“Short term volatility is greatest at turning points and diminishes as a trend becomes established.” – George Soros.

1. China Factory Activity Shrank Again in July — China’s factory activity shrank more than initially estimated last month, tightening the most in two years and extending the sell-off of Chinese equities. The final Caixin/Markit China Manufacturing PMI dropped to 47.8, from 49.4 in June, marking the fifth straight month of contraction. The final reading was lower than the flash PMI of 48.2 and the official manufacturing PMI, which fell to 50.0 in July from 50.2 in June.
2. Puerto Rico Debt-Crisis Grows as Payments Halt, Agency Defaults — Puerto Rico has confirmed that it failed to make a debt payment over the weekend, placing the U.S. commonwealth into default for the first time in its history. Congress may help the territory through the passage of a bankruptcy bill, although that effort has faced opposition. The island has also floated the idea that the Treasury Department could guarantee its debt when it seeks to borrow in the market again – helping to lower the cost significantly.
3. Greek Stock Market Re-Open After a Five-Week Shutdown — the Athen’s ASE Stock Index plunged nearly 30% last week, the worst fall on record, after the Athens Stock Exchange reopened following a five-week shutdown. Greek Banking stocks down by another near 30% plunge in banking stocks, as investors react to continuing questions about a new bailout from the EU and the country’s worsening economy.
4. Bill Ackman Takes $5.5 billion Stake in Oreo Maker Mondelez(MDLZ) — Ackman’s Pershing Square Capital Management LP revealed its stake, which amounts to about 7.5% including options and forward contracts, in a statement late Wednesday night. Nelson Peltz’s Trian Fund holds 3.1% of MDLZ.
5. China Spends Heavily to Prop Up Stocks — Peking University economist Christopher Balding has added up the bailout and stimulus measures announced since the Chinese equity panic in late June. They total $1.3T, or more than 10% of GDP. To put that in perspective, America’s Troubled Asset Relief Program was originally authorized to spend $700B. And that was a response to a systemic financial crisis in an economy some 70% bigger than China’s.
6. Bullish Sentiment Sees Slight Rise — courtesy of BIG, according to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment increased from 21.11% up to 24.32%. Even after the increase, though, bullish sentiment remains well below its average of 38% for the current bull market; a level it hasn’t been above for 19 weeks now.

The week ahead — Economic data from Econoday.com:

“Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical insignificance, of interest only to the IRS.” — Arthur Zeikel

1. China Stock Dive Continues — the benchmark Shanghai index sank almost 10% last week, renewing doubt that Beijing can reverse fears about the safety of its equities markets. The Shenzhen index lost 9%. The losses nearly erased gains made since the low point of the earlier sell-off this month. China ‘s regulator later said that Beijing will step up stock purchases.
2. Standard & Poor Warns Brazil’s Investment Grade Rating At Risk — Standard & Poor’s has warned Brazil it could lose its coveted investment-grade rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and implementation of austerity measures. The agency has now put the country’s foreign currency rating, which is rated one notch above junk, on negative outlook for possible downgrade.
3. Q2 US GDP at 2.3% vs 2.6% expected — U.S. economic growth accelerated in the second quarter as a pick up in consumer spending offset the drag from soft business spending on equipment. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate. The Fed on Wednesday described the economy as expanding “moderately” while upgrading its view of the labor market and saying housing had shown “additional” improvement. The Fed’s assessment left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.
4. AAII Bullish Sentiments — the latest survey of investor sentiment from the American Association of Individual Investors (AAII) also showed a large drop in bullish sentiment. This represents the lowest level since early June and the 18th straight week that it has been below the average reading of 38.19% since 2009.

The week ahead — Economic data from Econoday.com:

Whenever a well-known bearish analyst is interviewed in the financial press, it usually coincides with an important near-term market bottom – Clif Droke

1. Berkshire Returns to Energy Sector with $4.5B Stake in Phillips 66 — according to an SEC filing disclosed late on Friday, Berkshire Hathaway (BRK.A, BRK.B) has taken a $4.5B stake in Phillips 66 (NYSE:PSX), as Warren Buffett takes a renewed interest in the energy industry. Berkshire now holds nearly 58M shares after purchases this week, or more than 10% of the total outstanding. The latest wager comes amid a slump in crude prices, driven by concerns that a supply glut will persist.
2. Hedge Funds Took a Beating in August — billionaires David Einhorn and Daniel Loeb saw heavy declines at their main funds during August’s dramatic market selloff, as many other hedge funds suffered significant losses. Einhorn’s Greenlight Capital (NASDAQ:GLRE) fell 5.3% in August, extending the roughly $12B firm’s loss for the year to 13.8%. Others like Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Andor Capital -4.5%.
3. China Targets Media In Market Rout — Beijing punished nearly 200 people for allegedly spreading Internet rumors amid its market sell-off. In a broadcast confession, a reporter for a top Chinese financial news publication said he caused stock market “panic and disorder”. The head of the hedge fund’s Chinese unit has been detained by police to help with an investigation into market volatility.
4. Chinese Markets Closed on Sept 3 & Sept 4 due to Military Parade — Chinese markets closed on Sept 3 & Sept 4 due to a giant military parade marking the 70th anniversary of the end of World War II. Presiding over the extravaganza, President Xi Jinping said China would remain committed to “the path of peaceful development” and unexpectedly pledged to slash 300K troops from the country’s 2.3M strong military. The cuts, the largest reduction since 1997, will be mostly complete by the end of 2017.
5. ECB Ready To Add Stimulus — the ECB, seeing weaker growth and inflation, left open the door to expand and extend its monthly $66.7 bil bond-buying program, which is set to end in Sept 2016. ECB President M. Draghi signaled that the central bank is prepared to act. The ECB cut its GDP growth forecast to 1.7% from 1.9% in June and its inflation forecast to 1.1% from 1.5%.

The week ahead — Economic data from Econoday.com:

“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” — George Soros

1. Federal Reserve Raises Big Bank Capital — the US Central Bank said the largest 8 US banks must hold extra equity capital — 1%-4.5% of assets — encouraging them to reduce their size or risk. The new requirements may shrink profit and lending. JP Morgan (JPM), due to its size and complexity, faces a 4.5% bump. Others effected are Goldman (GS), Citi (C), Morgan Stanley (MS), AND Bank of America (BAC).
2. China and Federal Reserve Weight on Gold — gold fell to $1,106 an ounce on Comex, hitting its lowest level since Mar 2010, amid indications of lower Chinese demand and growing expectations the Fed will raise interest rates soon.
3. World’s Largest Hedge Fund Bridgewater Turned Bearish on China — Ray Dalio, billionaire and founder of Bridgewater Associates LP, the world’s biggest hedge fund has turned Bearish on the world’s fastest-growing economy. He warns, “our views on China have changed… there are no safe places to invest.” based on the latest newsletter. Thee move adds to a growing chorus of high-profile investors who are challenging the long-held view that China’s rise will provide a ballast to a whole host of investments, from commodities to bonds to shares in multinational firms, as they realize, “it appears that the repercussions of the stock market’s declines will probably be greater.”
4. Latest AAII Sentiments — courtesy of BIG, sentiment survey from the American Association of Individual Investors (AAII) showed modest increases in both bullish and bearish sentiment. In the case of bullish sentiment, an increase to 30.81% up to 32.5%, which marks the 17th straight week where sentiment has been below its average level dating back to 2009. During that period, the only other longer streak of below average readings in bullish sentiment was three years ago in the 20-week period stretching from April through August of 2012.

5. China Slowdown Continues, PMI Drops Sharply — business activity in China’s factory sector contracted at the fastest pace in 15 months in July, suggesting that the world’s second-largest economy is struggling to stabilize and halt a broad slowdown. The flash Caixin/Markit China PMI dropped to 48.2, the lowest reading since April last year and the fifth straight month under 50 – the level that separates growth from contraction.

The week ahead — Economic data from Econoday.com:

“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” – George Soros

1. Iran and Major Powers Reach Nuclear Deal — Iran and six major powers clinched a historic nuclear deal last Tues. Iran is allowed could carry out “specific research and development (R&D) activities for the first 8 years” of the deal, with further enrichment activities possible afterwards, “for exclusively peaceful purposes,” according to a copy of the JCPOA posted on the Russian government’s Facebook page. Tehran is also not permitted to stockpile large amounts of enriched uranium. Oil prices came under pressure following the news, in anticipation of Iran bringing more oil onto the market and forcing prices down.
2. China 2Q GDP rose 7% — China GDP rose 7% in the three months through June, making it more likely the country will hit its 2015 growth target of about 7%. Despite the upbeat economic data, Chinese shares extended their slump. Some 696 mainland firms remained suspended from trading, representing about a quarter of the number of companies listed on Shanghai and Shenzhen.
3. Retail Sales Disappoint Again — Sales fell 0.3% in June, defying expectations for a 0.3% gain, while a sizable 1.2% increase in May was revised down to 1.4%. Ex autos, the June drop was only 0.1%. The latest data will likely reduce the Q2 GDP. Retail Sales comprises about 70% of US GDP.
4. Eurozone Finance Ministers Agree to Third Greek Bailout ‘in principle’ — the Eurozone finance ministers reached a decision to grant Greece “in principle” a 3-year bailout from the bloc’s bailout fund, but that this was “subject to the completion of relevant national procedures.” The measures were approved by the Greek parliament in exchange for up to €86 billion in fresh loans; However, 32 members of PM Alexis Tsipras’ Syriza party voted “No”, a sign the premier may have lost his majority.
5. China Unleashes $483 Billion to Stem the Market Rout — Bloomberg, China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government. China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders. The money may be used to buy shares and provide liquidity to brokerages.

The week ahead — Economic data from Econoday.com:

Tags: Greece Bailout, Iran Nuclear Deal
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