July 28, 2015 “The Wall Street Journal:
Rates to consider: Opening
DJIA 17440.59 -127.94
10-Yr T note 2.228 +12/32
Oil 47.39 -.79
Euro 1.1090
Yen 123.25
Beijing Stumbles as Stocks Sag Anew: by
Chinese government is struggling to contain the collapse of a stock-market rally it helped engineer. Chinese shares suffered their biggest one-day percentage drop in over eight years on Monday. This whipped out the hundreds of billions of dollars of market value and putting an end to a three-week period of stability Beijing had achieved through stock purchases.
A spokesman for China’s top securities regulator said late Monday night that the government will increase its buying of stocks in a bid to stabilize the market.
Implications/Comments:
What is frightening about the Chinese government right now is the lack of understanding they have on the psychology of trading. There are a few things that need to be noted about traders:
1. Traders value liquidity – meaning that even if the market were to falter, traders need to be able to get on or off a position quickly.
2. (educated) Traders understand risks when they get on a position and they will have to live with the consequences of their trade.
3. Traders are opportunistic individuals – they will look at reports or any kind of information they can get their hands on and exploit trading opportunities.
Now a few things need to be cleared up. There was a surge of pseudo investors called ‘stir-fries’ that entered the market which accounted for 80% of all traders. With the Chinese government encouraging margin trading, these pseudo traders entered overly leveraged positions and increased the value of stocks that created the bubble. Also note that even though 80% of traders are pseudo traders the other 20% still holds a great deal of power because the other 80% are leverage to the point that if the 20% are to move out of the market a margin call will be initiated and a down ward spiral will occur.
The first reason- with the Chinese freezing trading activities traders, the notion of liquidity in the market was destroyed. Why stay in a market where the government has a clear way of manipulation the value of stocks?
Second + third reason - when going into a position, traders know that they have risks to account for. When the Chinese government announced that they will pump money into margin trader’s accounts, true traders understood that this kind of stimulus is temporary. Margin trading is a risky business and when the central government is actively participating in aiding margin trading to inflate the value of stocks; real traders understand that there is money to be made and these traders will exploit these opportunities.













