The Chinese are trying to kill me. I know it sounds ludicrous — that a whole country is out to get me — but hear me out.
Yesterday, I brushed my teeth. Nothing suspicious about that until I read the Chinese are making toothpaste with the poisonous chemical diethylene glyco. I looked on the tube and, sure enough, it was marked "MADE IN CHINA". I thought "this has to be a mistake because, why would the Chinese try to kill me?" I’m a big fan of the General Chow’s Chicken. My wife is even planning to run the Great Wall Marathon. No China bashing going on in my house.
Then I fed our cat, Mr. Kaiser. Mr. Kaiser has been acting fine but then I saw a China company made its pet food with tainted wheat gluten. I checked and, again, MY cat food was marked "MADE IN CHINA." First me, now my pets? This can no longer be a coincidence.
So last month I gave my boy the "Thomas The Train" wooden toy set for his second birthday. And yesterday, I hear they were recalled because the Chinese manufacturer used lead paint. Holy Feng Shui…now they’re trying to kill my kids too!
I look around. These Chinese are everywhere. My computer, my chair, the TV, the phone — all MADE IN CHINA! I could be slowly being poisoned. Even my underwear — MADE IN CHINA. Who knows what evil chemicals lurk in my undergarments. Ahhhh! I’m surrounded.
Why?!? Why me, Wen Jiabao?
It couldn’t be because of the China stock bubble article I wrote last week, could it? I mean, I was just making an observation. Nothing personal. Really.
Sure, I was trying to make money off of a China stock market decline, but I couldn’t even figure out how to do it. The China bubble seems to be truly a phenomenon isolated to the Shanghai market, which foreign citizens can’t even trade. So even though the Shanghai market declined about 15% in eight days, I couldn’t make a cent off the drop.
It certainly wasn’t for a lack of looking. First, I researched Chinese stocks trading as ADRs on the NYSE but most of them were decent companies that weren’t worth shorting. And most of them didn’t even blink during the Shanghai decline. China Mobile (CHL), PetroChina (PTR) and Aluminum Corp (ACH) are all actually higher now than at the beginning of the recent drop.
Then I looked at some of the more speculative China stocks listed on the NASDAQ, but most were too risky to short because of the low liquidity. Or, like C.trip (CTRP) and The9 (NCTY), they were pretty good companies and could be bought out. Again, too risky.
I finally settled on the a proxy for the Shanghai market, the Singapore iShares ETF (EWS). But even it barely budged. By the time I could have made a couple of bucks, the Shanghai reversed and I would have exited the trade poorer after commissions and fees.
So, Mr. Jiabao, you see….I can’t even make money shorting China stocks. Now, I can’t promise that I won’t try. My overlay of the Shanghai market with the NASDAQ still shows that if the Shanghai doesn’t make a new high, it could roll over into a serious decline. But my stubbornness could be someone else’s gain. And isn’t that what capitalism is all about.
You really have nothing to worry about, China. I promise to buy whatever stuff you make because, well, I really don’t have a choice. Just stop trying to kill me and my family. And please, GET OUT OF MY PANTS!
I enjoy your insights. Post more often! j/k
One issue with laying one chart over another is the lack of fundamental comparisons. For example, China vs. the Nasdaq. As we are all probably not so fond of remembering, many of the stocks in the Nasdaq were trading at absolutely absurd valuations at the beginning of 2000. Are the stocks in the Shanghai Index as equally absurd? Are the businesses actually making money? Given China’s economic growth, the Shanghai is much more reasonably valued than the Nasdaq was in 2000. (Check out EWZ, the Brazil ETF. It’s gone up 12 times in five years, which is more than either the Nasdaq or China. Is it going to crash?)
I recall a chart that I kept seeing over and over about a year ago. It was a chart of the S&P laid against the homebuilder confidence index (I think) and lagged one year. The correlation was tight for about ten years, then the homebuilder index plummetted. An ominous sign, many suggested. Not coincidentally, with the rise of the S&P, no one is touting the correlation anymore, for it’s no longer there.
That said, I do believe there is great value in studying charts, and correlations among charts, once they’re put into the proper context. I do agree that China is forming a bubble. I also suggest checking out EWA, EWO, and the ETF for Mexico. Bubbles abound. The “Crash” of 2000-2002 was not as deep as many think. Tech stocks took the brunt of it. The Dow, however, fell around 35% from top to bottom, but it didn’t stay down long. It stayed below 10,000 for less than two years total. That’s only a 20% correction. At the end of it, valuations were still high. They’ve lowered over the past five years because of large earnings, especially in tech stocks, which are now reasonably priced relative to the rest of the market. Cisco, for example, is growing its revenues at greater than 20%, yet it trades at 23 times earnings, which is about what P&G trades at.
Given the low interest rates and the abundant global liquidity, I think we still have a ways to go before we see a significant crash. (Global markets tend to crash together.) Still, it’s also my opinion that a mother of one is currently forming.
A bubble implies there is nothing to hold the bubble up fundamentally. In the Nasdaq of the late 90’s we had companies IPO’ing and spiking up in price, and there truly was air underneath, no income or earnings. This is why Nasdaq pulled back so much compared to the Dow.
I agree that Shanghai may have gotten ahead of itself, but with gdp growth of 10% since the 1970’s, and a relatively brand new securities market, there is no logic in comparing it to the Nasdaq bubble. Trying to time a pullback in a country growing gdp at 10% sounds like a great way to lose lots of money to me, if it were truly a bubble, it would be different.
If it made sense to short something just because it went up rapidly I would short AAPL, POT, and others, but that would be ignoring the story underneath.
China is an accident waiting to happen. There is no doubt that in the long run it will continue to prosper but, there are many excesses taking place.
China’s Government is so concerned about employement, that it has created over-capacity in many sectors of the economy.
What is going to happen when thr US consumer slows? The chinese, being fairly new at capitalism, will not now what buttons to hit when the crisis comes.
To see good evidence for a US consumer being KO’d goto
http://www.wrahal.blogspot.com
Check out FXI as a barometer for Shanghai.
Perhaps a pairs trade: Long EWJ and short EWT or EWH
Or Long FXI and short EWJ
Oops, meant long EWJ and short FXI.
Wow, I really had a lot of respect for your insight, until this post. Unfortunately, I now know that you are just another feeble minded sheep who is easily manipulated by mainstream America Media. It is no coincidence that the rise of China and the threat to the U.S as relinquishing its spot as the World’s economic superpower has coincided with these sensationalist stories about China trying to unermind and kill us. “First the Chinese are poisoning our toothpaste, then our pets, and now our kids!” I’m glad you will be one of the millions of Americans who buy into these stories meticulously fed to to our citizens by the media and our government so that we will all rally behind a war against China when the time comes. This post has really damaged your credibility.
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