That's what we need on the S&P today to reverse what is turning into a very ugly downtrend on the weekly chart. We've been discussing that line since February as the danger zone and, if you read us at all, you KNOW we short the S&P every time it gets to 2,100 and the last visit was mid-April, when I warned it wouldn't last in "Toppy Tuesday – What More Can They Do?" At the time, the market had spiked up on enthusiasm over the "emergency meeting" between the White House and the Fed – nothing came of it and the markets promptly began to fall for the next 4 weeks.
In that article, I noted that we expected weak earnings, especially in the Financial Sector and, more importantly and more relevant to today's discussion, I warned that the real crisis was China's growing debt load, saying:
As money is sucked out of the pockets of the many and placed in the bank accounts of the few, China's economy (like ours) has stagnated as consumers can't afford to buy the goods they are producing at work and, as of last year, Chinese firms had only just enough operating profit to cover the interest expenses on their debt 2 times, down from 6 times in 2010. That means a rise in rates OR a decline in profits can quickly lead to a huge economic crisis with massive defaults.
As credit stresses mount, China is drafting rules to make it easier for lenders to convert bank loans into equity stakes of debtor companies. China may also approve, as soon as this month, a plan allowing banks to convert as much as 1Tn Yuan ($150Bn) of soured debt into equity – a very bad idea.
Last May (in case you forgot) is when China began going off the rails – triggered by a wave of defaults that I was warning you about all spring. The problem was, I was too early with my warnings and a lot of people got complacent by May so this year I've waited before bringing it up again but the cycle will begin again soon and we need to keep our ears open for reports of Chinese loan defaults. Our own market followed China down with a