Let me see if I understand this correctly.

"A jump in unemployment sent stocks sharply lower Friday as investors feared that Americans won't soon deviate from their tightened budgets."

That means that someone thought consumers would go back to spending money, or realistically increasing debt, because the new year started? Or they thought that the $120 a month less in taxes (for only 4 months) President Obama has proposed was going to spur new home purchases? At the same time that nearly every industry in the nation is slashing jobs?

It must be great in the world that some of these economists live in.

We have lost the most jobs in this nation since 1945. That's at the end of WWII, when we scaled back from the massive military supply we needed for the war. And I believe more people had more savings and less debt than today - even adjusting for inflation. And the Government had none of the debt we have today, or will soon have even more of if Congress and President Obama get to spend as they plan on doing.

How could anyone look at the 2nd half of 2008 and not expect consumer spending to continue downwards. To expect the stock market to continue in the bear market that it's been in for months now. I mean what did they expect, President Obama would smile and the world would just step up and buy stocks?

President Obama is a Liberal Democrat. He has said from day one that he will increase the deficit, spending more money than ever before. He has made it explicitly clear that he intends to get even more money from fewer sources, business and the higher incomes. What exactly counts as higher income keeps changing, and getting smaller. And business really loves to have to pay more money as sales shrink.

Let's not forget that with the mismanagement of the Fed and the Treasury (neither of which is President Obama's fault - given) we have wasted billions of bailout dollars, have a line of industries waiting for their turn at the free money ATM called Government, and inflation is the one word no one wants to talk about. And inflation will be the one thing that really kicks everyone's ass.

Of course President Obama will say that the sky is falling tomorrow if he doesn't get to give away all our money. That's polispeak, meaning that he wants to look good at trying something that can't work so he has some political clout before it all falls apart. Then he can point backwards in time and blame everything that fails in his plan on President Bush. Politics as usual.

Of course these "old politics", that President Obama promised to banish, are very good at keeping political clout but horrendous for low wage earners and small business. The stock market knows this. That's why its a bear market. And as we approach the inauguration, I expect even more selling. I mean why have an investment when the taxes on it will cost more than you expect to make in the next 2 or 5 years.

As a stockbroker I learned to look for capitulation in the market. That emotional point when people just give up. That's when smart money jumps in and buys. Except that the emotional selling all happened in September and October. Since the election smart money is selling. And that means things are really going to get worse.

Until there is a reason to buy stocks, the market will continue to slowly slide down. Never in just a straight line, but trend down it will. The Democrat-led Congress will authorize spending in new programs that will not help any one get a job or start a business. The President will come up with plans on how the Government can take care of everyone, while being in every pocket deeper than before. And $1.2 trillion dollars in debt will look like a target to strive for in coming years.

I've said it before and I will again, a Nancy Pelosi and Harry Reid Congress with the most Liberal Democratic President in decades equates to double digit inflation, double digit unemployment, rock bottom consumer confidence, and business bankruptcies all not seen since the Carter Adminsitration - if we are lucky to have it that good.

So who is surprised? Not me.

Labels: American economy, bear market, Congress, credit crisis, Harry Reid, inflation, Nancy Pelosi, Polispeak, President Barack Obama, stockbroker

Last year I was looking at the gold markets and speculated that gold would surge along with several of the gold stocks. On December 6, 2007 I rebuffed the claims of Goldman Sachs when they stated to sell gold. At the time the spot price was $855.

In January of 2008 I pointed out a few gold stocks:

• Streettrack Gold Trust
  
• Barrick Gold Corp.
  
• Agnico Eagle Mines Ltd.
  
• Goldcorp Inc
  
• Western Goldfields Inc
  
• Agnico-Eagle Mines Ltd
  
• Alamos Gold Inc
  
• Anatolia Minerals Development Ltd
  
• European Goldfields Ltd
  

- each of which was soaring. At the same time I was pointing out my belief of what would happen to gold spot prices, oil, and the Dow Jones Index.

"All stock markets, all financial markets, move on emotion first. That’s given. And few things are more emotional that 1.25 basis point moves by the Fed in a week. But fundamental facts of the markets always come to fore and correct the emotion. To me, $1000 gold, and higher gold stocks across the world, is as fundamentally sound today as when I discussed it earlier this month and in December of 2007."

Which lead me to state

"Now I will go one step better. If supply remains constrained, as we can see is likely, and the U.S. economy has the mild recession now being stated by the Federal Reserve. If oil production is cut, in combination with the recent U.S. refinery accident that has placed pressure on capacity, and Senator Barack Obama becomes the Democratic nominee for the President of the United States. If all those actions occur, which seem 80% probable to me at this time, then I believe that gold spot prices in excess of $1125 are possible by the end of this year. Commensurate with this move should be gains among the gold mining stocks across the world."

How close did I get? $1035. Close enough for me and many others. And then gold drifted down. The power outages in South Africa were resolved, oil prices peaked and then dropped. The world was consumed with the problems of the mortgage bailout and then the credit crisis. Major financial institutions failed and/or were on the brink of collapse as politicians (like Barney Frank), The Fed, and the Secretary of Treasury all scurried around like rats on a sinking ship.

Now we have entered 2009 with several important facts known. Interest rates are at all-time lows, the mortgage crisis has yet to be abated, oil is on the rise again - albeit from lower levels than seen in recent years. The American economy is leading the world into a depression, and at our helm is a new inexperienced highly liberal Democrat. None of these things are positives.

The American Government is about to spend even more money than all of 2008 combined, with a Democrat-led Congress that has no desire to reign in the Democrat President. Both his policies as stated and his indicated primary goals are wastes of money on a grand scale few countries could ever command as their GDP.

Thus we are seeing gold sit at $879, the Dow at 9034. That's just about 2000 points lower than my initial expectations for 2008, but above the lows of the year - barely. What will happen next?

In a move much like what was seen in 2008 we will see gold and gold stocks rise. I again call for gold spot prices to hit $1125, with gold stocks reaching new 52 week highs. This will likely be coupled with a reduction in oil production, increases in crude oil prices (to a high of around $105 a barrel again), an ethanol glut, higher energy costs, increase home losses, the failure of more financial institutions, the bankruptcy of at least 1 major auto company, and higher unemployment.

The new stimulus plan envisioned by President Obama, some $850 billion dollars (about 5x the Bush stimulus), will stabilize investor fears and consumer confidence for 1 quarter. Then the resulting fact that most of the money was spent on mortgages, credit cards, bills, or placed into bank accounts and mattresses will be seen. And the economy will drop again. The stock market will drop to about 7600 - as I stated in 2008. The bear will roar.

Gold and gold stocks will be one of a few places investors and those that fear financial institutions will run to. Crude oil will be another. Demand will outweigh supply, and emotion will propel prices ahead of that. For 9 months of the year the economy will be abysmal.

If I am as correct as I was in 2008, then my expectation for gold will be in excess of 90% correct. In terms of the Dow I am being overly generous, if my past predictions are accurate. And Crude oil will likely exceed and then under-perform my belief.

While many will feel my thoughts are overstated, as they did and were partially correct in 2008, I believe that the overall outlook is less stable than in 2008. Politics internationally are as bad with Israel and Palestine trading rockets and Iran moving forward on creating nuclear weapons. Fewer banks are making loans, and fewer people and businesses are qualified to get them. Democratic spending is looking to increase the national debt to levels unseen, without any real expectation of improvement. Government interference with private business is greater than ever before - with the Government consistently proving it has no clue on how to run anything.

It is quite early in the new year. Our new President has yet to be sworn in. Much in the world is in flux. So I hope to be wrong, I hope very wrong, in what I am predicting. But I believe that at the end of this new year I will be no less than 60% correct. How you act on that is up to you.

Labels: American economy, bear market, Congress, crude oil, Dow Jones Index, gold spot prices, mortgage crisis, President Barack Obama, stimulus package

It’s amazing the various views and means by which so many try to predict where the gold markets will go and for how long. There is the fundamentals view, which I tend to agree with, charts, moving averages, economic indicators, lucky shoes, and so on. Each one has there own merit, and detractions. And to give you an idea, here is one thought I’ve recently seen.

“When you take a look at gold stocks they also are badly lagging the metal. Even though they made new 52-week highs early in January they underperformed the metal when they did so. This is important, because usually the XAU/gold and HUI/gold ratios lead gold and gold stocks. It is bullish when gold stocks outperform gold and when they both go up and gold stocks lag that is a powerful negative divergence that usually spells some sort of top being made.

I do expect the broad market to continue to rally - and expect that rally to keep a bid under gold stocks and commodities. But once the broad market tops, and I expect this to happen in March, I think we will see a big 25-30% correction in commodities and gold stocks. The Chinese stock market is likely to fall 40-60%! If we get such a correction I look to see the XAU bottom in the 130-145 area.”

Sounds a bit ominous doesn’t it?

Then there are the views I hold. That we know supply will tighten due to the multiple mines that shut down because of the power outages. Those outages are expected to last another month or so. Demand in China and India has consistently been on the rise, but the recent winter storms in China have affected millions. Businesses have shut down and people have been stranded. Thus their demand should decrease for a short period, then spike and normalized.

The U.S. economic outlook is still bleak. Though the Federal Reserve has cut rates dramatically in January that won’t really hit the economy till the 3rd quarter at best. A recession in America is a fact to many people and industry sectors. Oil, though down from January highs remains above year ago levels. And the U.S. stock market is leading the world markets lower, with financials still not done with the mortgage crisis.

Based on my observations, gold continues to be a strong choice. Given that many of the gold miners have pulled back, either through regional difficulties or profit taking. Considering the moves they made in the positive compared to the losses in the broad market a pause is to be expected.

Gold and gold stocks are a hedge versus a weak dollar, bad economic forecasts and weak general stock market movements. For the various gold investments to correct 30%, you would expect several of those factors to improve. At this point there is no indication that it will happen. In fact, once the unpredictable conditions of weather and power are resolved, the obvious expectation is that gold should increase since the other factors look to take several months more to even begin to improve.

Thus the question is what will be correct. Will gold and gold stocks fall into a bear market of their own, pulled down because of chart and moving day averages? Or will the fundamentals of demand and weak economics continue to propel gains made in January.

I’ve heard many arguments for both. And each always has their days when they are proven correct. But considering gold is again at the $900 level, plus my own personal preference to fundamentals, I say the charts will be wrong.

As always time will tell. Keep an eye on when the power comes back on, and the storm recovery is done. I think a spike will hit the gold stocks and the spot prices, and growth will continue till May or a bit later. And I still expect to see $1000 gold spot prices, with a commensurate move in individual gold stocks, long before then.

Labels: bear market, Chinese stock market, economic forecasts, economic indicators, Federal Reserve, gold spot prices, gold stocks, HUI, moving averages, XAU

As the 23rd of January started in China, a surge of anticipation and excitement took over the feelings of despair and impending doom. Poetic imagery indeed, and it even has a ring of truth to it. More likely the collective held breaths were let out and nervous tensions eased a bit, after the U.S. Federal Reserve cut rates a massive .75 point on the first trading day of the week following the Martin Luther King holiday. The rate cut helped buoy they U.S. stock markets which had opened 450 points down, to only have lost roughly 1/4th that amount by the close.

The impact has been felt on the other side of the planet, and China has rebounded well in the early trading. The Shanghai Composite Index move sharply in the first 5 minutes of trading to gain nearly 2%, ending a 6 day plunge that has totaled some 17% off the Index. Hong Kong Monetary Authority has followed the U.S. Fed dropping rates to 5% from 5.75%, and Chinese banks were expected to do the same, though not necessarily as deep a cut.

Several sectors performed well in the wake of this action. Mining stocks, and particularly those with gold, stood out with better than average gains. This is no doubt due to the combination of continued demand from India and China, the weaker Dollar, and the hedge that gold provides in instable and volatile markets.

BHP Billiton Ltd., the worlds largest mining stock had a dramatic start rising more than on any single day in the past 2 decades already. Bank of China Ltd. was also moving ahead after posting a profit that reversed the expected loss due to sub-prime mortgage loans.

Expectations of a further .25 basis point cut from the Fed at it’s month-end meeting helped to fuel further gains, and increase speculation about the future of the U.S. markets.

Now take a moment to absorb all that.

The Chinese markets have felt the same pain that the world markets have endured, and the relief that America has brought. But that relief may well be conditional and temporary. As mentioned, expectations are for an addition rate cut in the coming days are high, and the future outlook on the American economy is murky at best at this moment.

According to Marvin Fausto, Manila-based chief investment officer at BDO Unibank Inc.,

“Until economic data show the U.S. is out of a recession, sharp gains in equities will not be sustained.”

Add to that the mystery of the Chinese banks losses from sub-prime loans, because Chinese banks aren’t required to announce those losses until April, and things look even shakier.

“We don't have a good read" on the current value of mortgage holdings at Bank of China and other Chinese lenders, said Charlene Chu, a senior director at Fitch Ratings China.”

Now add in the fact that China will allow, on a trial basis, commercial banks to own stakes in insurance companies. And don’t forget the Olympics are coming mid-year.

What do you get?

That is the current state of Chinese stocks. One thing that can be presumed is that the potential recession woes of the United States is far from over in its impact on the world markets. Continued losses due to bad mortgage loans, high oil prices and a rush to gold are all going to have major impacts on the global economy.

PetroChina may well have a bounce that extends further into the year, and mining stocks can see continued interest from hedges with gold and the increased demand from India and China. Financials and insurance may get further interest as banks seek to acquire positions, offsetting potentially bad loans and adding assets to their balance sheets. Transportation, communication, and service industries are still all expected to have a boost from the Olympic games.

Considering the volatility in the world markets so far in the first month of the year, 2008 will keep everyone on their toes.

Labels: Bank of China, BDO Unibank, bear market, Charlene Chu, Chinese stocks, Fitch Ratings China, Hong Kong Monetary Authority, interest rates, Marvin Fausto, mortgage loans, Olympics, stock market

So where does gold, and gold stocks, go in this new market of overnight rate cuts? Yesterday the American stock market was closed for the Dr. Martin Luther King holiday, but the rest of the world markets dropped like rocks. Europe was down almost 7% in each nation, China dropped 5.5% and India fared no better.

So in the face of that news the U.S. markets opened with a drop of 450 points, and the Fed cut interest rates .75 basis points. It’s taken the rest of the day but the market seems to have recovered virtually all of the loss.

But what happens next?

Well the chance of the U.S. stock market dropping 18.5% was one factor driving the price of gold. While the interest rate move has been an impressive move not seen in decades, it also means that the real effects of the rate cute won’t be felt for 6 months at the very earliest. The losses from the mortgage crisis are still not over, and I still continue to see further hits to the various financial securities. Oil is still higher than it has been for decades. Consumer debt has reached more than 50% of the U.S. population.

Gold may have retreated a bit, but the environment hasn’t changed in my opinion. And I’m not alone.

“We suspect that the cuts won’t work. Sentiment has turned and people and companies are now focused on rebuilding their balance sheets. Looser lending conditions will be used to repay debt, not to borrow more. One way or the other, the US is heading for recession, and rate cuts now only risk making inflation a real threat.Of course, it’s all good news for gold. Gold has sold off recently, almost certainly in part due to various players rushing to liquidate easily sold assets to fund losing positions elsewhere. It looked set to fall further today, but the Fed’s announcement arrested the decline almost immediately. We suspect it will be back above $900 an ounce before too long. - John Stepek”

I agree that the current drop in gold has more to do with liquidation for cash in hand than any change in sentiment. Given 3 days for settlement of trades, and margin calls to come out, there may well be a change in direction back to the previous trend.

"This smacks of panic and desperation, but is obviously bullish for gold as interest rate cuts make gold more attractive," said Robin Bhar, UBS metals analyst in London.

So what have some of the gold stocks mentioned recently in this blog done on this turbulent day?

Western Goldfields Inc - 1.61% up
Agnico-Eagle Mines Ltd - 4.95% up
Alamos Gold Inc - 4.27% up
Goldcorp Inc - 3.19% up
Newmont Mining - 0.42% up
Zhaojin Mining - 18.63% down Hong Kong
Lingbao Gold - 16.19% down Hong Kong

Now if you have been paying attention I mentioned there would be a drop to 11,000 on the Dow. That there would be a bear market. That gold would do well, and the financial markets would fare poorly. Given the rate cut today, and the other factors pressuring the market, I continue to believe this will happen.

With the added threat of inflation becoming rampant, I feel this is more true now than back on January 4th (Gold soars in early 2008, but will it stay lofty?) and prior(Will 2008 be a lump of coal or a nice present for investors?).

Labels: Agnico-Eagle Mines Ltd, Alamos Gold Inc, bear market, gold stocks, interest rate, John Stepek, Newmont Mining, recession, Robin Bhar, stock market

Some days I wish I was not previously a stock broker. Sometimes I hope that what I feel are likely outcomes in the stock market do not come to fruition. But time and again I find that I get it right, not always on the timing or the exact figures, but the trend. And I did it again.

Back on December 26, 2007 I wrote a post Will 2008 be a lump of coal or a nice present for investors? In essence I felt that the beginning or 2008 would be a horrible year for many investors. This also went in line with my thinking about gold and gold stocks.

Directly I stated,

“I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Key in on the fact that oil has already hit $100 a barrel this year, and Citigroup announced

“The biggest hit came from a $18.1 billion write-down in the value of its investment portfolio. But the bank also set aside $4 billion on Tuesday to cover anticipated losses on loans to U.S. consumers — a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many customers to keep up with their payments.”

I am wrong in that the Dow Jones Index closed today at 12,501. That is a far cry from 11,000 but all the financials have yet to announce their losses, oil has not maintained $100 a barrel or more, the Fed is cutting rates, and all the 4th quarter numbers are yet to be reported. Even so, the Dow now stands 12.5% below the high and beyond correction territory. It is a mere 7.5% from a bear market.

Is America in a recession? Will gold spot prices hit $903 as have been projected by some brokerage houses? Will more Americans lose their homes?

I would say yes to all. I could very well be wrong, and I hope that I will be. But I don’t see an end to this problem in the near-term. The Fed cannot prevent many of these issues with the application of rate cuts.

Those that are in trouble, or will be, with their mortgages will not be helped by lower rates as that will not cap increased heating and gasoline prices. Small businesses are not going to be able to get new loans as easily even with lower rates as financials scramble to find cash to absorb the losses they are experiencing. Effectively some degree of pain must happen and is not preventable.

I say all this for one reason. So that you my readers can be prepared. If I am correct even in part, then this nation will encounter times we have not seen for quite a while. I doubt that we will see the inflation and unemployment that existed in the 1970’s (when I was a child) but I am sure that we will see levels that those under 30 have never experienced.

Credit will get crunched, and credit card debt will increase for a time. New loans will become far harder to achieve. And costs of fuel will go higher even if ethanol additives were readily available for widespread distribution today.

And then there is the political component. Don’t be lured into the cheap vote purchases offered by some candidates. The stimulus plan proposed by Senator Clinton, equating to $500 per person filing taxes is a ploy. It’s a one time gift that will help no one. It may help you pay a bill, say heating, for a month but will do nothing else for you. Rather a tax cut might help more, adding $50 a week to your paycheck. Either way, don’t sell your vote on a quick fix that is neither.

Further, if a Democrat is elected expect the impending pain to be trebled. Increased costs for nationalized healthcare and other social entitlements will hit the pocket books. That is not to say that a Republican in office will avert any of this. They will not. Just that the historical fiscal impact of a Democratic President is view more harshly, whether or not they are the best person for the position.

So my readers, be prepared. If I am right on the trend, and it seems that I am increasingly becoming so, those that are ready will endure best. And I only wish the best.

Labels: bear market, Citigroup, credit card debt, democrat, Dow Jones Index, gold spot prices, mortgage crisis

With the start of 2008 China has had its stock market surge, yet there are some questions. Already the impact of the Olympic games in August are being felt, as the Shanghai Composite Index at 5,272.8 points. While that is a mere 0.21 percent for the day, stocks related to the Olympics as well as Beijing-based and consumption-related stocks recorded gains of up to the 10 percent daily limit.

There is no question that the Olympic games are a source for a surge in any country that is host of the games. And the effect has been seen in 2007 with the 55% gain of the year, even with the technical bear market the stock markets fell into that same year. Expectations are that gains for 2008 will reach 35%, and the IPO market is flush.

But the question of inflation is hardly unheard. In November the CPI number reached 6.9%, which is a level unseen since the last century (1996 to be more exact). This is of course causing some tightening in the financial sector, and many see that sector being held back as a result.

But the Olympics are hardly the only factor affecting the Chinese markets. There is the potential bidding war for China Eastern, that is giving some loft to that entire sector. And Shanghai Diesel Engine is another that has enjoyed the profit from takeover news.

As I’ve mentioned before, many expect the Chinese markets to out perform all of Southeast Asia. The shipbuilding sector has been the target of several analysts, others looking at the exploration and refining of oil. And as mentioned above Chinese investors have placed some $61 billion into the IPO market.

So is this the start of a great year in China? Will there be a surge in that market again this year? Will the bear market rule and become an Usra Major instead of Ursa Minor? And most importantly is it too late to be involved?

My guess would be that the answer is yes and no. Like all things in any stock market, a run in any sector begets more investors jumping in, and some are bound to be top-ticking. But given that fact, the Olympics are still half a year away. The surge in international visitors has yet to hit the nation, and profits from that are yet to be realized.

The service sector has yet to really have the same benefit being projected in other sectors. Obviously inflation will retard some of this gain, and the gain will be anticipated prior to the actual international competition. The IPO markets are an unknown factor, but considering the growth of 270% it can be expected that even more investors will continue to seek out new companies. And as with all new companies the potential to innovate and succeed is impossible to full analyize in the short-term.

No matter the short-term effects of the Olympics, which I expect will dominate news and comments about the Chinese markets this first half of 2008, there are many things influencing China stocks. Most of them are long-term factors, and will have fruition well after the gold medal ceremonies have finished.

I would say, in my opinion, that the really most vital question is what are the financials going to do. With monetary tightening and inflation realities hitting the sector, it’s not the most favored sector. But if China stock markets act like other world stock indexes, they could be the indicator that sets the pace for the year and those to come.

Labels: 2008 Olympics, bear market, Chinese stock market, financial sector, IPO market, Olympic games, Southeast Asia

While in New York City recently I visited with several old brokerage friends. During that visit we all discussed the market and what may potentially be on the horizon.

One broker, whom I respect and consider quite sharp [even when I disagree], had an interesting comment on my predictions. I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup – which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.

My friend disagrees. His view is that if I am correct in these outcomes, then the Fed will be forced to lower rates further immediately. He feels that this is the only way to stem the problem that is the mortgage crisis. This is especially true when you consider the increase in credit card debt.

“All the people with million dollar homes that would be refinancing and getting an extra $200,000… They find it hard to change their lifestyle quickly. That says nothing about most people who are feeling deflation. And add those paying the mortgage with their credit card and you have a market that needs the Fed to cut.” – Paraphrase

Sound reasoning. But I don’t think a bear market is avoidable.

The fact that the mortgage crisis is far closer to its beginning than end. I expect that there are far more homes in danger than has been seen to date. Even with the highly selective mortgage bailout stated by President Bush, many are going to be at risk. Credit card debt can only float for so long. With the added pressure of oil at or above $100 per barrel, which I expect mid-January as I stated above, more will fail even if rates are lowered (less than 2 points).

Add to this the fact that financials are at high risk. The early infusion of foreign capital may look good now, but this does nothing for future and continuing losses. It’s window dressing. With re-insurers like ACA in trouble and Japanese banks are unwilling to help bailout the shortfall (due to very limited exposure to this risk), the sector will be weak. Historically if financials are stagnant or falling so goes the majority of the market.

That says nothing of the potential of a Democrat becoming President. Again historically a negative pressure on the market. It is even graver with several prominent Democrats nearly promising to increase corporate taxes (or outright take their profits – especially oil companies).

The Fed can lower rates, but that will not stop the general malaise I see coming. At the least the first half of 2008 will not be good. A move to 11,000 seems inevitable. If I am correct then the question is this.

Will those experiencing deflation outweigh the inflation fears? And if more people lose their homes how much of our financial institutions are we willing to sell to avoid the harshest realities of a crash?

Labels: ACA, bear market, Citigroup, credit card debt, democrat, JP Morgan, Michael Vass, mortgage crisis, New York City, overseas investments, President Bush

I have often found that some of the best information comes from the least expected places. For example I recently was at a Christmas party for a top NYC law firm. One of the people I met was a trader who specializes in Southeast Asia.

This trader believes that Japan, China, and Australia will all be exceptional areas of growth throughout the next 5 years. China is his personal favorite. I paraphrase…

“China has the sheer manpower that will help it outperform. In many ways it is similar to Japan of the 1950’s.”

It is hard to argue that point. Especially since the $5 billion 9.9% stake in Morgan Stanley was made December 19th. This positioning and the $29 billion Chinese buyers spent buying outside companies signal a long-term plan by China to integrate with the world markets in a more direct manner.

There is no question that the manpower resources available to Chinese corporations are a unique resource few nations can match. Add the previously stated investments and time, and you get growth and stocks that can surge longer and stronger than even in the last Chinese bull market.

But there are serious negatives. The Chinese stock market is hardly as transparent as many might wish. The latest bull has very recently reversed into a solid bear market. That transition occurring in an amazingly rapid month. And of course the communist nature of the Chinese Government adds political issues; some of which are known, some unknown, and 1 thing is assured – volatility.

There is no lack of investors that agree with the abovementioned trader I met. In fact I agree with reservations. While I am perhaps more cautious than Warren Buffett, China is a market that demands attention. The only question is the one most vital to all investors.

When is the right time to get in and out?

Labels: Australia, bear market, Bull market, Christmas party, Japan, Morgan Stanley, NYC law firm, Southeast Asia, Warren Buffett

Sometimes markets act swiftly. In America we have seen that since Monday, with the Dow Jones hitting correction territory and just 2 days later now resting up at 13,289. That’s a huge point swing, but when you consider China, it’s not that big a move.

Those that like distressed stocks, and have a feel for international markets may want to take a look. Of course the words of the reputable Warren Buffett should be heeded when he stated investors should be “cautious”. Why is the Chinese stock market in distress and Mr. Buffet advising caution? Because China is going through its own market bubble right now.

While you may not have heard this in the news, China had prices increase 4x in the past year. Beyond impressive growth without question. But the bubble is bursting now with massive recalls and particularly high valuations.

“Shares in the index trade at an average 44 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 17 times profit.”

Because of these pressures China has now officially gone into a bear market having dropped 21% in a single month. And some feel this is not the bottom.

“Yan Ji, an investment manager in Shanghai for HSBC Jintrust Fund Management Co., which oversees the equivalent of about $517 million. ``What we have seen now is only the start.”

So the question is, is this the feeding ground for international bears feasting on shorts as the pressure mounts, or is it an opportunity for savvy bulls picking and choosing their targets? As with any market in turmoil, there is no easy answer.

China is seeking to slow the 11% growth of that nation; Chinese brokerages are being encouraged to invest overseas to the tune of $34 billion. The last bear market lasted 4 years and caused the Chinese market to drop 50%, before rising 5x in its wake.

And some are optimistic, like

“It's far too early to talk about a prolonged bear market as domestic demand is still strong,'' said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai.”

Well overall one thing can truly be said, without risk there is no reward. But to know whether you are leaping without looking is important as well. There is no question that there is money to be made with China stocks. Just make sure you know where you have placed your footing.

**This can be seen at China Stocks Blog where I am a contributing author.**

Labels: APS Asset Management, bear market, Bull market, Chinese stock market, Dow Jones, HSBC Jintrust Fund Management, Leo Gao, MSCI Asia Pacific Index, Shanghai Composite Index, Warren Buffett, Yan Ji