Are the Chinese stock markets poised to drop again? And if they do will it be a buying opportunity or the beginning of a bear market? Those are the questions that are on the minds of stock traders and investors as the Asian markets stumble lower. Perhaps the only answers will come from America, predominantly from the Fed and the economy,

So far Monday there has been a 5.5% drop in the Shanghai Composite Index, with Hong Kong down 4.7%. This is following the drop in U.S. markets on Friday, and reflects the insecurity many have about the next moves of the U.S. Federal Reserve. Expectations after last weeks astounding .75 basis rate cut were that this week’s regularly scheduled meeting would provide another .50 basis point rate cut. Those expectations have come under question and the markets have sold in the face of that uncertainty.

The lagging U.S. economy is causing ripples throughout the world. Fears of a recession in America have hit financial sectors across the globe. While the Fed’s rate cuts have been a strong reassurance, the underlying weakness of the economy is still a factor that affects everyone. Many are looking to see if the proposed stimulus package will be enacted in time and with enough force to avert further slowdowns. The final effect of the stimulus plan is debatable though.

So as the Chinese financial sector bobs like a buoy on the ocean, fears of further losses both near-term and long term are abounding. One thing that is not being spoken about is a benefit that only China has in this year. The Olympics.

Unlike the forced injection of capital planned in the U.S., China has the Olympic Games which will bring in capital to its communications, travel, lodging, and services industries. This boost is temporary, but is enormous. 2nd and 3rd quarter numbers are bound to get a bonus, and coupled with continued lower rates from America could overcome any world recession fears.

The real questions seem to be, is America in a recession, how long will it last, and how slow will it be. There is no question that world interest rates will be going lower, led by America. It’s likely that another .50 - .75 basis points will be dropped before the end of the year. Most might agree that it could happen as soon as the end of the 2nd quarter.

Perhaps the only sector that is weathering the questions and intermediate volatility with relative ease has been the mining sector. Huge demand for gold and other base metals continues to be on the rise in China and India. Prices for gold remain at virtual record levels, with futures markets still trending up.

So whether or not the Fed moves rates this week or not, the real questions will take a month or 2 to be resolved. Until then cautious decisions and opportunities will rise and fall like an Olympic pole vaulter. [Obviously joke writing is not my main pursuit.]

Labels: Federal Reserve, financial sector, Hong Kong, Olympic games, Shanghai Composite Index, stock market

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

Well now that everyone has finished the turkey (minus a few leftover sandwiches), let it digest, and worked off the extra weight running around shopping at every store with a discount sale it’s time of me to get back to work. There has been a lot worth writing about, but let me start with a simple thought. The economy.

The economy is perhaps not the simple part of the thought. It has far too many factors involved, and minds far greater than mine have debated endlessly about what will and does make it move up and down. But as a man who pays attention to the events and has a decent hold on current events I’ll throw my 2 cents in.

I had a friend recently ask me what I thought would be happening to the economy, and my answer was it’s going to get bad. Perhaps recession bad. And I added that the current group of Democratic candidates may only make it worse.

I say this because of several factors. Not the least of which are, the housing crisis, the financial sector, the cost of oil, and potential tax ramifications based on the current plans announced by candidates.

Let’s look at the housing crisis. While there are estimates that state the maximum reach of the crisis is on 5% of homes, I think it fails to take a couple of things into account. While only 5% of home mortgages have failed now, I would expect these are the early defaulters. I would guess that there are another 10-15% of homes in danger of default. Given that the Fed has lowered rates, these homes on the edge have gotten a bit of extra time, but that does not fix their problem.

This leads us to the financial sector. Already several major banks are claiming huge losses due to the bad loans they have made. In order to recoup their losses and in hopes of preventing more credit is being crunched. This means that large- and mid-sized corporations will have less capital available to them, and some short-term loans may be called or canceled. That does nothing to stimulate growth. Plus variable loans to the riskier ventures will invariably go up to offset the losses in the home sector. Thus the purchase of houses must slow, the real estate markets will cease top be a haven for a while and money will have to flow into new areas for investment.

Now when you consider that the corporations are getting higher cost for loans, or being denied, this is happening at the same time that costs for fuel are going up. A lot. That hits profit centers fast. Thus profit margins shrink at the same time that retail is hitting its greatest need for the annual shopping rush of the holidays.

Keep in mind that small companies will be cut off from loans by banks since their credit and assets are too weak in a tight credit market. Add the higher cost of transportation and several small companies will fail to make it thru the end of the year, I expect. That will hit all the businesses that supply and help them operate.

Also keep in mind that as I recall the market virtually never rises, or even maintains its level without the positive performance of the financial sector. As I mentioned that sector is already failing. As the dominoes fall I expect them to perform worse near term. Thus that is direct downward pressure on the market. And while the holiday sales will help retailers absorb the cost of higher fuel, the consumer will likely spend less (or buy items with greater discounts) because the cost of heating their homes and electricity and mortgages are all up.

What’s the last piece of this puzzle? The Presidential race. We have a critical election where several nation defining events will occur. Already several Democratic candidates have expressed expanding entitlement programs. Those programs, like nationalized healthcare, must be paid for via taxes. Those taxes will come from companies making less profit and citizens with less discretionary income. (And a bailout of the mortgage crisis costs even more that needs to me recouped from taxes) This is beyond the fact that when Democratic candidates are elected (which could happen in 2008 – which is a bad thought) the markets normally react poorly initially, when looked at historically.

Add all that up and you have a stagnating market, with reduced sales, higher costs, shrinking profit margins, higher taxes, horrible bond rates, and depressed real estate values. I call that a real problem. Especially if the tight credit, higher fuel costs, and higher taxes cause more home mortgages to fail than just the 15% low-end estimate I posed earlier.

What’s the best plan? Well I used to tell my clients (back when I was a broker, years ago) that we can assume these events as facts and plan for the worse. Set up a plan to sit and wait for a couple of the trends to reverse, and take advantage of market overreactions where possible (the market is more emotional than fact driven even in the best of markets). Is that the best plan for you? I have no idea.

Discuss this with your financial professionals, read what better minds than I say, and make up your own mind. Just remember, it’s all connected, and there is never a perfect answer.

** This can also be seen at Economist Blog where I am an occassional contributing author.**

Labels: credit market, Democratic Party, election 2008, financial sector, heating oil, holiday retail sales, mortgage loans, Presidential race, real estate, stock market