Looking at the Dow Jones Index and the economy - 3.14.2008.3

As the Dow Jones Index tumbles again, down some 200 points today, I had to look back on some of the things I’ve said recently. I can’t say I am surprised at the condition of the market, nor the outlook being discussed now. On reflecting I found that I mentioned many of these things back in November 2007.

“The Fed's huge new credit facility, announced on Tuesday, "can help in a rather small way ... but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital," National Bureau of Economic Research President Martin Feldstein noted.

And I stated.

“I had a friend recently ask me what I thought would be happening to the economy, and my answer was it’s going to get bad. Perhaps recession bad. And I added that the current group of Democratic candidates may only make it worse.

I say this because of several factors. Not the least of which are, the housing crisis, the financial sector, the cost of oil, and potential tax ramifications based on the current plans announced by candidates.”

Perhaps I was too general. Maybe I could have been more clear.

“One broker, whom I respect and consider quite sharp [even when I disagree], had an interesting comment on my predictions. I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Maybe if could have seen what would be the effects

“The facts are that China and India need gold. Even in a global slowdown their demand has increased pressure on supply. Recession and inflation fears and a lagging stock market in the United States have not diminished though they are not leading world headlines this moment. Oil prices are foreseeable going to continue higher and place more pressure on world economies, especially if OPEC cuts production rates as expected. And the prospect of a Democratic President in America is generally seen as a negative for the stock market, further spurring a move to gold to hedge investments.”

Fine, all that having been said at points in the past, what do I have to say now?

We need to see the stock market crash. Seriously it needs to drop to my target of 11,000 I called for in 2007. And every single action by the Fed and Congress to stop this will only create a bigger and longer lasting problem.

At the moment the Government is trying to create an artificial floor for the market. The reason is to give investors a false sense of hope and a bit of political momentum. Neither is worth the problem it is creating. The Fed has reacted too slowly and in moderation thus not correcting any of the liquidity issues. Huge rate cuts may look impressive, but since they don’t have an effect for months if not a year, the short-term effect is windowdressing. A series of stagard smaller cuts (started far earlier) over a period of time is far more effective.

Injecting money into the pockets of citizens is also a waste of money. The momentum and problems are not with people failing to buy things, it’s with the cost of the things being purchased. If oil costs are up 40% then there is just that much less to spend in a discrectionary manner.

Giving people money in the middle of chaos means that the money will either go to pay immediate bills or stashed away for the possible immediate need to pay a bill. Rather, let the emotion and the weakness in the market play out and then give the stimulus. Otherwise you are throwing money down a drain hoping it will eventually clog if you dump enough. And we are weakening the dollar in the process, which hurts the very economy we are trying to fix.

The financials are not done with the mortgage crisis. Some would like to divert attention from this, but the fact is that we are still in the crisis. And a great number of people will lose their homes. The housing market will have it’s crash, which is long overdue, and credit will be harder to get. All of which is normal.

For too long people have had too much credit without any security to back it on. A full generation of young adults have grown up thinking that this was the norm. We need this correction to get back to reality.

Want lower oil prices? Develop new sources of energy. Not because it’s an ecological thing to do, or because of some nightmare dreamed up based on barely enough information to make an estimate on. We need to do it because it will create jobs that can’t be exported, will lower dependance on oil, and infuse the economy with cash. It also means that the equity structure of the market will change, several blue chips will lose value and new ones will be created. Such is a dynamic market, which we don’t have now.

Gold will strike my target of $125 and oil $1125 this year. And they will both do so far faster than I expected if we continue to weaken the dollar and fix they symptoms and not the problem. Loss is part of an investment, as is long-term gain based on fundementals. To try to prevent one prevents the other.

This will feel bad, and unemployment may hit, gasp, 8%. 30 years ago that was a massive win. And it’s not a bad thing. If we aren’t throwing money at the public because they aren’t as comfortable as they were 5 years ago. If politicians had balls they would say this. Social entitlements should only be for those in need, not thouse that need to want.

The end of the 1st quarter will be another round of write-off for financials. And the market will continue to flounder as they try to stabilize their losses. At least one major financial will fail (actually will be forced to merge because they are too big to fail). And at 11,000 the market will stabilize and slowly rise. Growth will begin at that point at a moderate and unimpressive 1% or 7% in the market.

If gold moves as I expect, and the Government stops wasting money in stimulus plans, then there will be a sale in the commodity and an influx in the market. If wind and solar get a few positive laws there will be a spur in that arena and oil will drop slightly after hitting my target. IF taxes are increased, as was voted on yesterday, then the problem will extend into 2009 3rd quarter.

Patience, calm and paying attention to the underlying fundementals will do investors and homeowners more good than cutting rates and suggesting purchases of new Ipods that people can’t afford to have anyway. Shifting energy plans away from ethanol, which is driving up food prices and thus inflation, is also smart.

What will I do with my $600 from the Government stimulus plan? Leave it in the bank until I have a bigger purchase item I need for my business. I’ve already cleared my debt, and keep minimal revolving credit. My investments are balanced and long-term so the current moves don’t faze me. Unlike the Governments rush to do something – even if they have no idea what to rush and do, I have a plan and that allows me to sit and wait to see what happens.

So now you have my thoughts. I’ve factored in the lower refining levels due to the accident earlier this year. I’ve factored in the lesser supply of gold from South Africa, and the Olympics in China. I’ve looked at the real estate market, and the Dow Jones. So until the Dow hits 11,000 (plus minus 100 points or so – I’m not that good) oil and gold rise further and we enter the 3rd quarter it’s just time to accept the pain. But I’m sure this being an election year all of that will get mucked up by political ambitions.

We shall see.

Clues on the Chinese stock market via the Year of the Rat

While most of the Asian markets are taking a breather for the Chinese Lunar New Year, I’ve decided to see what is being said about the ups and downs that have been experience in recent months. As I’ve mentioned previously, there is no shortage of opinions on where Chinese stocks will go, and/or end the year. But there are a few things most everyone will agree with.

The biggest item is that the economy in China is growing and growing fast. Estimates of 10% growth for the year are only slightly off last years pace. China has grown enough that it is now making more investments outside the country than are coming in. Add to that the performances of several major companies (such as BHP Billiton Ltd, Bank of China Ltd, China Eastern, among others) and things look quite cheerful. If you don’t mind the bumps.

Interest rates followed the U.S. and were lowered after the Federal Reserve cut in January to catch up to the recessionary pressure and mortgage crisis. Still the Shanghai Composite Index has been off some 13% year-to-date. Several popular names have taken hits like China Life Insurance, New Oriental Education & Technology, and Shanda Interactive.

Not long ago I noted that Warren Buffet had recommended caution for investments in China. And shortly there after I mentioned a trader that favors China, and the potential of the Olympic Games this year. Now I’ve seen that Motley Fool had an article by Will Frankenhoff, that is looking for buying opportunitiues. That goes along with my cautionary call that recent winter storms and world conditions may be presenting a buying opportunity.

Considering both sides of this equation one mutual fund company has sought to give investors an opportunity to be involved with both sides. For those looking to be long yet unsure which individual Chinese stock to pick there is the UltraChina ProFund. And for those with a more bearish outlook there is the UltraShort China ProFund.

Which is best? Well let’s look at what people born under the year of the Rat are supposed to be like.

“Rat people are born under the sign of charm and aggressiveness. They are expressive and can be talkative sometimes…Rats are self-contained and keep problems to themselves….

The Rat is quick-witted. Most rats get more accomplished in 24 hours than the rest of us do in as many days. They are confident and usually have good instinct…

Unfortunately, as soon as the Rat earns money, he spends it.”

Going by this guide, which I do not profess is the perfect description, you might get this conclusion. February – and the whole year – is a matching of Yin and Yang , and as such the Chinese stock market has visited valleys and peaks. The full extent of exposure to the mortgage crisis will be unknown until April thus exhibiting the need for patience. Growth for the nation is expected to be very aggressive by anyone’s standard and is a mark of hard work. And more than a small amount of money made last year and this will be spent to rebuild and create new infrastructure that was damaged or needed from the ice storms that ravaged the southern parts of the nation thus providing for practicality, responsibility and long term planning.

All in all it sounds like a Rat. So perhaps one thought would be to have patience for the eventual outcomes of this year. The outlook is good for mergers like with China Eastern, and the test of banks investing in insurance companies. And the potential for growth to outpace expectations is high.

You may not believe in the Chinese calendar, but many do. And if that is the way they will be guiding their investments well it may be a hint. So it will be interesting to see how close my rough analysis based on the Rat will turn out to be.

Chinese stocks may present a buying opportunity

The Dow Jones Index drops 370 points, financial stocks are being hit hard, and the service sector index hit a low not seen since 9/11. That feels bad, and it bodes is for the economy. We all know that, as does the world markets.

"This was certainly an unexpected piece of bad news. The magnitude of the miss below the estimates really got people’s attention," said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles.

The FTSE 100 Index lost 158.20 points, Hang Seng index plunged 1,339.24 points, or 5.4 percent, to close the half-day session at 23,469.46. Japan's Nikkei 225 index tumbled 4.7 percent to 13,099.24. And that’s just the immediate reaction.

"It's unbridled pessimism," said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. "Everyone is concentrating on a U.S. recession, but Europe is also looking bad.... We are in for a bear market now."

Now that you’ve had the shock, focus on the positives. For China stocks there are several items that may bode well. Obviously there is the fact that the Olympics will help draw new revenues to hundreds of businesses and industries. It’s a spark to the economy that definitely going to be a cushion regardless of the American economy at the time. But that is a short boost and limited in its scope.

There of course is the news that besides the pressure coming from America in recent weeks, there is a national crisis in the form of winter storms that have hit the lowest temperatures in 100 years.

"In northern China we have quite a good emergency plan to cope with unusual weather conditions. But in southern parts of China, the mechanism and emergency plan to cope with such weather needs to be improved," said head of the Chinese Meteorological Administration, Zheng Guoguang.

In the midst of such gloom and serious causes of concern, and with so few glimmers of upside hope in the near future bears normally rule. But, besides the bears, savvy bull market investors have to be happy. This is a market that in some ways mirrors what I saw as the reaction of some investors after 9/11. While many panicked and sold, a small few searched and picked the sturdiest of industries to get into. Not huge positions all at once, but a piece here and there as the prices went lower and lower.

Now I know I’ve questioned the growth in China for some time. I realize that their may well be limiting factors, and the American Economy ranks high among them. But with world stock market prices getting hit again, European markets being shaky, low interest rates, and the 54 billion Yuan cost of this unforeseen and devastating winter storm, I like the opportunity.

Is this the perfect time? Never, such a thing does not exist. But a smart plan, taking the best companies in fields that are and will be hardest hit shortly, involves taking disaster and world turmoil and turning it into a long-term profit center. While some may look for the quick boost to the service sector, and transportation, I think financials are the key along with mining.

Time will tell if these sectors will end the year up, but considering that by the end of the quarter both should be hit hard it’s attractive to me. But again, that’s only if you think buying in troubled times is a useful part of your overall portfolio plan, and you expect China and world markets to regain some of the strength they have lost.

Chinese stocks continue their rollercoaster ride

Are the Chinese stock markets poised to drop again? And if they do will it be a buying opportunity or the beginning of a bear market? Those are the questions that are on the minds of stock traders and investors as the Asian markets stumble lower. Perhaps the only answers will come from America, predominantly from the Fed and the economy,

So far Monday there has been a 5.5% drop in the Shanghai Composite Index, with Hong Kong down 4.7%. This is following the drop in U.S. markets on Friday, and reflects the insecurity many have about the next moves of the U.S. Federal Reserve. Expectations after last weeks astounding .75 basis rate cut were that this week’s regularly scheduled meeting would provide another .50 basis point rate cut. Those expectations have come under question and the markets have sold in the face of that uncertainty.

The lagging U.S. economy is causing ripples throughout the world. Fears of a recession in America have hit financial sectors across the globe. While the Fed’s rate cuts have been a strong reassurance, the underlying weakness of the economy is still a factor that affects everyone. Many are looking to see if the proposed stimulus package will be enacted in time and with enough force to avert further slowdowns. The final effect of the stimulus plan is debatable though.

So as the Chinese financial sector bobs like a buoy on the ocean, fears of further losses both near-term and long term are abounding. One thing that is not being spoken about is a benefit that only China has in this year. The Olympics.

Unlike the forced injection of capital planned in the U.S., China has the Olympic Games which will bring in capital to its communications, travel, lodging, and services industries. This boost is temporary, but is enormous. 2nd and 3rd quarter numbers are bound to get a bonus, and coupled with continued lower rates from America could overcome any world recession fears.

The real questions seem to be, is America in a recession, how long will it last, and how slow will it be. There is no question that world interest rates will be going lower, led by America. It’s likely that another .50 - .75 basis points will be dropped before the end of the year. Most might agree that it could happen as soon as the end of the 2nd quarter.

Perhaps the only sector that is weathering the questions and intermediate volatility with relative ease has been the mining sector. Huge demand for gold and other base metals continues to be on the rise in China and India. Prices for gold remain at virtual record levels, with futures markets still trending up.

So whether or not the Fed moves rates this week or not, the real questions will take a month or 2 to be resolved. Until then cautious decisions and opportunities will rise and fall like an Olympic pole vaulter. [Obviously joke writing is not my main pursuit.]

Will the Chinese markets take the gold medal in 2008?

With the start of 2008 China has had its stock market surge, yet there are some questions. Already the impact of the Olympic games in August are being felt, as the Shanghai Composite Index at 5,272.8 points. While that is a mere 0.21 percent for the day, stocks related to the Olympics as well as Beijing-based and consumption-related stocks recorded gains of up to the 10 percent daily limit.

There is no question that the Olympic games are a source for a surge in any country that is host of the games. And the effect has been seen in 2007 with the 55% gain of the year, even with the technical bear market the stock markets fell into that same year. Expectations are that gains for 2008 will reach 35%, and the IPO market is flush.

But the question of inflation is hardly unheard. In November the CPI number reached 6.9%, which is a level unseen since the last century (1996 to be more exact). This is of course causing some tightening in the financial sector, and many see that sector being held back as a result.

But the Olympics are hardly the only factor affecting the Chinese markets. There is the potential bidding war for China Eastern, that is giving some loft to that entire sector. And Shanghai Diesel Engine is another that has enjoyed the profit from takeover news.

As I’ve mentioned before, many expect the Chinese markets to out perform all of Southeast Asia. The shipbuilding sector has been the target of several analysts, others looking at the exploration and refining of oil. And as mentioned above Chinese investors have placed some $61 billion into the IPO market.

So is this the start of a great year in China? Will there be a surge in that market again this year? Will the bear market rule and become an Usra Major instead of Ursa Minor? And most importantly is it too late to be involved?

My guess would be that the answer is yes and no. Like all things in any stock market, a run in any sector begets more investors jumping in, and some are bound to be top-ticking. But given that fact, the Olympics are still half a year away. The surge in international visitors has yet to hit the nation, and profits from that are yet to be realized.

The service sector has yet to really have the same benefit being projected in other sectors. Obviously inflation will retard some of this gain, and the gain will be anticipated prior to the actual international competition. The IPO markets are an unknown factor, but considering the growth of 270% it can be expected that even more investors will continue to seek out new companies. And as with all new companies the potential to innovate and succeed is impossible to full analyize in the short-term.

No matter the short-term effects of the Olympics, which I expect will dominate news and comments about the Chinese markets this first half of 2008, there are many things influencing China stocks. Most of them are long-term factors, and will have fruition well after the gold medal ceremonies have finished.

I would say, in my opinion, that the really most vital question is what are the financials going to do. With monetary tightening and inflation realities hitting the sector, it’s not the most favored sector. But if China stock markets act like other world stock indexes, they could be the indicator that sets the pace for the year and those to come.