On Friday I discussed worries surrounding the Chinese Wealth Management Product (WMP) called "Credit Equals Gold #1 Collective Trust," in which $500 million had been loaned to a nearly bankrupt coal mining company. Questions about whether this product would be allowed to default, or who would cover the losses have now been partially answered.
A "mysterious third party" has come to the rescue which will allow China Credit Trust, the issuer, to make good on its commitment to investors. At the moment it appears that investors will escape with their limbs intact, although they will miss a few interest payments and receive a lower yield than previously thought.
The last minute solution is likely a result of involvement by the state, and involves the third-party investor receiving an equity stake in the nearly bankrupt coal mining company. Recently this coal mining company had been granted approval to restart a closed mine, which appears to be a major blessing and a critical component to this problem's resolution.
A happy ending for now, this issue of ongoing "almost defaults" will be back for another round soon enough.
The last FOMC meeting presided over by Ben Bernanke began on Tuesday, wrapping up with the official statement on Wednesday. As you would expect, the recent pullback sparked much conversation regarding whether further stimulus reductions will be discontinued. While anything is possible, especially considering the recent roiling of emerging market currencies, my inclination is that the Fed will remain on its stated path without reversing course. Economic data since the last meeting has been on the weak side, but I believe the Fed must appear bold and confident that the course it has embarked on is based on longer-trend data and consistent with broader markers. An about face during this next meeting could give the impression of a whimsical central bank, which certainly would not help instill the confidence our economy needs to maintain the path to recovery.
Friday's huge 32% swing up in the VIX is giving back some of those gains as option traders calm their nerves. As Sam Stovall, chief equity strategist at S&P Capital IQ put it, "Global economic and profit growth projections really haven't changed. The only thing that has changed is the fear of what might happen. We have to take a wait-and-see attitude."
The above content was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
