China Falls Another 6.7%; Fills Late May Gap

I will post a chart in this entry a little later in the day since stockcharts.com doesn't update Shanghai data promptly but China fell another 6.7% overnight. I had been targeting a gap in the chart in the mid 2600s (last day of May 2009), and with a close at 2667 they have arrived. The entire move down from peak took almost exactly 1 month; the index is now down 23% from peak.

• The Shanghai index lost 192.94 to 2,667.75, a three-month low. Today’s slump was the most since June 10, 2008, when the index tumbled 7.7 percent after the central bank ordered lenders to set aside record reserves to curb credit growth and inflation.
• At least 150 stocks on the 898-member index dropped by the daily 10 percent limit.

Remember all those new retail accounts being opened in China? [Jul 24, 2009: Bookkeeping - Selling China Exposure as Chinese Run In]

Individual investors opened 484,799 stock accounts last week, data from the nation’s clearing house showed today, the most since the five days ended Jan. 25, 2008. “The prospect of making quick bucks in the stock market is luring retail investors,”

Looks like they are learning about the joys of markets in very short order.

• “It’s panic selling we saw today,” said Leo Gao, who helps oversee about $600 million at APS Asset Management Ltd. in Shanghai. “The plunge reflects investor pessimism over short-term liquidity rather than any changes in the fundamentals of the economy. Investors are now waiting for the government to step forward and make some sort of gesture.”

Meanwhile in the "we can have our cake and eat it to" category, the U.S. markets are unfazed as after utilizing the rebound in China as part of the reason to run the market up, it now matters little that it has lost a quarter of its value. [Aug 12, 2009: Shanghai Corrects 10%, America Shrugs it Off] [Aug 17, 2009: China Plunges 5.8% Overnight]

On an anecdotal level, from much of what I am reading - I think the Chinese government is fine with the pullback as they were seeking to stop a bubble before it got out of hand. [Jul 28, 2009: FT.com: China Warns Over Asset Bubbles] Notice the day of that very public warning issued - the Chinese market topped within 2 days. Meanwhile in the likewise (allegedly) managed domestic markets U.S. government officials have no such qualms about bubbles. Since we can not see them here (we have invisible bubbles) we can do nothing about them other than turning the spigots on full blast and crossing our fingers. (source: Greenspan)

On a pure tangent I see Europe's combined index has a valuation of nearly 50x earnings. Not too shabby, approaching NASDAQ 1999/early 2000 levels there.

• Europe’s Stoxx 600 fell 0.6 percent to 236.07 at 9:16 a.m. in London. The gauge has rallied 49 percent since March 9 as companies from L’Oreal to Goldman Sachs Group Inc. reported higher-than-projected earnings, while the German and French economies unexpectedly expanded. The rally has driven the price- earnings ratio for the index up to 48.6, the highest level since June 2003, according to weekly data compiled by Bloomberg.

Remember in the end, stocks are just like any other commodity - supply and demand. If you have a Fed hell bent on throwing money in all directions and there is a limited supply of stock certificates and plenty more worthless US pesos chasing it; well economics 101 tells you what happens to prices. The ECB has made a ton of short term (1 year duration) money available as well to their collective banking system... Go Team Western Countries.

As always - valuations, China, yada yada yada - none of it matters until it matters... and then Sun Tzu strikes. Quickly. Unless Larry Summers can intervene. (allegedly)

I am growing incrementally more bullish on China, and more bearish on the U.S. as the Chinese market returns to Earth and this divergence between the 2 markets widens.

[Aug 15, 2009: Fibonnaci Stops Rally in China?]