Good Morning!

Legendary investor Ray Dalio who has +$3B invested in Chinese businesses says the country is “overdue” for a debt shake-up. China has almost doubled its debt over the past 5 years. Debt-to-GDP is now at a record 281.5% 🙈

🌏 There's trouble brewing in China. Specifically, in China's property sector. China Evergrande Group—one of the country's largest real estate developers—filed for Chapter 15 bankruptcy in New York yesterday to shield itself against US creditors while it works out a plan to restructure over $300 billion of debt. The move doesn't exactly come as shock: the struggles extend back to December 2021 when the company defaulted on a dollar bond. The bankruptcy filing follows profit warnings from another major Chinese developer, Country Garden, which recently struggled to make coupon payments on dollar bonds and is similarly preparing for a debt restructuring. The concern now is that property-sector troubles could spread to other parts of the economy (which, by the way, can use all the help it can get!).

🏘️ Speaking of property sector woes: US housing affordability is sitting at four-decade lows. According to Freddie Mac, the average rate on a 30-year fixed mortgage jumped to 7.09% last week. That's the highest in over 21 years. That means would-be-homebuyers can afford a lot less home. Three years ago, a $2,500 monthly mortgage combined with a 20% downpayment could get you a $758k home. Today, the same monthly payment and 20% down are only enough for a $443k home (shown above). With yields on the 10-year Treasury—which is closely correlated to mortgage rates—now hellbent on rising, affordability is at risk of getting even worse.

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📈 Staying on topic, global government bond yields are surging. Yesterday, the yield on 30-year US Treasuries reached its highest since 2011. The 10-year yield, meanwhile, touched 2007 levels while its German and UK counterparts reached their highest in 8 years and 11 years, respectively. The message being sent by bond investors across the world: central banks will keep rates higher as they continue the battle against inflation. That could mean trouble for stocks (and long-duration Tech stocks in particular).

📉 Investor sentiment has tracked prices over the past few weeks. This is to say it has deteriorated. That goes for both retail and institutional investors. The latest AAII Sentiment Survey revealed the second-sharpest decline in the bull-bear spread (over 13%) of the year last week (shown above), pushing bullish sentiment below average for the first time in 11 weeks. Turning to the pros, the NAAIM Exposure Index—which represents the average exposure to US equities by active managers—continued its decline, dropping to 59.9 from last week's 65.5. Elsewhere, indicators point to risk-off sentiment among investors.

🤐 Here's something you don't expect to be said out loud: the director of China's National Energy Administration says "it is necessary to increase propaganda" around the country's energy sector. The comment comes as China focuses on protecting national interest in industries like nuclear and petroleum from "hostile foreign forces". It also comes as part of China's broad changes aimed at tightening the control of information.

📊 Yesterday's highlights:

WMT Walmart: $1.84 EPS (vs. $1.71 expected) ✅, $161.63 billion in revenue (vs. $160.27B expected) ✅.

• Higher in-person and online traffic plus bigger average ticket sizes pushed net income up 53% YoY.

• The company saw a 24% jump in e-commerce sales as well as improvement across newer, higher-margin businesses like advertisements and subscriptions.

• It also raised full-year guidance for both sales growth (to 4-4.5% from 3.5%) and EPS (to $6.36-6.46 from $6.10-6.20).

AMAT Applied Materials: $1.90 EPS (vs. $1.73 expected) ✅, $6.43 billion in revenue (vs. $6.16B expected) ✅.

• Demand for chips for AI computing and the Internet of Things fueled better-than-expected sales and profits for the largest US maker of semi-manufacturing equipment.

• And it expects further improvement: despite fears of an industry-wide slowdown, the company issued current quarter guidance for both sales and profits well above Wall Street's estimates.

👀 What we’re watching today:

• DE Deere

• PANW Palo Alto Networks

• EL Estee Lauder

• XPEV Xpeng

• VIPS Vipshop Holdings

• China downgrade: Nomura has lowered its 2023 growth forecast for China to 4.6%.

• PBOC intervention: China's state banks have been selling USD to buy yuan to slow the latter's depreciation.

• Logistics: Supply chains have normalized but container rates from China to the US have started to rise again.

• MMF ATH: Money-market fund assets have reached a record $5.57tn after seeing ~$40bn in inflows over the past week.

• Rocket finances: SpaceX turned a small $55 million profit on $1.5 billion in sales in Q1.

• Retirement accounts: The number of million-dollar 401(k) retirement accounts rose by 12% in Q2.

• Crypto settlement: Genesis and FTX have reached a $175 million settlement on a nearly $4 billion claim.

• Crypto sell-off: A ~7% plunge in Bitcoin led to more than $1 billion in liquidation losses over the past 24 hours.

• Funding secured: Broadcom has secured up to $28.4 billion in new debt to finance its VMWare acquisition.

• Lawsuit warning: Tesla has warned Core Lithium of a potential lawsuit over a failed 2022 supply agreement.

• Founder rescinds: Share of LL Flooring took a hit after the company's founder withdrew his proposal to buy the business.

• Activist stake: Starboard Value has acquired a 5% stake in Bloomin' Brands and is now a top-5 shareholder.

• Trucking deal: Estes Express Lines has agreed to acquire bankrupt Yellow's terminals for $1.3 billion.

Sources:

• https://www.bloomberg.com/news/articles/2023-08-17/china-s-state-developers-warn-of-major-losses-as-crisis-spreads

• https://www.ft.com/content/1b6e5631-ae66-462a-a6db-a44174ed76ac

• https://www.aaii.com/sentimentsurvey

• https://www.naaim.org/programs/naaim-exposure-index/

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