Mario’s February Stock and Financial Market Takes Plus A Taste Of China

By: Mario_Cavolo

There is no substitute for the daily hours of studying, researching and watching the markets. While it is analytical, you also develop a feel for it that's hard to explain, "get in the groove" so to speak. That’s just when the market will make a fool of you and takes lots of your carefully strategized money. With those caveats in mind, if you are long stocks right now, you're basically out of your mind. WHY would you be long stocks right now? The markets are correcting downward lead by the China/HK markets because valuations after this past year's rise are too high relative to overall economic health.

As you may know, the stock markets anticipate the economic situation by around six months. In other words, if the stock market is rising for a few months as it did last year, it is doing so anticipating, we could say hoping, that the economic fundamentals will follow over the course of the next six months or so. The other rule to remember is that the stock markets and other asset classes like commodities & gold will generally go up when interest rates go down. Simple.  Because o f expanding debt levels and their inflationary impact on the economy, interest rates are starting to rise. Hence, the weakening of the uptrend.

If you want to understand the markets, you must look at and understand the correlations between the asset classes- global stocks (Euro, U.S., China/HK/Japan), gold, oil, and currencies. If you only watch one or two of them, you are at a big disadvantage. How can you possibly understand stock and gold movements if you don't understand the connection to the EUR/USD and AUD/JPY movements? Beyond that, there are the agricultural commodities to consider.

Global Stock Markets

At this juncture, there are several factors threatening future growth and stability worldwide, mostly related to debt levels. I'm using nice, professional words here, rather than Marc Faber's fabulous "We're doomed, we're doomed" from a couple of weeks back. Countries and their provinces, states, municipalities have too much debt. As the PIIGS countries of Europe, plus England plus the USA, especially California are over burdened by debt, that fear is now front and center registering in market sentiment.

Whether this is a bull market rest or an end to a bear market rally, we are definitely in a bearish corrective cycle at this time. Technical Analysis suggests that 9600's on the Dow and 1025-1040 on the S&P will hold as the lower support levels and we'll be trading in this range for most of 2010. With nasty news, those levels will not hold. Who cares? We should be in cash, period. And as explained below, in USD cash.

Between disappointing economic improvement, stubborn high unemployment levels, and sovereign (country level) debt defaults, we simply don't have a rosy picture suggesting stocks will continue their wonderful rise of last year. Corporate earnings have been coming in pretty good in fact, reflecting cost-cutting and productivity improvement efforts. That's the good side but not enough to make any sane person think the stock market will rally another 50% in 2010. GS (Goldman Sachs) is leading the financial sector down. A strong upward swing is much less likely, reasonably expecting the stock markets to go perhaps a little up, perhaps a little down and mostly sideways in the range from current levels until Summer. 

Bad News Could Come From Any Global Region

United States

In the United States, the economic struggle including real estate deflation will probably continue for several more years. The markets are subject to any number of a dozen shocking announcements that will send the markets plunging. Maybe, maybe not, but this will probably happen, so expect some serious volatility. In addition, during this next 3 month time period, an avalanche of mortgage rate resets are coming in the U.S. and could easily bring another crisis scenario. The banks are still playing their high leverage games that threaten the stability of the system. They're not lending out the money they're getting. They're using it to generate profits for themselves.

China

Here in China, there could be bad news on the horizon because they overinflated the housing market (trust me I live here, they did.) Same as the U.S., the Chinese government poured a Niagara Falls of liquidity into the markets, of which around 50% was misdirected by more greedy rich people into the real estate and stock markets here; feeding the speculative, Macau gambling mindset of the Chinese business world. For example, during the past year Shenzhen banks virtually ignored stricter lending guidelines from the central government and now Shenzhen also has quite the bubble. Hainan Island is also bubbling over beyond reason; property prices have close to DOUBLED IN THE PAST MONTH; including the capital city of Haikou whose winter weather and shoreline is nowhere near as tropical, sexy nice as Sanya 300km south at the southern tip of the island.

Do however keep in mind, that China, both the government and private sector, still has much lower leverage and much more cash compared to the already bloated Western economies. This FACT may prevent any serious declines from becoming nuclear meltdowns (Speaking of nuclear, did you know China is building at least 50 new nuclear plants?) Human beings have a different mindset when they can wait out a problem and don't NEED to sell. That's why it feels so nice to be wealthy and/or have little debt.  Here in China, I think lots of real estate buyers currently paying 400EU per square meter are going to regret it, but 50% of those property owners have NO mortgage and the other 50% put 20-30% down so they can afford downside without panic selling unlike the U.S. last year when everyone’s debt/mortgage load was maxed out. 

Euro Region

There could be more bad news any day, any time, announced from the Euro region. This is why weakness in the Euro and a rising USD will most likely continue for the next few months targeting 84 next on the US Dollar Index according Nadeem Wayalat’s forecasting, currently hovering with strength around the 80 mark. On the chart of the EURO, we have a Death Cross, the 50 day moving average turning below the 200 day moving average, indicating a very strong downtrend. Of course the European Union leadership is smart; they want the EURO to drift lower, making European exports cheaper, to help stimulate business. This is exactly what happened with the USD last year.

Nothing bullish is happening in oil either. Trend for this quarter remains bearish on weak demand and high inventories. While oil demand will increase due to the auto markets in China and India, more aggressive development and use of alternative power including solar, wind, natural gas, LPG, and nuclear over the next 10 years will reduce oil demand. Did you know the entire Shanghai Taxi Co. fleet of 20,000 Volkswagens runs on LPG? Why the heck don't we have more cars doing the same?

Global Real Estate

The affordability indexes show that most of the world's major cities including China have overpriced housing. The one place in the world where the housing affordability index shows reasonably priced housing?; the United States. I am sure you can also find reasonably priced housing in the 2nd tier cities of China, maybe Latin America and parts of Europe? Kuala Lumpur in Malaysia is still OK, a great city, but not an economic or business powerhouse. China's big cities are out of control. Same case exists for Europe's main cities, Vancouver in Canada, Australia, etc. We can expect a continuation of the Chinese invasion into the U.S. to snap up cheap property for the next couple of years.

Conclusions

You should be in USD cash, or in Chinese RMB if possible. You could put your money in Brazilian Reals or Aussie dollars but the high yields will most likely be offset by their decline against the dollar. With diligent research, I'm sure you could find some good buys in stocks and any major market dips will create the opportunity to buy up shares at lower prices. A diversified portfolio should include a small percentage of gold. There are more specific asset allocations and strategies available to our market and business advisory clients based on the above commentary and research. We share our our strategic allocations for the global investment markets including stocks, commodities & currencies, and business advisory for China including the Chinese residential property markets.

A Few More Takes

Who's In Charge - The Mexican Peso Phenomenon

As Taleb points out in his classic Fooled By Randomness, consider the “Mexican peso” phenomenon…the big boy speculator/traders with billions, even trillions trading forex/commodities/futures every day…they drive the charts up and down, getting themselves rich no matter what; it is amazing to see that yes, fundamentals do matter, but just as one part of the picture, not the main driver; these traders with millions a minute at their fingertips are the masters of the universe, masters of anticipation and manipulation, who set the rules and sentiment…most of the time. The fundamental media news is just following to fill in the “reasons” for the public watching the talking heads, while the smart money traders just keep playing in their playground of fortune.

For example, what was that recent rise in oil to $82 last month?? Because of a sudden change in fundamentals? Of course not. It was ridiculous to think it based on fundamentals, weak oil demand, etc. The billionaire traders drove it up, almost like they did for fun, just to drive it up so that they could what?…scare out the weak players and then short it!!! Meanwhile, the media plays the fool reporting short term nearsighted fundamental news that is irrelevant “oh oil went back up this weeks on news that blah, blah, blah” AFTER the move starts!!

A Real Life Media News Report That You Will Never See

Imagine this mock daily CNN Oil News Update a couple weeks back when crude oil peaked at $83:

“Crude oil rose further up to $83 this week on speculative trader smart money driving the price up to just above the chart previous high, (that’s to freak out the weak hands and make them sell at the peak) setting themselves up again for a sweet 1000 pip short position ride all the way back down to the low 70’s, which is where the price should be in the first place based on long term weaker demand expectations, for a fabulous profit. These same speculator traders aware of the oil/USD negative correlation, and who control billions in capital daily, simultaneously went long the USD, working the position on both sides to rake in enormous profits. And they’ll do it again as always as the setups keep coming along. Now for the weather...its back to you Jane!"

I don’t think so.

Gold - Safe Haven Asset or Not?

Meanwhile, I’m happy to play the gold short, but I am confused why in this environment there would be this positive correlation between gold/silver and the markets?  If gold is regarded as the place to flee from “instability” as Martin Armstrong well-explained, as currencies/economies/markets are showing their true colors of weakness, I would think gold would be rising….but instead it seems to be in synch with the downward movements of stocks and oil…not enough people are convinced yet that gold will genuinely fill those boots, or the smart money is enjoying the ride down further before buying in?..indicating its more speculative trading than genuine safe haven alternative as the fiat currencies continue to devalue. Keeping in mind some of the recent frighteningly insightful analysis of the gold market, gold’s price is currently sitting just above long term support on the rising trendline of the daily and weekly chart with 1064 as the last point.  

China Spoiling the Party

Meanwhile, what’s really happening on the ground here in China is being poorly reported in the West, including massive hyperinflation, via especially recent outrageous property price spikes this month; grocery store prices, house rents, commercial rents, food, pork, chicken, rice, fuel, auto expenses, continue creeping up and in; there are evil games afoot orchestrated by the rich to make themselves richer…pure greedy orchestrations with anything for the common good as a bothersome afterthought. The future looks bright for fewer and fewer as the dark side of capitalism reigns in the U.S. and gains new ground in China.

Isn't it an incredible coincidence that China property prices would fly upward starting about 3 months ago coincidentally at the same time the China and Hong Kong stock markets started to rollover and lead the current global stock market correction? At the same time, it was reported this week that the secondary housing market in China plunged. Well of course!  First of all, in Chinese culture, the secondary housing market is weak as all Chinese favor buying things brand new because new things have no bad karma from previous owners. Secondly, the government, banks and real estate developers jointly offer various incentives to buy new homes, driving the prices of new developments up higher and higher while making the fat China cats even richer. Those holding the economic power and influence know how to play these clever economic war games much more so than most realize. They are masters of negotiation at “not revealing”…see my latest post on the unprecedented, fresh, spiking of real estate prices on Hainan Island. Haikou, Hainan and Sanya Real Estate Doubles In a Month

Cheers,

By Mario Cavolo

www.mariocavolo.com

Biography:  Mario Cavolo has been based in China for over 10 years. He is a professional speaker, writer and media event personality providing multinational and media industry clients with training, coaching, communication, market research and advisory services.  Take advantage of Mario’s “on the ground” China insights by visiting www.mariocavolo.com, where you will find insightful articles and commentary on business challenges, communication, and global market advisory with a special focus on China business and culture.

© 2010 Copyright Mario Cavolo - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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