Chinese stocks are crashing again.
The Shanghai Stock Exchange fell 8.5% on Monday… its biggest drop since January 2008.
Regular readers know we’ve been following the wild ride in Chinese stocks. A few weeks ago, Chinese stocks crashed the most in two decades.
Chinese regulators tried every trick in the book to stop the crash. They banned short selling (betting that a stock will fall). They banned initial public offerings. They halted trading on 51% of Mainland Chinese stocks. They even set up a $480 billion fund to buy Chinese stocks.
It worked, but not for long. After stabilizing for a little over two weeks, Chinese stocks are crashing again.
“Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. in Hong Kong. “Once those disappear, the market cannot support itself.”
• One of the smartest investors in the world just turned bearish on China…
Ray Dalio is the founder of Bridgewater, the world’s largest hedge fund. He has one of the best investing records in history, so we like to follow what he’s thinking.
Dalio was bullish on China, even after Chinese stocks crashed a few weeks ago. The Wall Street Journal reported Dalio told his clients in June that China’s problems “represented opportunities.”
But Dalio just changed his mind. In a note sent to Bridgewater’s investors this month, Dalio said, “Our views about China have changed. There are now no safe places to invest.”
… because the forces on debt are coming from debt restructurings, economic restructurings, and real estate and stock market bubbles bursting all at the same time, we are now seeing mutually reinforcing negative forces on growth.
Bill Ackman is also warning investors about China. He’s the founder and CEO of the hedge fund Pershing Square Capital Management. He is also an extremely successful investor.
At a recent investment conference, Ackman said the situation in China “looks worse to me than 2007 in the United States… much worse.”
• Shifting gears, Obamacare is creating “mega insurers”…
On Friday, health insurance company Anthem (ANTM) agreed to buy rival Cigna (CI) for $48.3 billion.
These are America’s second and fifth biggest health insurers. If the deal goes through, the combined company will be massive. It would insure 53 million people and collect around $117 billion in revenue each year.
This is the second huge health insurance deal announced this month. Three weeks ago, Aetna (AET) agreed to buy Humana (HUM) for $34 billion.
If both of these deals go through, three “mega insurers” will dominate the US health insurance industry. UnitedHealth Group (UNH), the largest health insurer in the country, is the only major one not involved in merger talks yet. With a market cap of $112 billion, UnitedHealth would still be the biggest health insurer if both of the other deals go through.
The Financial Times reports that the Affordable Care Act, also known as “Obamacare,” is fueling the takeover craze:
Obamacare is here to stay. That, at least, is the conclusion of US health insurers, who have embarked on a round of big-ticket deal making to prepare for a future under the Affordable Care Act.
The merger announcements haven’t been good for shareholders so far. All four of the companies’ stocks have declined since the deals were announced. Aetna’s share price has dropped 14% over the past month. Cigna’s is down 17%.
• Online retailer Amazon made a surprise profit last quarter…
Wall Street expected Amazon to lose $0.14 per share last quarter. Instead, it announced on July 23 that it earned a profit of $0.19 per share.
Amazon’s sales are growing like crazy. It increased revenues by 20% last quarter, and its quarterly sales have grown 31% on average since 2000. Quarterly sales didn’t fall once during that period.
But Amazon barely keeps any of that money in profits. The company’s net income margin has averaged 0.04% since 2012. Net income margin is the percentage of sales a company keeps as profits after all expenses.
• Despite its tiny profit, Amazon’s stock is on fire…
It soared 10% on Monday. It’s now up 72% so far this year.
Analysts think Amazon’s stock will continue to go up. A recent Bloomberg article said four analysts expect the stock to hit $700 per share. That’s 33% above its current price.
Momentum might carry Amazon’s stock higher… but it’s getting very expensive.
Amazon is now a more valuable company than Wal-Mart. For comparison, Wal-Mart made $16.1 billion in profits in the last year. It pays a 2.75% dividend. And its stock has a price/earnings (P/E) ratio of 14.6… meaning if you buy Wal-Mart stock, you’re paying $14.60 for every dollar of earnings.
Amazon, on the other hand, has lost $188 million in the last year. It pays no dividend. And it doesn't even have a P/E ratio because it has negative earnings in the last year.
None of this means Amazon’s stock can’t go higher. But it’s definitely not a “value stock” that a disciplined investor like Warren Buffet would buy.
Chart of the Day
We told you earlier that Chinese stocks are crashing again. This chart shows the Shanghai index since June 1…
As you can see, Chinese stocks fell 32% in June and early July. Regulators managed to stabilize them for about two weeks by restricting who could sell their stocks. But now, Chinese stocks are crashing again. They just dropped 8.5% in one day… their worst day since January 2008.
Delray Beach, Florida
July 28, 2015