About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, January 22, 2010

Shanghai Express -- In The Roundhouse

Last summer's post on the Shanghai Composite happened to nearly
catch the top for the market. I thought the market was fairly valued
but way overbought. The overbought has been worked off slowly,
but I'll return to that.

During the even darker days of late 2008, China was the first of the
major economies to step up to counter economic free fall with a
massive dose of fiscal stimulus ($584 bil. -- well over 10% of GDP)
and a round of very easy money by directing the banks to lend
aggressively. Reported data indicate the program did arrest China's
nosedive. But with rapid recovery has come a cyclical re-acceleration
of inflation. A substantial but undisclosed amount of the lending went
into speculative asset acquisition schemes ranging from inventory
speculation to real estate. Now, China is looking to regain control
over bank lending to curb speculation and to remove some of the
inflation stimulus. The investment side of the economy was the main
beneficiary of the stimulus. Factory operating rates are on the rise
but some careful observers are concerned about new plant to come
on stream in the wake of the investment surge.

The market stalled out last summer partly because 2Q and 3Q
earnings trailed recovery expectations but mainly because the
"action" moved from the equities market to the real estate market
as players leveraged stock gains to move into both residential and
commercial properties.

There is pundit talk out there that China is devloping a bubble
economy. I do not have the data base to confim that kind of view,
but common sense tells you that bank loan losses are going to rise,
that reserves held at the PBoC will need to increase and that the
banks may eventually have to add more capital in the wake of
the lending spree.

For now, China is trying to put trim in the sails to avoid a more
awkward battle with inflation and asset speculation down the road.
Cannot blame them for that. The ripple effect has been to
stifle the commodities markets in the short run as players wonder
about the effects of a possibly more muted China economy on global
demand.

My view has been that the $SSEC is fairly valued in a range of 3200-
3500. The market closed today at 3128 and is coming close to a test
of the 40 wk. m/a. The RSI is around 51 and is thus still well above
a ripe oversold reading under 30, but the RSI trend is down. All in
all, we are at the point where we see how real China concerns
actually are. Folks will be watching since China is in the lead among
the majors in grappling with whether and how to exit its big
stimulative programs.

A fall in the Shanghai index RSI to under 30 would in my view set
up a nice rally opportunity via the various etfs available $SSEC
Chart.

China is planning a bullet train connection twixt Beijing
and Shanghai...Construction to begin shortly...Seems
now that I should retire the "Shanghai Express"
phrase for a new one...

1 comment:

David said...

Dear Peter,

Just thought you should check this page out (see #7): http://jpkatz.com/resources/best-economics-finance-blogs.php