of China isn’t responding with enough force, or that they have responded with too much force and it is backfiring; take your pick.



In the US, the concern is that the recovery should be stronger by now, and there is the threat of the Fed hiking interest rates at the mid-September FOMC meeting. It all highlights just how addicted the markets are to cheap money stimulus from central banks, and how that addiction has distorted valuations.



So, for the moment we don’t know what spooked the markets in the final hour of trade. Maybe it was just an algorithm that triggered. Maybe we put too much faith in a shoddy Chinese market that wasn’t built to last and now looks like nothing more than a shiny knock-off of western markets. Maybe too many people grew weary of the pep talks from financial advisers repeating the mantra, don’t worry, you’re in it for the long haul; it just dredges up old ghosts.



If the Financial Crisis of 2008-2009 taught us anything, it was a lesson in the fragility of the financial and capital markets and the stages of denial as market developments unfold. And just because stocks drop in price it doesn’t mean they are cheap or on sale or great values. Maybe there were some big hedge funds that started forced liquidations when things turned south. Maybe traders remembered that the Fed could still hike rates next month, even in the maw of a market correction. I’m still not sure why the Fed seems inclined to a rate hike but they seem to like the idea.



The economic news was decent enough: New U.S. single-family home sales rose a bit less than expected in July. Sales increased 5.4 percent to a seasonally adjusted annual rate of 507,000 units. The stock of new houses for sale increased 1.9 percent to 218,000 last month, the highest level since March 2010. Still, supply remains less than half of what it was at the height of the housing boom. The median price of a new home rose 2 percent from a year ago to $285,900.



Home prices continued to rise in June. The S&P Case-Shiller 20-city composite index rose 5 percent year-over-year in June. Home prices in Phoenix posted a 4.1% gain year-over-year.



Consumer confidence rebounded in August. The Conference Board said its index of consumer attitudes jumped to 101.5, up from a reading of 91.0 in July. In the report, Lynn Franco at the Conference Board said, “Consumers’ assessment of current conditions was considerably more upbeat, primarily due to a more favorable appraisal of the labor market … The uncertainty expressed last month about the short-term outlook has dissipated and consumers are once again feeling optimistic about the near future. Income expectations, however, were little improved.”



Financial firm Markit said its preliminary or “flash” reading of its Purchasing Managers Index for the services sector slipped to 55.2 in August from the final 55.7 reading in July. The U.S. services sector expanded at a slower pace in August than July as new business growth softened.



The Congressional Budget Office says the US budget deficit is likely to fall by $60 billion in 2015 due to strong revenue gains. The CBO said it now estimates a $426 billion deficit for fiscal year 2015, down from its $486 billion forecast made in March. It also forecast a fiscal 2016 deficit of $414 billion, a reduction of $41 billion. The CBO says the government may be able to pay its bills without a debt limit hike through early December.



Oil prices managed a mild rally but couldn’t close above $40 a barrel. API reported a huge 7.3 million barrel drawdown in oil inventories this week (against expectations of a build) and sparked a headline-driven jerk higher in crude prices.



Oil prices dropping below $40 dollar-a-barrel sounds like a beautiful thing. It means cheap gas for your SUV and lower energy bills. At $2.60 a gallon, gas is now about a dollar below where it was last year at this time. And it could continue to fall. Eleven states now have gas prices under $2. When President Obama predicted in his State of the Union Address in January that “the typical family this year should save $750 at the pump,” he was probably right. Multiply that by the nation’s 115 million households and you get a total savings of over $86 billion. That’s huge.



Lower gas prices help poor people in particular; households with incomes of less than $50,000 spent 21% of their income on energy in 2012, while households earning more than $50,000 spent 9%. Additionally, Americans who live in chillier regions like New England and the Midwest could save another $750 or so on energy bills. The bad news is largely restricted to the Dakotas, Texas, Oklahoma, and Alaska. And when oil prices are low, we tend to use more gas; we loosen up on conservation, demand increases and that, of course, leads to higher prices; not all at once, but slowly, over time.



Boeing (BA) expects to cut several hundred jobs in its satellite unit through the end of this year. The company said some of those people could find work in other parts of Boeing. The cuts come as commercial orders have been delayed due to lack of funding following the closure of the Export-Import Bank. Boeing also raised its outlook for aircraft demand in China despite the recent turmoil in the nation. Boeing sees China buying 6,330 aircraft in the next 20 years, a 5% jump from last year’s forecast.



Hacked companies, get ready — a federal court just made it easier for the government to sue you. “Monday’s decision from the Third Circuit Court of Appeals clarifies the Federal Trade Commission’s powers, giving it more ammunition against businesses that fail to invest in their own security.” The court’s decision finds that the FTC acted appropriately when it sued Wyndham Worldwide Corporation (WYN), a massive international hotel chain and hospitality conglomerate, after Wyndham was hacked three times in two years, exposing the credit card data of more than 600,000 customers.”



Infidelity website Ashley Madison and its parent company, Avid Life Media, have been sued in federal court in California by a man who claims that the companies failed to adequately protect clients’ personal and financial information from theft, saying he suffered emotional distress. The lawsuit seeks class-action status.