Tuesday, February 27, 2007

2/27 Recent Comments on China Stock Market and Global Speculation

Feb 27 (Econotech FHPN)-- In its first year, my "blog" website has evolved into a format of infrequent long pieces on "big picture" themes. Because of today's events in the global financial markets, I am making an exception to this format by posting a few recent e-mails to some close friends on the markets and global situation. These are posted as written to friends, as fast as possible, there was no attempt to back up, fill out, or qualify my thoughts, as I do in my long articles, so I sincerely apologize if I have inadvertently offended anyone in my haste. (I also don't use capitalization to speed my typing). This post is an exception, I don't intend to become a frequent blogger, I'm sorry for that, but presently only hope for your valuable time for more substantive articles on critical, and I fear dire, topics when I have the chance. Thank you very much.

Sent: Thursday, February 22, 2007 2:14 AM
Subject: Shanghai A shares index up 81% since Sep 1

u.s.-centric investors/traders should be aware that this index is at the "bleeding edge" of global speculation at the present time, up 81% since sep 1, and that since the beginning of 2007, it has become much more volatile on a daily basis. the index has put in a marginal new high. i think it makes sense to monitor it very closely right now to see whether this might be the beginning of a topping pattern after having gone nearly vertical from mid-nov to mid-jan.

it closed at 3125 at the previous peak on 1/24/07. it closed at 3148 on 2/16/07, and has been closed the past days for chinese new year. this is up from an intra-day low of 2668 on 2/06, following the first sell-off since this huge leg of the uptrend began sep 1 at 1743. if it fell 36% down to 2,000, it would be where it was on 11/15/06.

china stocks have 10% daily limits, i don't know whether that could contribute to the steepness of a potential decline, as i believe has sometimes happened in u.s. futures markets when they hit daily limits on the opening during a precipitous slide.

tonight the nikkei 225 broke 18,000 for the first time in six years, as the "free money" 0.5% interest rate global speculative orgy continues.

Sent: Tuesday, February 27, 2007 12:12 AM
Subject: shanghai a shares down -9% tonight

shanghai a shares are down -9% tonight, the most in ten years. last week i sent out an e-mail noting the increased volatility and marginal new highs in china's stock market. i got no replies, perhaps it did not go out correctly, so i will repeat what i said, that this more volatile market action has made it a key time to monitor china's stock market for signs of topping for those interested, and also that since that market has been at the "bleeding edge" of global equity speculation, especially since mid-nov, its increased volatility might come to have broader implications (especially in a global financial environment extremely risk complacent at the current time). these are always long shots, but in light of the decline in shanghai a shares tonight, i would once again repeat that suggestion, not a prediction, just a heads-up for anyone interested in monitoring this.

Sent: Tuesday, February 27, 2007 2:17 AM
Subject: p.s. very scary world once again

btw, for what it's worth, if you've been following what's going on in pakistan/afghanistan with al queda/taliban lately, including cheney's trip, the world is becoming very scary very quickly once again, yet financial markets just don't seem to care.

Sent: Tuesday, February 13, 2007 1:25 PM
Subject: QQQQ

the attached chart is a 4-year weekly chart of the qqqq, nasdaq 100 etf. since i haven't seen the following ultra-simplistic observation in print, i want to make it here. i believe the nasdaq 100 usually tops out right around the beginning of the year, after its usual 4q fun-and-games, silly season, bonus-enhancing rally. this is shown by the first three short vertical red lines that i have drawn. you can also see it by looking at the peaks in the true strength index below the chart. if this pattern continues to hold, either a qqqq decline commences soon, as in the first two red-line tops, or the qqqq goes sideways until may, which is the other usual area for a tech top ("sell in may and go away"), as in the third red-line top. this belief in the good probability of a qqqq top is one of the reasons why i "took profits" in my paper model portfolio last wed.

Sent: Tuesday, February 27, 2007 9:57 AM
Subject: reply to a question on implications of china's -9% stock market decline last night

here is an expansion of my reply to someone who asked me this morning, "i'm unclear as to what might be the broader implications?...what are the long shots?" in response to the e-mail i sent out on china's -9% stock market decline last night:

btw, just curious, but did you get my brief e-mail on the timeliness of watching for possible topping action in china last week?

by "long shots," i'm simply referring to "calling a top" in a very over-extended market such as china's, which i am not in the business or ego game of attempting to do, merely monitoring things to see if it does in fact seem to break down, in line with my investment philosophy that i've tried to articulate to you the past year or two.

some possible broad implications are first, that cyclical bull markets, such as the global one since oct 2002, almost by definition don't end until the big uptrend in the stock leadership groups, and key financial/economic phenomena, of that particular cycle finally gets over-extended and starts to break down under the burden of too much unjustifiable risk taking.

china and emerging markets more generally are one of, if not the, key such groups in this particular cycle (financial stocks being another, tech obviously in the last in the late 1990s), so if they finally decisively break down, which would likely take a while, then this bull market cycle is likely over, needs to go through a correction, even bear market.

despite the sharp correction last may-june, that trend breakdown did not happen, which is why i said a number of times on my blog site since early june last year that the global bull market still seemed to me to be intact. it then went through what might have, in retrospect, culminated in a "blowoff" upside stage in china recently (and also in private equity deals, btw, the latest record deals might be another proverbial "ringing of the bell" at a major top).

another broad implication is that if china's decline yesterday is an indication of a beginning of an increase in global risk aversion, then this ultimately might have very broad, profound and unforeseeable negative implications, simply because such risk aversion has been virtually non-existent, with a recent exception of the u .s. subprime real estate mortgage market.

in such an environment, all sorts of unexpected "negative surprises" whose potential were previously simply swept under the rug can seemingly come out of nowhere and begin to accelerate a downward, reinforcing spiral of increasing risk aversion, again not forecasting that, but that's just how it could happen. i.e., when it rains, it pours.

e.g., just like most u.s.-centric investors/traders really don't viscerally appreciate the recent degree of speculation in china since it's not something they deal with, perhaps even much more importantly, they have virtually no idea of the impact of the "yen carry trade," despite repeated references in the financial press to financing global speculation using the ultra-low interest rate currency of japan.

of course, the standard counter-argument to all this has been that modern financial products have dispersed risks so broadly that there are no critical weak points whose failure could cause systemic problems. which may be why there has been so much global risk taking, the previous financial circuit breakers and fuse boxes don't get tripped very early.

another possible implication is the most obvious, if china starts to falter a bit, then that is probably a sign that the global economy will slow down somewhat in the second half of 2007.

if any or all of these implications start to gain any credibility, there is often an initial "flight to safety" reaction which tends to benefit less risky assets, often perceived to be u.s. dollar based. so it would also be interesting to watch if this is the reaction again if this plays out a little more.

of course, china's market decline just might just be one-night blip in a global speculative orgy. as all the players know, china's five-year party congress this fall and olympics next year has made investors in china extremely confident that the game won't be over anytime soon. so it's a little more interesting now.

also, i sent out a second e-mail late last night noting increased geopolitical risks, mentioning pakistan/afghanistan. i.e., things could also surprise in many hot spots, in either direction. e.g., it's quite possible that the new draft iraq oil law announced yesterday gives the oil multinationals exactly what cheney/halliburton crowd have wanted for nearly two decades now (it may have been written by them), i need to read more about it first.

i.e., global events and markets just might be entering a more surprising, fluid phase, of which the china decline last night is a harbinger of unexpected things to come. so once again, heads-up. or down, depending on your proclivity.

in closing, i want to re-emphasize that i don't try to "call tops," i don't play that game. i simply try to tune into the increase in volatility as a possible indication of an unfavorable changing risk-reward ratio. in the past, i've found that taking more risk for the same or less reward is generally not a good strategy/tactic. then again, that's just my personal preference, and those of you who know me should factor that in, of course.

Sent: Tuesday, February 27, 2007 12:35 PM
Subject: p.s. global real estate bubble

p.s. in an earlier e-mail today, i emphasized the international aspects, especially the stupendous changes in emerging markets, in part because of my strong bias that in historical perspective those will be seen as the seminal change of this era

that said, i did not mean to in any way understress the importance in this particular economic/financial cycle of global real estate speculation. it's just that for u.s.-centric investors, whom i was sending this e-mail to, that issue continues to be beaten to death, it is extremely well-known, whereas many of them often don't see as clearly the stuff coming from overseas.

(also, i have yet to see a fully satisfactory explanation of the ultra-low long-term interest rates that have underpinned the real estate bubble for so long, though i have my views, based on under-real-investment, not so-called "excess" global savings, given the huge unmet basic needs of most of the world's population).

very few u.s.-centric investors/traders, let alone the general public, see these international risks as clearly as they do the domestic ones, such as the real estate bubble, understandably so, especially given the mass media. so that is what i have tried to alert them to. many, many others are doing a great job on real estate and other issues, so for me to emphasize it would be redundant.

of course, emerging markets and global real estate are completely interlinked. ultra-simplistically, it is the enormous improvements in global productivity derived from shifting hundreds of millions of essentially peasants into the modern industrial/urban globalized economy (similar to what happened in the u.s. national economy following the civil war from the 1860s to the 1920s), that is the driving force, so to speak, that supports the enormous wasteful speculation in the global markets.

just like most of the twentieth century's growth, especially from 1945 to 1971, rested on the foundation of essentially "free" hydrocarbon energy created by nature tens of millions of years ago to be finally tapped, for the past two decades, especially since the end of the cold war, the recruitment of essentially hundreds of millions of "free" labor has been the "free energy" increasingly driving the global economy, employing up until now a lot of the technology of the advanced sectors.

hence my focus on that process, for what it's worth.

(btw, as an historical footnote, i view the accelerated development of "emerging markets," home of most of the world's population, as the continuation of the key seminal change since the end of ww ii, initially called decolonization or anti-imperialism by leftists, not the cold war per se, which i view as a u.s.-centric perspective.

in that light, i sometimes tend to view communism, despite its origins, not so much as a european authoritarian political philosophy, the so-called left version of the right's fascism, but rather, based on where it actually took political power on the eurasian mainland in russia and china, as a very distorted and unfortunate historical abreaction to the very negative effects on global development of the western capitalism of that earlier era in the first half of the 20th century.

imho, it didn't have to be so, and decades of tragedies, such as the vietnam war, the great leap forward and cultural revolution in china, etc, could have and should have been avoided, especially if the u.s. had played the european decolonization game following ww ii totally differently, rather than subsuming it under the cold war on communism prism as ww ii drew to a close.

unfortunately, again imho, the same thing is playing out yet again in yet another permuation, under the guise of the war on terrorism or radical islamic fundamentalism, whatever bush/cheney wants to label it. too bad, but it seems being susceptible to this exaggerated good guy/bad guy stuff is just human nature. it was just a lot less dangerous when the "wmd" were swords and spears instead of nuclear bombs and missles.)