Themes: China, Stock Market, UK Sares, Economy
The fate of UK stocks is once again out of our control.
The Chinese market looks about ready to pop. Our view is that it’s overvalued, attracting too much hot money and could be set for a massive correction. According to one think tank, this could happen as soon as 17 July as we discuss below.
This would have a massive impact on UK stocks. Thankfully, we know a few good places where you can hide your capital if and when the trouble starts. You should take defensive steps now to avoid being one of the many that could lose big very soon.
But first, let’s explain the Chinese threat...
Academics call it the “international transmission mechanism” but we simply call it the spill over effect. You see, what happens on the UK stock market is influenced massively by the US and Asian economies. Direction and sentiment in London-traded stocks is all too often driven by these bigger economies and their bigger stock markets.
Since 19 October 1987 – Black Monday – the spill over effect has had a massive impact on the markets. It was on this day that we first saw the contagion of fear across financial markets. Almost all stock markets around the world fell together despite widely differing economic realities. Last year, the credit crunch served to remind us that we must look beyond our shores when sizing up long term investments.
And there’s never been a worse time to be at the mercy of foreign forces...
Is China the next bubble waiting to be popped?
In short, the Chinese stock market is worryingly overvalued. With a 69% rally from its low last year, the whole Asian region is not cheap. But China is trading extensively above its 40 day moving average. Chartists are describing the market as “significantly overbought.”
These nascent China fears are building fast. A couple of BNP Paribas analysts set up an independent research “project” (although I should stress that these are not the views of BNP Paribas) to say what they really feel about the Chinese market:
“Amid the current financial crisis, there has been one equity index beating all others: the Shanghai Composite. Our analysis of this main Chinese equity index shows clear signatures of a bubble build up and we go on to predict its most likely crash date - July 17 – 27 2009.”
Pencil that into your diaries because it comes from a reliable source. These are the same analysts that used their system to call the top of the bull market in oil in May last year. They were right last time and we think they’ll be right again…
You see, it’s not unusual to say that the Chinese market – up 65% in 2009 alone and trading at 32 times this year’s earnings – is in a bubble. What is unusual is that so few investors in the UK are paying attention to it. We saw last year the domino effect of falling markets. We may be over 5,000 miles away, but London’s stock market could soon be feeling the negative effect of Chinese market excesses. This is why you must take action to defend yourself now…
What you should buy to protect yourself
Our bearish warnings are already feeding through to the market...
While the general market has fallen just 5% from its recent peak, mining stocks are already down 21% and oil and gas producers are not far behind. These are two of the sectors most closely linked to the resource hungry Chinese economy. Should the bubble burst we could see even greater losses in these sectors and indeed across the market. It would bring back the fears of a double dip recession and would depress already shaky investor confidence across the world.
The simplest way to protect yourself from these time bombs is to diversify your holdings away from the stock market – corporate bonds are a good example of this. But for investors focused on shares, we would recommend you stock up on defensives.
In fact, right now there are a handful of large cap defensive stocks that are so cheap their dividend yields are actually larger than their P/E ratios. These positions did not participate in the March rallies and are extremely good value right now.
For dividends to eclipse P/E ratios is not an everyday occurrence and long-term investors could do very well stocking up on high-yielding names like Vodafone, Shell and Premier Foods.
The big picture looks iffy and now is the time to diversify into safer, defensive plays. If China does go off with a bang, the spill over could hit the UK stock market as soon as on Friday.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is the investment director of The Fleet Street Letter, the UK’s longest-standing investment newsletter. The team’s latest research advises readers where to put their money now to best survive and profit from the “summer of surprises”. This includes three timely files:
1. The Best Investment for the Next Six Years;
2. Gold: The best way into the "Ultimate Inflation Haven";
3. Three "Price Makers" that could make you rich in the inflationary years ahead. [NOTE: These are shares in defensive sectors that offer good value at current levels.]
PLUS: If you act now, you’ll receive by return The Fleet Street Letter’s latest special report, revealing a unique investment that will go UP as the market goes DOWN.
Click here to access this time-sensitive advice now.
Note: Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary.
MARKET NOTES
Why $150 is critical for Goldman Sachs
BY FRANK HEMSLEY
Goldman Sachs shares closed last week at $141.87... and yet opened up this week at $146.72. In fact, Monday’s opening price was greater than Friday’s high price. That’s a sign of huge built-up buy orders while the market was closed over the weekend.
Everyone wanted a piece of Goldmans ahead of their 2nd quarter results. And as you can see from today’s chart, investors have been behind this stock for the past eight months. Goldman Sachs’ share price chart has been a one way train.
But we’re at a crossroads at $150, as marked by the horizontal line. This has been an important "support level" in the past. The price held above there several times throughout 2008... until the market-wide collapse in October last year.
Since the market bottomed in March, Goldmans has raced back up, but so far it’s stopped dead at $150. What was once support has turned into an important resistance level.
Can investors drive Goldmans through overhead resistance?
On the face of its results, Goldmans didn’t disappoint.
It reported $13.76 billion in net revenues for the second quarter. This was up from $9.42 billion during the same period last year. Total profit for April to June was $3.44 billion, its largest ever quarterly profit.
But 78% of those revenues came from its "Trading and Principal Investments" group. Investment banking - what Goldman used to do - actually experienced a 15% decline in year-over-year quarterly revenues. And the "Asset Management" business also saw a 28% decline in quarterly revenues compared to the same time last year.
And don’t forget that the last quarter has been a stellar quarter for the market in general. If the markets turn down, and there is less to be had from its principal investments, Goldman could just as easily lose its shine.
Either way, $150 remains a critical level for technical traders around the world. Don’t worry too much about intraday movements. Only if it closes above $150 does Goldman’s rally look sustainable.
The Daily Reckoning – No real recovery
BY BILL BONNER
Waterford, Ireland
Wednesday, 15 July 2009
Our faith is weakening. That is, our faith that the government will be able to cause inflation, sooner or later.
Let’s review our own narrative: deflation now, inflation later.
It’s very simple. Maybe too simple. After half a century of credit expansion, we now have a credit contraction. In this sense, everything is happening as it should.
There was a crash and credit crunch at the end of last year. Then, the feds panicked. They fought back with monetary and fiscal stimulus. Rates were cut to nearly zero. The Fed flooded the system with cash and easy credit – buying up Wall Street’s bad investments... propping up bad banks... and guaranteeing trillions worth of bad debt. And the federal government passed a stimulus program that authorized more than $700 billion in spending.
Beginning on 9 March, we also got a big bounce in the world’s stock markets – just as we should. US stocks are up about 40% since then. Some foreign markets are up even more. Russian stocks, for example, have more than doubled. Chinese stocks are up more than 60%.
As the bounce continued, people began to get the wrong idea. They thought they saw ‘green shoots’ and the ‘light at the end of the tunnel.’ But if the economy is really improving, we haven’t seen much evidence of it here at the Daily Reckoning headquarters.
As near as we can tell, housing prices are still going down and unemployment is still going up... and most important... people are still acting as though we were on the downward slope of the credit cycle. The latest numbers we’ve seen show that they saved more money in the first half of the year than the total in extra ‘stimulus’ that they received. Savings – last reported at 5% in this space – are now close to 7%. This is a just what you’d expect. But it is a huge turnaround, too.
As to housing prices, there are a million option ARMs still to be reset over the next 4 years. They won’t peak out until 2011... with average increases of about 80%. That will cause hundreds of thousands more houses to be dumped onto the market... and probably push the bottom of the housing decline to 2012.
As long as housing prices are falling, jobs are declining, and consumers are inclined to save rather than spend, there will be no real recovery.
In our book, recovery is impossible anyway. Because the pre-crisis economy had reached the terminal stages of the credit cycle. It was like someone in the terminal stages of a fatal illness. After they have died, you don’t wish that they could recover... and be just like they were before they died. They were sick and dying then! No, you sign the book of memories and condolences and turn the page. You let new life take the place of the dead. You move on.
But the feds have their ghoulish agenda. They have the poor thing on life-support. One tube feeds the oxygen of easy credit. Another drips in more ‘stimulus.’ The economy rattles every time it breathes. Dead companies, such as GM, say they are reborn. But take away the tubes... and they collapse.
Dead-in-the-water households learn to live submerged in debt ... with special tubes provided by the feds – such as the underwater mortgage refinancing offered by Fannie and Freddie, where homeowners can get up to 125% of the value of their houses. And the brain dead economists at the Fed and the Treasury department continue to offer their elixirs and panaceas – even though they have never worked.
Everything is happening as it should, in other words. But what happens next?
Read on…
CONTINUED on our website...
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