Trader’s Narrative

Last week we reviewed the white hot Chinese stock market with a cautionary note. I wanted to return to it briefly because the situation is serious and deserving of much more attention.

Putting aside price charts of the Chinese equity market for now and turning to monetary measures, we can see something rather alarming happening. China’s M2 has enjoyed a constant rate of acceleration as shown in the chart below (in semi log scale). But in late 2008 the rate of acceleration suddenly increased dramatically:

This was a consequence of the massive stimulus plan put into motion by the Chinese government. They pumped unprecedented amounts of liquidity into their economy to offset the world-wide economic slowdown. There would be nothing singularly alarming about that since all central banks around the world, as well as governments in charge of fiscal policy, have orchestrated a collective burst of activity.

What is alarming is that the Chinese economy, stock market and especially real estate market are just now displaying bubble-like characteristics. The government controlled banking sector is a mystery wrapped in an enigma. No one can begin to fathom the amount of non-performing loans on the books. Unlike the US which went through a gut wrenching cleansing - thanks to the largess of the lobby-less taxpayer, the financial sector is once again back in fighting shape (privatized profits, public losses). China has yet to address their toxic assets

As we briefly touched on before, since last year’s low the Shanghai market has now appreciated more than 100%. Once again the stock market has enthralled the average person in China with thoughts of wealth and the possibility of making more in a month than what they earn in a year at their regular job. Speculation in the market is seen as not only a legitimate way to make money but a very lucrative one with low barriers to entry.

A sure sign of a bubble is extreme turnover. Recently, the total Chinese stock market turnover (in one day) reached $63 billion. That’s more than the combined total turnover of $58 billion in London, New York and Tokyo for the same day!
Continue reading ‘China’s Bubble 2.0 Threatens Global Recovery’

Amid all the wailing and gnashing of teeth, we had a successful IPO: Visa (V) went public yesterday and made history.

Not only was it a resounding success for the investment bankers in a very difficult time, it was also the biggest IPO ever at $18 billion. And it managed to jump +30% from its $44 per share pricing.

But perhaps it was because of the financial and credit market turmoil that Visa did so well. Unlike many financial companies it carries no consumer debt but instead relies on small commissions on transactions.

Leadership
Each bull market has its leaders. A few years ago, Google (GOOG) and Baidu (BIDU) debuted on the stock exchange and quickly became the darling of momentum investors. Now they both lie broken, not only below their long term moving averages but also with the sword of Democles” (overhead resistance) hanging persistently above price.

So, if we are in the painful process of putting in another bottom here, as I’ve endlessly argued for the past little while, it is wise to look for the next leadership that will breath new life into the “new” bull market.

If Visa does as well as its competitor, MasterCard (MA), I’ll be a happy camper.

IPO Market? What IPO Market?
So far this year, we’ve had only 22 IPOS. Last year, by this time, we had 47. That is a greater than 50% drop off in activity.

If you’ll recall, the IPO market has predictive abilities.

The other way that the IPO market can help us time the market, or at least understand where we are in terms of market cycles, is by being a contrarian indicator of sorts. A bountiful harvest of IPOs has almost always preceded dramatic and sustained market downturns while a barren IPO market has historically meant the opposite.

After an unforgettable debut last year, Baidu.com spent the next few months deflating but really nowhere in particular. Recently though, it gapped up on a massive volume spike and it has surprisingly stayed aloft while the general market has gone to hell in a handbasket.

And this week it actually broke above its multi-month channel. Although it does have some resistance at these and higher levels, they are not that recent so I don’t think they will have a large effect. If BIDU can continue to act with the relative strength that it has shown up till now, I think we can expect some great things in the weeks and months to come.

Yet, I can’t deny that the chart of Baidu reminds me of Sears Holdings. If you recall, SHLD was acting very strong as well… until it broke support last week and tumbled below $150. Obviously the large instutions that were dumping shares into the spike higher knew something!

Only time will tell if BIDU can actually hold up or whether it will falter like SHLD.