|August 13, 2009|
The U.S. market has climbed 50% from its March bottom. But that's small potatoes compared to China. The Shanghai Composite Index was recently up 103% since its November low.
The Chinese economy is awash in cash. Banks have doled out $1 trillion as part of the country's stimulus package. However, about 15% of that ($145 billion), analysts say, went directly into the stock market. Hence the super bounce.
Some air is already seeping out of the bubble. Since hitting its high on August 4th, the Shanghai index is down by 10%.
While the Chinese stock market may be deflating, its economic juggernaut rolls on. Imports of crude oil and iron ore hit record highs in July, MarketWatch reported.
Wall Street sees this as bullish. Merrill Lynch raised its economic forecast for China, from 8% expected growth in 2009 to 8.7%. Goldman increased their forecast from 8.5% to 9.4%.
Here again, we turn to Andrew Gordon, whose value investing credentials are supported by a 20-year career in international business, some of which involved working in and around China.
During periods of high demand for commodities, bulk shipping costs go up, Andrew points out. When demand is soft, they go down. This fluctuation is measured by the Baltic Dry Index. It is the best leading indicator, Andrew says, of commodity demand. "And China's industrial activity," he says, "is the main driver of the index."
But there could be an even better indicator of Chinese industrial activity than the Baltic Dry Index… McDonald's.
Worldwide, the fast food restaurant had a good month last month, but the numbers would have been better were it not for China, where same store sales have been negative for seven consecutive months.
Due in part to the aforementioned demand in China, the International Energy Agency (IEA) raised its oil consumption projections for 2009 and 2010.
The IEA expects oil demand of 85.3 million barrels a day in 2010 – a 1.6% increase over 2009. The OPEC cartel also expects crude oil consumption to rise next year. A sign of current growing demand: U.S. crude inventories dropped 1.4 million barrels last week.
We'll take a wait and see on the economic recovery. But Investor's Daily Edge options expert, Ted Peroulakis has made the most of the strength in the energy complex.
Last month, Ted cited the increasing demand for fossil fuels. Pointing to increased factory output, gains in construction spending and other signs of economic recovery, he suggested that subscribers to his Options Power Trader to increase their exposure to energy. Ted recommended short term positions in oil and gas driller, Noble Energy, and natural gas giant, Chesapeake Energy.
The 50% rally in the S&P has been fueled by less-than-horrible economic reports and still weak, but better-than-expected corporate earnings.
But while the media are on their hands and knees examining "green shoots", corporate insiders are heading for the exits. Thomson Reuters reports that corporate insiders recently pulled $53 from the market for every $1 they put in. Vickers Stock Research also tracks insider activity. They report that insider selling has now reached late 2007 levels – right before the bear began.
Several times this week, we have suggested that a sharp pullback is imminent, but that you shouldn't try to time the market. Let your trailing stops tell you when it's time to sell.
Our colleagues at DailyWealth agree. In yesterday's issue, Steve Sjuggerud suggested the market may be headed for a blow off top before the big correction. Even greater gains could be ahead and you don't want to miss them. Here's what Steve has to say:
If you do want to take some money off the table, Steve McDonald, editor of the Bond Trader, has an idea you should consider.
Most people are a lot better at buying stocks than selling them. And after such a stellar run it's even harder to pull the trigger. But a recent Smart Money article by James Stewart suggests an easy, fundamental indicator to identify stocks where you should take profits or reduce exposure. Steve writes:
You can find the PEG ratio for most stocks under the "Key Statistics" heading on Yahoo! Finance. If you're looking to lighten your load and reduce your risk, this is a measure you should use.
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