Watch Greece – But Don’t Ignore China!

Market Roundup Dow -261.49 to 17,515.42 S&P -34.59 to 2,046.75 NASDAQ -87.70 to 4,909.76 10-YR Yield -0.025 to 2.206% Gold +$5.40 to $1,158 Oil -$0.49 to $51.84

Europe’s debt mess is grabbing headlines this week. That’s especially true in light of news today that Greece has until Sunday or that’s it – it’ll be kicked out of the euro. We also learned late in the day that the entire Greek banking system will remain shut at least through then.

But the even more dramatic action is going on in China … where the stock market is falling sharply. The benchmark Shanghai Composite Index lost another 6% overnight, extending its losses to more than 30% just since its June 12 peak. The higher-risk Shenzhen Composite Index dominated by smaller, more speculative companies has tanked more than 40%.

So many stocks fell so far, so fast that more than 2,000 equities were either halted or locked “limit down” overnight. That means more than 70% of China’s publicly traded stocks couldn’t even be traded by the end of the day. By comparison’s sake, only 0.2% of U.S. stocks are currently halted on domestic exchanges.

Big losses hit the Chinese equity markets.

Unable to sell shares to cover margin calls, investors there went to work selling everything else that wasn’t nailed down. Bloomberg noted that assets as diverse as copper, iron ore, eggs and soybeans plunged so far that they were halted by the Chinese futures exchange.

Selling also spilled out all over Asia – with Japan losing more than 3% and Hong Kong tanking almost 6%. That was the worst one-day rout since November 2008, the depths of the credit crisis.

We’ve now seen more than $4 trillion in Chinese wealth go up in smoke. Authorities are trying a little bit of everything in response to stem the declines. The People’s Bank of China is indirectly lending money to investment firms to buy shares. A group of 21 securities firms banded together to say they would buy stocks and tuck them away.

Initial Public Offerings have also been suspended to prevent more supply of stock from hitting the markets. Major media outlets are publishing pieces about the wisdom of buying stock rather than panicking. A $19 billion market stabilization fund was announced.

But none of it seems to have done much good so far. Indeed, policymakers there are reportedly already referring to July 3 as “Beijing’s Black Friday” due to the heavy losses suffered on that date. Individual investors — who opened thousands of brokerage accounts and used borrowed money to buy rapidly rising shares late in the game — are getting hit particularly hard.

You might think you’re insulated from the turmoil if you don’t own investments like China-equity based ETFs. But the reality is that the speed of the decline and surge in volatility has spooked investors in a wide range of China “proxies.” Think metals like copper and the companies that produce them, commodity currencies like the Australian and New Zealand dollars, and other ETFs that own foreign stocks in Asia and South America.

“Many of those markets have already been beaten down to dirt-cheap levels.”

So what’s next? Well, many of those markets have already been beaten down to dirt-cheap levels. They reflect a heck of a lot of pessimism, and arguably could be the value trades of the decade once the panic subsides.

It’s only natural to see corrections … even large ones … on the way to higher prices, after all. And it’s worth pointing out that China’s domestic market is still up more than 70% in the past year even after the recent selloff. That’s why I’ve been gradually, gingerly stepping into a few emerging-market investments over the past couple of months.

But it’s definitely not the time to go hog wild. We’ll need to see some stabilization in China and related markets if we’re going to see stabilization in all the China proxy investments – and gain the confidence to do more than dip our toes in.

My final words of advice: Stay tuned and stay focused on what’s happening away from Europe. Greece may be grabbing the headlines. But what’s happening in Asia is much more important for the global economy and global markets. That’s why I recommend you keep an eye on those China proxies I mentioned.

So with that in mind, have you been watching the Chinese turmoil? Do you own China proxy investments, and are you sticking with them? Do you believe the government can get a handle on the volatility over there, and by doing so, stem the panic selling? Share your thoughts over at the Money and Markets website when you get a chance.

Our Readers Speak

While the Chinese market collapse continues to unfold, events in Greece are also moving fast – and getting your chins wagging over at the website.

Reader R.J.F. said: “I expect that the eurozone leaders will throw Greece another lifeline while continuing the tough talk. One more instance of kicking the can down the road. It will not end well, but there will be a short-term rally as the crisis is postponed.”

But Reader Michael thinks the Greeks have spoken, and that the fallout is coming next. He said: “The Greek people rejected the proposal on Sunday. Let them figure their own way out. They agreed with the government policy of throwing money around, so they can stew in their own kettle of fish.”

Meanwhile, Reader Richard S. offered this big-picture perspective: “The politicians have screwed it up over the years like all previous failed empires, and now their excessive spending and running up debt far above their means has come home to roost just like here in the U.S. and a bunch of states.

“Don’t throw good taxpayer money at them and think they will change their stripes. They had a good thing going at others’ expense and will try to keep it going, but it’s time to cut them loose. They will of course repudiate the debt.”

As for China, Reader James shared this opinion: “The Chinese government is pulling out all stops to kick start their stock market. Besides pumping in large amounts of funny money (borrowed in one way or another), they’ve even allowed investors to use their homes as collateral.

“Perhaps that is just adding fuel to the fire under the housing bubble – or maybe a fuse – but it sure sounds dangerous to me. And China and its money are quite involved in the U.S. economy/debt; We may see greater repercussions from that quarter than from the E.U.”

Interesting – and potentially dangerous times – for sure. That’s why I’m recommending subscribers raise some cash, take some profits, cut a few losses, and hunker down until these situations settle out. Huge bargains are being created in many foreign markets as a result of the carnage. But as always, timing is key when it comes to gingerly stepping in and taking advantage of them.

Any ground I didn’t cover here on Greece? China? Other global hotspots? Then hit up the website and add your thoughts.

Other Developments of the Day

The New York Stock Exchange went “dark” around 11:30 a.m. Eastern today, with Big Board trading activity shutting down. Officials blamed a “technical issue” rather than any kind of cyberattack. Trading also continued on several other exchanges, and the NYSE finally got back up and running around 3:10 p.m.

But on a day where investors were already skittish amid overseas turmoil, and when United Continental Holdings (UAL) was forced to halt hundreds of flights for almost two hours due to “an issue with a router,” the NYSE’s outage helped contribute to a lousy, uncertain tone on Wall Street.

Microsoft (MSFT) said it will slash more than 6 percent of its job force, about 7,800 positions, most of them in its phone business. The moves comes after missteps in the smartphone and hardware markets, according to the New York Times. The tech giant was already in the process of eliminating 18,000 positions, and these layoffs will reportedly come on top of that.

Yet another mega-bank CEO has been shown the door in Europe. This time, it’s Antony Jenkins of the U.K.’s Barclay’s PLC (BCS).

Of course, here in the U.S., lousy bank CEOs never seem to get booted or arrested when their institutions screw up. They get golden parachutes or stay in the corner suite, while billions in fines pile up.

Investigators are trying to piece together why an F-16 fighter jet collided with a Cessna commercial plane, killing two. The South Carolina crash involved a long-term pilot flying out of Shaw Air Force Base in Sumter.

What do you have to say about more Microsoft layoffs, bank CEOs getting the broom, “technical issues” or China’s turmoil? Let me know at the website.

Until next time,

Mike Larson