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Clarity or Confusion

July 13, 2012 – 5:01 pm

Everyone has been focused, not on Europe this week (though it remains a major concern), but on China and its economic outlook. China has recently lowered interest rates twice in one month and announced 100 new infrastructure projects to stem weakness in their economy. This caused worry about their growth in the second quarter. Late last night they announced the second quarter GDP numbers. The estimate was for a 7.5% growth, down to a three year low and down from the first quarter of 8.1%. The new number was 7.6%. This sparked a relief rally this morning as apparently investors and traders were worried about it being weaker than expected. The recent speculation that they might have a hard landing is likely not going to happen. China has clearly signaled the same worry with the recent efforts to spur economic activity. Their efforts are going to work and we just may have seen the low in their slowdown. The rest of the year is likely to show a reacceleration of growth.

Weakness is causing them to attempt more stimulus. That worked during the financial crisis but it also produced what most believe is a property bubble in China. With that bubble bursting it is believed that the Chinese are dealing with a large number of bad loans. However, because of their closed society and secretive government we will not know for sure what is happening. In last night’s release of data there were hints that property values have bottomed and loan initiations are picking up.

There are three major concerns that investors are focused on: China’s growth, Europe’s recession and the U.S. fiscal cliff. All three are currently being address with different levels of intensity. With clarity of these issues the market will react favorably. With continued obfuscation the market will react negatively.

Good Trading
Steve Peasley

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