Stocks advanced smartly on Monday as bonds fell, the dollar strengthened and crude oil rose as well. The major official move of the day was the People’s Bank of China’s decision to cut its reserve requirement ratio to 18.5%.
The cut was expected, but 100 basis points was more than expected and represented the largest cut since late 2008. The reduction is expected to make around $200 billion in liquidity available. You see, by cutting the reserve ratio, the PBOC allows banks to lend more. Like they aren’t lending enough already? Sheesh.
It was also reported that the People’s Bank of China was considering a program similar to the long-term financing operation (LTRO) invented by the European Central Bank. This would allow banks to use local government debt as collateral for cheap three-year loans from the central bank. Banks would be expected to use the funds to boost lending. Yes, adding more fake money to stressed-out companies is going to make it all better. Right.
This is why there are boom and bust cycles. Eventually too much borrowed money chases too many bad projects and suddenly the world blows up. But right now we are in the upswing of the boom section of the cycle, so the central banks are telling us, “Don’t pay no never mind to the ultimate consequences.”
Well, actually, the China Securities Regulatory Commission wants you to know this is really not a problem. It will allow institutional managers to lend stock for short-selling, expand the number of shares that can be shorted and tighten rules on margin lending. The CSRC said that the moves were not designed to encourage short selling, but rather moderate volatility and help with price discovery. Be careful what you wish for, that’s all I can say.
With the emerging markets becoming more volatile, this makes them an excellent candidate for opportunistic, systematic trading. Today’s recommendation is a bearish trade on the iShares MSCI Emerging Markets Index ETF (EEM), which is very liquid, trading more than 25 million shares a day.
Buy the EEM June $45 puts at $2.60 limit, good till canceled, for target $3.90. The ticker symbol is EEM150619P00045000, and these are the monthly puts that expire on June 19, 2015.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
