Don't Miss This $92 Billion Government Cash Injection

David Goodboy's picture

Wednesday, January 25, 2017 - 9:30am

by David Goodboy

The biggest bull market in history was triggered by the Federal Reserve pouring money into the economy to prevent financial Armageddon during the 2008 meltdown. Since that time, the Dow has soared from a low in the mid-6000s to just below 20,000 in seven short years.

The lesson we can learn here is that the government is the most powerful influence over stock prices. Investors who went long the market just before the bailout are sitting on handsome profits. Watching carefully for additional governmental actions in global economies is the way smart investors rack up outsized gains.

The good news is that I have identified another governmental "cash injection" that will likely fuel strong gains in the respective stock market.

First, let's look at what happened in the United States, then drill into how to profit from the next governmental cash injection.

The United States was on the brink of financial disaster. Stalwart financial institutions were failing. Century-old names like Lehman Brothers collapsed in the rubble of over-leveraged positions and decades of hubris.

If you were investing during these risky times, you understand what it is like to be on the front lines of a global superpower's economic collapse. Many investing pundits were calling for a replay of the Great Depression with widespread unemployment and even riots as unemployment skyrocketed. Everyone -- and I do mean everyone -- was preparing for the worst. The stock market collapsed, taking years of profits with it, as did the impossible-to-fail housing market.

Next, the Federal Reserve under the guidance of Ben Bernanke, who by the way wrote his doctoral thesis on the Great Depression, stepped in with an unprecedented government support.
 
The Emergency Economic Stabilization Act of 2008, aka "the bailout", was a law enacted in response to the economic crisis. It initially allowed up to $700 billion for the purchase of distressed assets, with a focus on mortgage-backed securities. The money was also used to supply cash directly to banks. The funds for the purchase of distressed assets were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases. Both foreign and domestic banks are included in the program.

This was just a part of the economic bailout in the United States. All told, the Special Inspector General for TARP's summary of the cash injections says that the total commitment of government is $16.8 trillion dollars. And not only did this bailout save the economy, but it also launched the biggest bull market of all time.

Today, a similar situation is happening in the world's second-largest economy.

The Chinese government recently ordered its monstrous pension fund to buy up to $600 billion yuan, roughly $92 billion, worth of equities in the Chinese stock market. As we know from the United States' actions, this amount can potentially ramp up much higher over time.

Yin Weimin, the Minister of Human Resources and Social Security, stated, "Detailed guidelines about how the investments will be conducted are expected shortly, and the investments will be made through commissioned institutional investors."

There are a few things that investors need to know about this cash injection.

First, it is for China's A-share stocks only. The difference between A-share/B-share markets is how the shares are denominated in the currency. Mainland China's two stock exchanges, in Shanghai and Shenzhen, both have A- and B-share markets. The major difference is that A-shares are denominated in renminbi and B-shares in foreign currency (U.S. dollars in Shanghai, and Hong Kong dollars in Shenzhen).

Second, it may take some time for the entire cash injection to take place. Despite the government controlling the pension funds in China, they are decentralized and under the direct supervision of regional and local governments. The structure suggests that the cash enters the stock market in batches rather than a steady flow. This can slow the bullish effect but, at the same time, it may extend the duration of the upward trend.

Third, along with the pension fund buying, the Chinese government has finally moved to allow regular investors to use margin when purchasing stocks. This should increase the Chinese public's interest in the stock market and fuel the bullish market.

Finally, retail investors made up around 80% of all stock market volume in China in 2016. Now, the start of the pension fund buying should attract more and more high-return-seeking institutions to the equity market.

Risks To Consider: China is notorious for difficult to analyze information flow. This makes trading on economic news items, as well as company reports, a risky proposition. While there is potential for outsized returns currently, investing in the Chinese market is only for risk-embracing investors prepared for volatility.

Action To Take: Go long on the Deutsche X-Tracker Harvest CSI 300 ETF (NYSE: ASHR) on an upside break of $25.70 per share. My upside target is $32.00 per share and initial stops are suggested at $23.77 per share.

Editor's Note: This little-known indicator predicted the last market collapse... and can save you from the next one too. Full details here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.