Tuesday, February 27, 2007

When China Sneezes Now....

....we better start having Kleenex around:
NEW YORK Feb 27, 2007 (AP)— Stocks plummeted Tuesday, briefly hurtling the Dow Jones industrials down nearly 550 points as Wall Street succumbed to a global market plunge sparked by growing concerns that the U.S. and Chinese economies are cooling and that equities prices have become overinflated.

A 9 percent slide in Chinese stocks, which came a day after investors sent Shanghai's benchmark index to a record high close, set the tone for U.S. trading. The Dow began the day falling sharply, and the decline accelerated throughout the course of the session before stocks took a huge plunge in late afternoon as computer-driven sell programs kicked in.

The Dow fell 546.02, or 4.3 percent, to 12,086.06 before recovering some ground in the last hour of trading to close down 415.86, or 3.29 percent, at 12,216.40, according to preliminary calculations. Because the worst of the plunge took place after 2:30 p.m., the New York Stock Exchange's trading limits, designed to halt such precipitous moves, were not activated.
So, two things: one, look out for tomorrow, and two...well, let's just say that some were more prescient than others:
Last year 2.4 million investors began trading stocks through the Shanghai exchange, a 250% increase in new accounts. That's an average of about 7,000 a day, a flood of fresh blood from san hu (as the Chinese call small investors) that is making seasoned traders nervous. "When you see shop assistants and taxi drivers racing out to borrow money to buy stocks, you've got trouble," says commodities guru Jim Rogers. "That's the market sucking in a whole lot of neophytes priming to get slaughtered."

Plenty of stock analysts and fund managers disagree, arguing that prices are simply keeping pace with China's remarkable economic rise and that accounting reform and better supervision have made Chinese companies more attractive. The country's GDP grew 10.7% last year, the highest rate since 1995. But the alarm is being sounded by Beijing officials, who are worried there could be another Chinese market meltdown like the one in 2001 that soured the public on stocks for years. On Dec. 30, Cheng Siwei, a vice chairman of the National People's Congress, cautioned investors against "blind optimism" in the country's relatively underdeveloped capital markets. China Central Television, the government TV network, last week aired a show warning citizens not to put up their homes as collateral for loans to buy stock. Authorities are doing more than jawbone. Bank lending for stock purchases was banned last month, and regulators temporarily halted the sale of new mutual funds.
So, basically, it was less than two weeks later that the architects sketch came true:

The S&P 500 right now is trading at a P/E of about 18, which is four points higher than its historic level.

It was trading about at about 48 when the market began it's recovery in 2002.

We can see what this is all about: Bush's three tax cuts that were targeted for rich investors did little to create the massive recapture of capital gains they were intended to (likely because Clinton beat him to the punch). Instead, it create recessionary conditions that were ripe for investors to tie up their money longer in income producing vehicles, forcing corporations to think more short term in terms of profitability and less long term in strategic planning. They had to maintain those profitability rates of upwards of 5 or even 6% in order to retain investor dollars in stiff competition with other investors.

The kicker of this is, as investors finally felt safe enough to start cashing out assets, that's when the market was beginning its upward climb, but it also built in a major, heavy downward spiral, which my estimate says will take it somewhere south of 10,000 by the end of the year.

Too, because the consumer market collapsed in the fourth quarter last year (something unheard of happened...there was actually a decline in consumer spending in the Christmas quarter as opposed to any other quarter in 2006, and a decline from 2005's Christmas quarter) and the housing bubble burst, this does not bode well for the markets.

The final pin in the voodoo doll of the economy was the pace of mergers and acquisitions last year.

Anytime, and I mean, anytime you hear about megamergers even being discussed is the time to start putting your money into municipal bonds and Treasuries. You know what they say about the sucker at the poker game.

If you look around and you can't see him that means it's you.

tags technorati :