What the Bear Market in Chinese Stocks is Telling Us

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


China has been the economic engine powering the global recovery, but the engine may be sputtering based on the behavior of Chinese stocks. The Shanghai Composite has been trading in bear market territory since May 6th.

Unlike the U.S., UK and EU, which have service based economies, China's economy is heavily industrial. What takes place in China provides important information about the state of the global manufacturing. Activity in China is a key driver of the markets for industrial metals, materials, and energy. It was just announced in the media that China has become the largest consumer of energy commodities globally; pulling ahead of the United States, but the Chinese government has denied it.

Since the major Western economies and the Chinese economy have different compositions, it is reasonable to assume that their stock markets could trade in different patterns. The bull market peaks came at about the same time however. The Shanghai market hit a bottom around 1000 in mid-2005 and entered a bubble pattern in 2006, which continued until a high of 6036 was reached on October 17, 2007. As the bubble burst, Chinese stocks fell 72% until the market reached 1707 on November 4, 2008.  Unlike U.S. stocks, which continued to fall until they reached their bottom in early March 2009, the Shanghai composite then began to rally. The prices for metals, materials, and the companies that produce them tended to follow the Chinese market and not Western markets - investors should keep this in mind for future reference. Oil didn't bottom until mid-February 2009 though.

Not only did the Shanghai Composite hit its low four months earlier than the U.S. market, its high from the rally that followed took place well before the top in Western stock markets. So far, Chinese stocks topped at 3471 on August 4, 2009. U.S. stocks peaked on April 26, 2010. By the end of August 2009 the Shanghai index was down more than 20% on a closing basis, but only briefly. After some recovery, stocks entered bear market territory again for a few days in the end of September. They then moved up and traded with less than a 20% drop from the August peak for many months until May 6th of this year. Chinese stocks have continued to trade at a bear market loss since that date.

Poor performance of Chinese stocks indicates weakness in the global industrial economy. Most commodities are likely to suffer declines as a result. This has more significance for the U.S. currently than it usually would ordinarily because the industrial sector of the economy has performed best during the recovery. The much bigger service sector has remained fairly anemic despite $3 trillion of federal deficit spending in fiscal years 2009 and 2010. If U.S. manufacturing turns negative, and behavior of Chinese stocks indicates is might, the U.S. economy is likely to follow.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Puts on Inflation Trade Because of Mumbai Mamba

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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If you were watching the U.S. market this morning, you saw sudden moves up in natural resource stocks, materials, and commodities. Emerging markets are the key to global demand for materials and the meltup in the Indian stock market is bullish for this sector as well as the usual inflation hedges gold and silver. While one mainstream stock market 'expert' after another has continually warned about the punk U.S. economy and encouraged bearishness on the part of investors, the New York Investing meetup has been telling the public that commodities bottomed this winter and to get in on the action. The place to watch isn't the U.S or Europe, it's the developing economies and unless you keep your eye on the right ball, you'll never make any money in the markets (and the mainstream press will be there to insure you don't).

The Sensex in Mumbai opened up another 3% last night and after a volatile session managed to close up with a slight gain after more than a 17% rise the day before. Along with China and Brazil, India is one of the major growth stories of the world. Currently, it's use of natural resources is minuscule compared to the U.S., per capital oil consumption was only one twenty-fifth of the U.S. as recently as 2005. Like China, oil use in India is growing rapidly and has plenty of room for expansion for many, many years. India is the world leader in the use of one commodity however - gold. It is estimated that Indian consumers hold 20% of all the world's gold, putting the world's central banks to shame. Gold is the traditional form of savings there as it is in a number of developing countries. Will a richer India buy even more gold? If so, how much will this effect gold's price?

The one exception to bullishness from India showing up in hard asset stocks today is oil. Oil is struggling to get above its $60 a barrel resistance (it was as high as $60.99 in London before U.S. trading began, but fell back to the 59 level after our markets opened). I have no doubts it will break 60 soon, on its way to 70. The Memorial Day holiday in late May to Independence Day in early July is a particularly bullish one for oil. The manipulation of oil news (mentioned many times in this blog) also seems to know no bounds. What is happening in Nigeria is much worse than most mainstream media reports indicate. Why is the bad news being under reported? News reports last week were filled with bearish prognostications for oil as well, even though the weekly storage report indicated a major drop in oil on hand.

Gold and silver were weak on the open this morning, but turned around shortly thereafter. It is only a matter of time before they have significant breakouts. I was quite amused when I read a report this morning from an 'expert' who was warning that prices in the U.S. could double in the next decade. We will be lucky if they don't double in some 10 month periods in the next decade, let alone in 10 years.

NEXT: More Oil Disappears; Gold Investment Demand Skyrockets

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Negative Outlook for Market from January Barometer

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

At the New York Investing meetup we look at the first four trading days of the year as a guide to whether money is shifting into or out of the U.S. stock market. This reading was essentially neutral this year. There are others however that look at the entire month of January to gage money flow for the market. This reading was unabashedly negative. The Dow Jones was down 8.8% and the S&P 500 was down 8.6% on the month. While the stock market was suffering in January, gold was gaining strength and closed at a bullish six-month high the last day of the month. While worries about inflation (which are only going to get worse) are propelling gold upwards, collapsing corporate earnings and an economy that continues to deteriorate are pushing stocks down.

Trading activity in January only reinforced already existing trends for stocks and gold that can clearly be seen in their charts. All major U.S. stock indices, including the Dow, the S&P 500, Nasdaq and Russell 2000, pierced their 200-month simple moving averages four months ago. All of them closed below this line in January. There have only been two significant breaks of the 200-month moving average in the last 100 years - briefly during the mid-70s and for a much longer time during the Great Depression 1930s. In sharp contrast to the mega-bear stock index charts, the gold chart is extremely bullish. It indicates that gold's drop from the 1033 high last March is merely a consolidation (sideways movement) in a longer term uptrend.

The poor performance of stocks in January was consistent with the outlook for the economy and corporate earnings, which only got worse as the month progressed. Only a week ago, analysts were predicting a 28% drop in S&P earnings for the Q4 2008. Now a 35% drop is projected. Seven of the 10 sectors in the S&P 500 are expected to have earnings drops. Financials are the only sector that is likely to out and out lose money though. The next worse hit sectors, consumer discretionary and the materials, are heading toward 70% and 69% drops in earnings respectively. Health care, consumer staples and utilities are the only sectors with any possible earnings growth. U.S. consumer spending figures for December were released this morning and were down a worse than expected 1.0% (a record sixth straight drop). Until the economy revives (and this is not in the foreseeable future), earnings growth outside of companies that provide necessities or precious metals is unlikely.

While the beginning of the year provides the most valuable information for future stock performance, trading at the beginning of the month is also something that should be watched. In a bull market, these days are almost always up, although an occasional glitch does happen. In a bear market, down days are much more likely during this period because money is flowing out of the market instead of into as is does during bull phases. Keep an eye on this during the rest of the year, especially at the beginning of a quarter.

NEXT: Government Action on Both Sides of the Pacific

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.