Chart of the Day: Chinese stocks in steep downtrend & CBOE VIX AT NEW LOWS

As stock markets around the world continue to edge upwards, the Chinese Equity Markets and the CBOE VIX have both been trending downwards.

Chart of the Day - Chinese stocks in steep downtrend

Equity valuations continue to be driven by hopes of QE3 and Bailouts/handouts by Central Bankers rather than fundamentals, which at this stage are still looking rather weak.

As the VIX trends to new lows, it's important to take profits in stock portfolios and rebalance them towards more stable large cap companies that preferably have less leverage than their mid-cap counterparts.

SHANGHAI COMPOSITE IND. vs. DJIA

The Shanghai Composite is clearly not mirroring the move in the DJIA. Chinese stock markets are testing new lows for the year as concerns of a stumbling recovery in the developed markets continue.

Will we see a revaluation in the Chinese Yuan? Currency markets have been all over the place. The Euro has rebounded of recent panic lows even as sovereign debt troubles in the 'PIIGS' nations remain unresolved.
The USD has given back some of its recent gains, mainly due to an improving risk appetite and the subsequent rebound in global equities.

But as David Rosenberg recently said, are the Chinese Equity markets and the Baltic Dry Index warning investors that we could be in for a difficult second half in FY10?
Perhaps it's now time to be cutting back on risky assets and looking at minimizing portfolio volatility.

China leads global equity market downward - AGAIN !!!

Once again, the Chinese Equity market seems to be leading the ongoing correction in global equity markets.

The Chinese Equity market topped out in July 2009.
The S&P 500 hit its 'bear market' rally / recovery highs in April 2010 !

Markets have been as volatile as ever, and fundamentals have shown no significant improvement.
We are moving from an individual & corporate debt crisis to a sovereign debt crisis.
The so called '' sub prime '' sovereign debt of countries like the PIIGS is already starting to stress out global bond markets.

How will the already weakened PIIG nations cope with the austerity measures, and still continue to support the global economic recovery?

Meanwhile, the Chinese government has been tightening liquidity as it tries to cool down a bubbling real estate market in urban China.This could mean tougher business conditions in the industrial metals and ores sector if the Chinese economy starts to slow down.

The rally is clearly getting rather long in the tooth, and may be running out of fuel!!!!

WORLD MARKETS - WHERE THE HELL ARE THEY HEADED ?

Anyone tuning in to the financial media is bound to be confused by the things he/she hears !!

Here's a quick snapshot

• Bear market rally within an overall structural bear market.


• A new Bull market, now that the worst is behind us.


• Deleveraging still ongoing, and its about to get worse.


• Over-indebted world economy still drowning in debt.
• The Chinese Markets are about to lead a 'world wide stock market correction'


• Green Shoots everywhere, bull market around the corner.


• Company Results continue to exceed 'estimates'!


• Job losses are increasing at a 'decreasing rate'!!


• Don't listen to the bears who have been way off since March '09


• Don't listen to the bulls, who only resurface when markets are up 50%


• Get into the market now, or you could miss the bus!

Obviously no one has the answer here; but given all the conflicting 'expert advice', what's an investor to do?

Sadly, while focussing on everything that's happening around them, very few analysts ask their investors to analyse their risk profiles before they invest.

Irrespective of which direction the market is about to take; how much 'pain' and 'volatility' is an investor able to withstand before he throws in the towel ?

Markets have been rallying since their March 2009 lows. The stock market and Wall Street experts now see a recovery far far before anyone else on main street. Its important to remember that many of these 'experts' failed to see the dramatic market collapse that occured in the second half of 2008.

What worries me is that a large part of this market rebound has occured from oversold levels (yes, the benefits of hindsight kicking in!!), largely supported by a massive overdose of stimulus medication! This is clearly not sustainable in the long term.

Debt levels are high and many industries face surplus capacity and low pricing power. Job losses continue to demoralise consumers on main street.

Meanwhile, equity markets the world over have provided exciting trading opportunities to nimble traders. But remember; for the average investor, these 'paper profits' may not translate into 'bankable profits' in these chaotic markets.

So, its important to book profits on such investments now. Yes, there's always the risk of selling out early, but there again you just don't want to be the guy who's a day late!! These are cruel markets for a slow moving investor.

Focus on weeding out stocks with weak fundamentals from your portfolio. A rising tide lifts all boats as they say, so offload those positions that don't have the inherent strength to make it in this turbulent economy.

Overall, try and maintain adequate liquidity in your portfolio. In my opinion, the worst is not behind us just yet!

When too many 'experts' start to get bullish, its time to be cautiously realistic rather than recklessly optimistic !

INDIAN EQUITIES : A VOLATILE WEEK

Last week's trading at the BSE Sensex (India) would surely test the nerves of expert traders. Take a closer look at the chart below.

The Chinese stock markets and the Indian Monsoons continue to dictate market direction in the near term.

According to the MET Dept, the monsoons are staging a late comback. Given how wrong these guys have been so far, I'm still waiting for more clarity on their call for a 'late monsoon revival'.

As for the Chinese Markets; every time liquidity concerns arise - we see a sell off.

Week on week both markets appear relatively unchanged. Let's wait and see how Asian equities respond to the overnight rise in the US markets.

SHANGHAI COMPOSITE : TOO FAR TOO FAST ? ?

The Chinese stock markets are finally correcting. And how!!

World markets today are tracking the daily movement of the Shanghai Composite.
A 5% down move in China, results in a sell off across world markets.

Since China led the markets on the way up, could the Chinese markets be signalling the start of a new leg down?

As we head into 2010, governments across the world are crowding out private sector borrowing in the bond markets. Given that growth rates are still extremely anaemic (or non-existent), we are definitely going to need more stimulus packages in the near future.

China can never substitute American consumer consumption with local Chinese consumption in the near term. The domestic market in China has a long way to go before it rivals the '''credit loving - consumer driven - overspending habits'''' of the US consumer!

Markets meanwhile may have run up too far too fast; and are only beginning to realize that the worst may not necessarily be behind us.

Here's a quote from Abheek Barua (chief economist, HDFC Bank).
'' The fact that the worst is behind us does not necessarily mean that the best is around the corner. That's something that all of us need to recognize.''

BUYING THE BOUNCE!

The markets have rallied swiftly since early March. Lack of clarity on the mega bailouts does not appear to concern the markets at the moment; and everyone seems optimistic ahead of the upcoming G20 meeting.









Speculators, Traders and Investors:
Bear Market rallies can be quite convincing as they can occur without any fundamental change for the better. The markets were oversold with the S&P500 well under 700 and panic stricken traders were forecasting the DJIA at 5000 levels.
The current market volatility is almost impossible to trade, with huge intraday directional changes, as hopes and dashed hopes (read: bailouts and failing instant fixes and solutions) keep traders on their toes.
Some make money buy buying markets when the sell off sharply, others get stuck in losing positions when the markets resume their decline.
For now, this market appears to be a traders market - where only the extremely lucky and nimble traders stand a chance of coming out ahead.
Longer term investors would do well to watch out for the coming earnings season and signs of further stress in the economy before jumping in right away.
It's painful to watch a market rallying away without reason ( especially when you are not in it - & the fundamentals don't justify a rally !), but its more painful to jump in too early; only to get stuck in a losing position in a chaotic market.
The market can stay irrational a lot longer than you can stay solvent!
It important to remember that bear markets can be irrational at times and last longer than people expect. As an Indian analyst Ramesh Damani recently commented : Equity returns are never linear - i.e. a stock can stay undervalued for an extended perid of time before suddenly turning into a multi bagger.
Good companies and solid balance sheets are not immune to bear market declines.

My caution at this stage is mainly due to worries that market regulators and the authorities are busy with just stabilizing the market and averting a near term 'panic collapse' rather than solving long term fundamental flaws that caused this mess in the first place.

As someone recently said; a recession is part and parcel of the economic cycle, but a depression is a collapse of the system of debt.
At this stage though, its all about stabilizing the ship, so as the Fed and US Treasury say - take on more credit, go out and spend it and hope that we can get the party started again.

GOLD : A STORE OF VALUE

2008 - THE SLOWDOWN

Global markets continue to stumble in an uncertain business environment.
Emerging markets like Brazil (BOVESPA Index), India (BSE SENSEX), and China (Shanghai Composite) have had a particularly difficult time.
So are these slowdown fears for real? Over the next few posts I will analyze the impacts of a global slowdown in the backdrop of a highly leveraged and interconnected global economy.
To begin with here are some charts -
Shipping rates have had a volatile 2008. In the first half of 2008 a weakening USD coupled with high oil prices pushed commodities and shipping rates to new highs.

Is Chinese demand finally slowing? Or is this just a blip on the charts due to the 2008 Olympics?

2008 has been a terrible year for equities.

Fears of a US led global slowdown and a risk averse investing environment have resulted in large outflows from emerging market equities.

2008 so far----

THE LAST 5 YEARS The Chinese stock market is down very sharply since it peaked in the last quarter of 2007.

Indian Equities have fared better, over the 6month and 5 year horizon. Over the last 3 quarters however, growth rates have moderated, and as Indian companies continue to expand, with inadequate local infrastructure(transport bottlenecks and power shortages) and domestic inflation rates of just under 13%, we are in for some challenging times ahead. The Indian Financial sector has fared much better than its global counterparts, but as lending standards tighten, interest rate sensitive sectors like Automobiles and Real Estate are likely to underperform. I will soon put up my update on the Indian Economy.

THE CHINDIA MELTDOWN

CHINDIA : http://en.wikipedia.org/wiki/Chindia

Stock markets here have had a dreadful first quarter.

There seems no end to the bad news, as writedowns continue across leading Investment banks.

Local Inflation is starting to concern governments, as food and fuel prices continue to rise.

The Shanghai Composite is down almost 45% since its peak in October last year. A lot of Chinese first time investors and retail investors will learn some very hard lessons. In addition to the crash in the stock market, the chinese economy is facing rising prices at home, and the prospect of a slowing US economy.

The BSE SENSEX is down almost 25% since it Jan 2008 high. Confidence has taken a beating, and fresh buying is waiting for lower levels.

The Financial sector is down sharply, after some banks disclosed indirect exposure to 'subprime linked' assets in their US subsidiaries.

The Oil and Gas marketing companies are down, on fears of rising subsidy burdens on retail fuels.

The Exporters in the IT space, auto component and textile sector are having a difficult time dealing with a volatile but strengthening Indian Rupee

Valuations in the Capital Goods and Power sector have corrected drastically, as investor expectations are now more realistic.

Avoid the Real Estate sector and stocks of Brokerage firms. Although these stocks are down sharply from recent 52 week highs, I do not see value at current levels.

Overall, its a wait and watch approach, as the bulls have disappeared on Dalal Street in Mumbai.