China -- Shanghai Composite

Big China's stock market has been captive to sizable speculation away from stocks and into both
commercial and residential real estate since mid-2009. Moreover, accelerating inflation over
much of 2010 crimped the p/e multiple on the Shanghai as players raised the return rate at which
future earnings are discounted. Now, the inflation thrust measures have been signaling yet higher
inflation ahead, but the Gov. has moved in to administer certain prices and to re-shuffle the weights
of the CPI components and, presto, inflation is showing signs of moderation. The stock market
has recently responded positively to the Gov.'s signal. In addition, China's money M-2 has continued to decelerate down from an alarming 30% yr/yr growth to 17.2% through 1/11. I continue to be of a
mind that we will see M-2 fall below 15% yr/yr in the months ahead, which will take further pressure
off the inflation rate down the road. There are signs that the real economy is cooling some as well,
but I think the politics of the Party still tilt in favor of bringing the growth of money under greater
control first.

I view the Shanghai Composite as fairly valued in a range of 3000 - 3200, and I note that the 3200
level has proven to be a growing source of resistance ($SSEC chart).

Since underlying inflation pressure has not peaked yet, it is hard to say for how long players will
go along with the idea that the China CPI is moderating. the market is in an uptend now, but for
it to be convincing, the Shanghai -- now 3000 -- has to move up to and take out 3200 resistance.
I do continue uncertain re: the Shanghai short term, but with a major changing of the political
guard coming in 2012, I think the Party would like to see a rising market to herald it. So, I am
looking for a bull run to start at some point this year.