 |
Did you breathe a sigh of relief when the Dow Jones jumped by 779 points last Thursday and Friday? Did that 7.3% two-day jump impress you?
I Wasn’t. Let Me Give You Three Reasons Why.
First of all, I don’t trust any rally that is based upon a government rescue. The price tag for bailing out Fannie Mae, Freddie Mac, and AIG is already in the $700 billion range and almost certain to rise if Washington Mutual and Morgan Stanley (and others yet to be revealed) join the list.
By the time the rest of the anything-for-a-commission crowd comes clean with their financial sins, I would be surprised if the government’s bailout tab DOESN’T EXCEED 1 TRILLION DOLLARS!
We’re not talking about play money either.
We’re talking about real dollars that you, I, and our children will be paying for decades. Instead of celebrating, I believe that the bailouts are a reason to be even more worried about the state of our economy and the U.S. stock market.
Second, I believe that the end-of-week rally you saw last week was not because of the government bailouts but because of the temporary ban on short selling. Last week, the SEC banned short selling on 799 financial companies. And they just happened to announce this dramatic change right before a ‘triple witching’ Friday.
Triple witching is when stock index futures, stock index options and individual stock options all expire on the same day. A triple witching day only happens four times a year. It is also called “freaky Friday” because of the exaggerated moves it often creates.
| Internal Sponsorship |
|
Bernanke and Paulson tell Senate Banking Committee Chief: Here’s why Washington’s $1 trillion bail out is little more than a band-aid on a massive wound … Why more than 1,000 banks are still in danger of collapsing no matter what Washington does … Why scores of household-name companies are still at risk for huge stock losses or even bankruptcy … And what you must do now to protect and grow your wealth. |
Last Friday would have been volatile enough because of triple witching. But the SEC only threw fuel on the fire by banning short selling. Once the ban on short selling expires on October 2, the selling pressure could return in droves.
Third and most important, if you’re going to remain invested in the stock market, you’re making a huge mistake by ignoring the Super Ball bounce going on over in Asia.
I don’t see the Chinese, Japanese, Indian, Taiwanese, South Korean, or Singaporean governments spending billions of taxpayer dollars to bail out a bunch of greedy and irresponsible corporations.
I don’t see any of the Asian economies in danger of rolling into a recession either.
And while the Wall Street crowd was high-fiving each other over the 7.3% bounce on Thursday and Friday, some of the Asian stocks I’ve been telling you about in past issues of Money and Markets were jumping by two, three, four, or five times that amount.
Don’t take my word for it — just take a look at this table:
|
9/17 Close
|
9/19 Close
|
Two-Day % Gain
|
|
| Focus Media (FMCN) |
$22.25
|
$31.19
|
40.1%
|
| Las Vegas Sands (LVS) |
$31.83
|
$43.80
|
37.6%
|
| Trina Solar (TSL) |
$25.02
|
$33.50
|
33.9%
|
| China Telecom (CHA) |
$35.75
|
$47.61
|
33.1%
|
| E-House (EJ) |
$7.53
|
$9.50
|
26.1%
|
| China Mobile (CHL) |
$44.11
|
$54.97
|
24.6%
|
| Yanzhous Coal (YZC) |
$11.13
|
$13.79
|
23.9%
|
| CNOOC (CEO) |
$104.91
|
$129.09
|
23.0%
|
| Man Sang Holdings (MHJ) |
$3.10
|
$3.75
|
21.9%
|
| Siliconware Precision Industries (SPIL) |
$5.38
|
$6.40
|
18.9%
|
The reasons for those huge returns are simple:
The Chinese government is sticking their nose into the stock market’s business too … but in a very, very good way.
 |
| The People’s Bank of China is lighting a fire under China’s economy. |
Over the last six years, the Chinese central bank had been focused on cooling down its red-hot economy and fighting inflation by repeatedly increasing interest rates and reserve requirements at Chinese banks.
How repeatedly? How about 18 straight rate increases!
Not any longer, though.
For the first time in six years, the People’s Bank of China (the Chinese equivalent of our Federal Reserve Bank) cut interest rates. China’s key lending rate dropped from 7.47% to 7.2%. What’s more, bank reserve requirements were chopped by a full 1% to 16.5%.
After 18 rate hikes, you can just imagine how enthusiastic Chinese investors are over the news. And for good reasons too.
The drop in lending rates and bank reserve ratios will provide a strong base of price support for Chinese assets — both stocks and real estate — as well as stimulate the Chinese economy. Lowering interest rates will also trim the cost of business borrowing. And the cut in reserve requirements will reduce the funding costs for banks.
The biggest benefit of this turnabout in monetary policy isn’t cheaper money. But rather it’s the clear signal that the Chinese government is going to stop pushing the exchange rate of the renminbi higher.
 |
| The Chinese government has sent a clear signal that it will stop pushing the renminbi’s exchange rate higher. |
The U.S. Congress has been aggressively coercing China to raise the exchange rate of its currency against the U.S. dollar. But the higher Chinese renminbi has been killing Chinese exporters. However, now that the monetary policy has switched from tightening to loosening, the renminbi is almost certain to reverse course, start to decline, and give Chinese exporters a gigantic boost.
Let’s Connect Three Very Important
Fundamental Dots in China
DOT #1: The Chinese economy has slowed, but only slightly. Chinese GDP has increased by double-digit rates for five years in a row and has grown by 10.1% in the first six months of 2008. That’s a little off its 11%-plus rate of last year. But China is still growing by a very healthy pace.
DOT #2: The Shanghai Composite Index is down by 50% from its November peak. That big decline has pushed the valuations of Chinese stocks from very expensive to very cheap. In fact, I think the valuations are dirt, dirt cheap compared to the pace of economic growth.
DOT #3: The about-face in monetary policy is akin to throwing gasoline on a smoldering fire. Now that the Chinese stock market has the interest rate wind at its back, the new path of least resistance will be upward.
I’ve been waiting for a catalyst like this to catch the Asian markets on fire. And we now have it.
Best wishes,
Tony
P.S. For up-to-date commentary on the Asian markets, be sure to visit my blog at: http://blogs.moneyandmarkets.com/blog/china-and-asia-stock-alert.
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com.
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
|
© 2008 by Weiss Research, Inc. All rights reserved. |
15430 Endeavour Drive, Jupiter, FL 33478 |
