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Dallas, TX
November 10, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Here Comes Another End Of China Theory
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What's Hot Today: |
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U.S. stock index futures were flat on Tuesday morning.
Global markets were mostly higher overnight following the Monday rally
in the U.S.
Today's Economic Calendar:
- ICSC-Goldman Store Sales 7:45 AM ET
- Redbook 8:55 AM ET
- 4-Week Bill Auction 11:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
News For Thought
Bull market in golf carts spurred by federal government incentives. According
to The Wall Street Journal: "Thanks to the federal tax credit to buy high-mileage
cars that was part of President Obama's stimulus plan, Uncle Sam is now paying
Americans to buy that great necessity of modern life, the golf cart." So for
those looking for that special stocking stuffer, here are the facts, as reported
by The Journal: "The federal credit provides from $4,200 to $5,500 for the purchase
of an electric vehicle, and when it is combined with similar incentive plans
in many states the tax credits can pay for nearly the entire cost of a golf cart.
Even in states that don't have their own tax rebate plans, the federal credit
is generous enough to pay for half or even two-thirds of the average sticker
price of a cart, which is typically in the range of $8,000 to $10,000." Makes
you want to take up the game, doesn't it?
Slight signs of easier lending appear. A small number of banks may be
starting to ease the availability of credit. According to The Wall Street Journal: "Banks
continued to tighten lending standards for businesses and consumers over the
past three months, the Federal Reserve's latest survey of loan officers showed.
But a smaller fraction of banks were making it harder to get loans, an encouraging
sign the grip of the credit crunch may soon be easing."
Report: Peak oil is a lot closer than anyone thinks. According to Reuters: "The
world is closer to a peak in oil supply than International Energy Agency estimates
admit, UK newspaper The Guardian reported in its Tuesday edition, citing an unidentified "whistleblower" at
the IEA." According to the report, the IEA may be involved in a cover up of the
situation as '"Many inside the organization believe that maintaining oil supplies
at even 90 million to 95 million barrels a day would be impossible but there
are fears that panic could spread on the financial markets if the figures were
brought down further," the Guardian quoted the IEA source as saying.' The IEA
had no official comment about the article.
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Here Comes Another End Of China Theory
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Is China Too Big To Fail?
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Another opinion about China's inevitable downfall is
circulating. This one is about the rising idle capacity in the system and the
unsustainability of credit leading to the growth juggernaut's demise.
A running theme in this column has been China. A few years ago, we were talking
about the potential for social unrest in China as the rich got richer and the
poor just got poorer. And we were partially right. Riots and social unrest are
happening there on a somewhat regular basis. But, so far, it's just that, riots
and social unrest with no real consequences other than the personal damage to
property and the grief associated with the loss of loved ones.
Yet, the juggernaut keeps coming. The Chinese government continues to put money
into resource rich nations in Africa and South America in order to continue to
harvest the fuel to keep its still centrally engineered economy going. And as
the rest of the world struggles, China keeps on chugging, delivering 8% or better
GDP growth every quarter and not giving an inch in its trade disputes with the
U.S. or Europe.
So here's yet another theory about how the Chinese miracle will end. According
to The Wall Street Journal: "China is vulnerable to the same Kryptonite that
has hurt countless other economies: credit." Here are the facts. According to
The Journal: "China's money supply has risen 29% in the past year. At the government's
behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during
that time." As a result "That flood of borrowed cash has been channeled into
new infrastructure and production capacity. These investments will account for
up to half of China's gross domestic product this year, according to some estimates."
What it means is that China's growth is coming from a continuation of what it's
done in the past, build buildings, train tracks, roads, and energy infrastructure.
You know, the stuff that will someday spur commerce. Meanwhile, Europe is landlocked,
its trees are gone, and its standard of living continues to fall. In the U.S.,
the government is preocuppied with health care "reform" as the jobless rate rises
to 10%, and the health care industry continues to remind Congress that its recent
health care bills will cost jobs. More important, the health care industry, which
is a significant portion of the U.S. economy, continues to shed jobs.
The argument is that China is creating a false sense of growth. It's putting
money into busy work, and that the number of empty buildings and roads to nowhere
are the telltale sign that the whole thing is smoke and mirrors. The Journal
notes the following: "A key question is whether China needs all of this investment.
Analysts at the London hedge fund Pivot Capital Management say that China already
has enough idle steel-production capacity, for example, to match the steel output
of Japan and South Korea combined. Meanwhile, the ratio of investment to GDP
is rising, suggesting China's investment is less and less efficient, says Edward
Chancellor at Boston asset-management firm GMO."
So what's the conclusion? At least one person Edward Chancellor at Boston asset-management
firm GMO thinks that "The combination of soaring investment and dwindling returns
was seen in Japan in its asset bubbles in the 1980s and in the "Asian Tigers" just
before their crises in the late 1990s."
If that's the case, then we still have one bubble left to burst in the world.
And right now it's the biggest one left, the Chinese miracle.
Conclusion
For us the fundamental question is when will China fail versus whether China
will fail at all? And the answer is that we don't know. The pieces for a huge
disappointment have been in place there for a long time. But the paradigm just
keeps on rocking. Sure, it's all government engineered. And yes, it's bound to
have its share of smoke and mirrors thrown in.
But a lot of China's success is perception. Remember that when Clinton balanced
the yearly budget, the markets soared, even though the national debt kept growing
during that period.
So why is China still booming? Because people keep putting money into it and
the government continues to prop up the things that it needs to prop up.
China, unlike the Western world is not planning on quick success. It's planning
on long term success. Rather than working on sequential quarter to quarter success,
it's planning to be around for centuries.
This is a foreign set of parameters for the West, where instant gratification
is paramount and is the major reason why there are always predictions that China
will fail.
Can it fail tomorrow? Sure, anything is possible. But is it likely to? If you'd
have asked us five years ago, we'd have said, yup, tomorrow.
The fact is that we were wrong about China failing five years ago. Now, we're
smart enough to say that we don't know if and when it will fail. We're also smart
enough to realize that the whole Chinese dynamic is too big and too diverse to
be bottled up in an easy to digest package. There are too many interlocking and
unpredictable pieces to the puzzle.
So to the latest theory about why and how China will implode, we say, good luck,
we'll be watching and when we see the whites of the collapse's eyes, we'll do
something about it. Until then, you're on your own.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Ishares FTSE/Xinhua China 25 ETF (NYSE: FXI) Makes New High But Is Too Volatile For Average Investors
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The Ishares
FTSE/Xinhua China 25 ETF (NYSE: FXI) continues its surge.
Chart Courtesy of StockCharts.com
The Chinese stock market has been incredibly volatile this
year, but those who have held on to the FXI ETF have been
rewarded for their steely resolve.
To be sure, we couldn't have held this fund for long, given our personality and
penchant for trading. Yet, you've got to admit, the thing has some serious staying
power.
The ETF bottomed in March and has doubled in price as of the close of trading
on 11-9. The problem is the volatility. This ETF, in the last few months has
been in a trading channel that encompasses a 10% trading range from top to bottom.
It has also broken below its 50-day moving average three different times in the
last four months, whipsawing those who follow the 50-day line as a trading guideline.
And making things even worse, the ETF has lots of gap openings and closes, which
means that its U.S. price is essentially dictated by the overnight action in
China.
What it means is that this ETF is only good for buy and hold investors with cast
iron stomachs. And that means that when it finally breaks, it will be a hard
and very costly break.
This is a perfect example of why investors need to adapt their trading style
to their level of tolerance, which is dictated by their personality. This scribe
can't stand that much volatility, which means that this ETF is not a good fit.
We are neither recommeding the sale or the purchase of FXI. The purpose of this
article is to educate subscribers as to the presence of an interesting trend
in the market. Dr. Duarte does not own shares of RTH.
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Technical
Look at the Market |
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ng For 1100 One More Time
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The S & P
500 closed just below 1100 on 11-6, and may be gathering
steam for another move toward the key resistance level.
Volume and breadth were excellent on Monday, and the ratio of up volume to down
volume was 16 to 1, suggesting lots of momentum. In fact, 16 to 1 is almost too
much momentum. But it's hard to tell at this point, so we'll wait to see what
happens before making any more pronouncements other than money was moving into
stocks in an aggressive fashion on Monday.
The drug stocks were fairly decent movers, while energy stocks also rallied.
Big tech stocks were mixed.
Chart Courtesy of StockCharts.com
The technical picture may be about to be decided. If the
S & P 500 can actually take out 1100 in a big way, we
could see significantly higher prices in stocks, at least
for the short term, as momentum money piles on.
Chart Courtesy of StockCharts.com
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