It seems like China won't stop at anything to keep its economy running full steam ahead: China announced a massive $586 billion stimulus package. There they go again, China's cutting interest rates again to 5.58% (the 4th time in the last 10 weeks).
This brings me to the question: How do you tell if a market has actually bottomed?
In the last 100 years, there have been 4 comparable market disasters. They are the Great Depression of 1929, the 1973 Oil Crisis, the Nikkei crash of 1989-1990, and the Nasdaq Tech Bust of 2001.
During the Great Depression, the Dow PE went from 32.6 to 5 over 3 years. It was down for 18 years.
In the 1973 Oil Crisis, the S&P PE went from 23 to 12 over 2 years. It rebounded.
The Nikkei PE went from 78 to 28.47 over 3 years. It's been struggling downward for the last 2 decades.
The Nasdaq PE went from 264 to 58 over 2 years. It rebounded.
USA: The S&P is down 52% off it's peak over 1 year and we're sitting at a forecast 2009 average PE ratio of around 11.9.
China: The Hang Seng peaked in November of last year at 31,638 and fell to 11,015 on October 28th and is now sitting at 13,846. I've got the Hang Seng PE located at 8.9.
A few considerations: You need to take into account are the Yuan/Dollar exchange rates and how the USA is funding a lot of this massive deficit thanks to our neighbors on the opposite side of the world. Also, when you compare the Hang Seng to the Nikkei above, notice that the PE ratio of the Nikkei only dropped to 28.47, which was still off the charts.
Analysis via Ben Graham:
P/E = (8.5 + 2G)
That's if you look at the Ben Graham equation. This implies that USA is going to grow faster over the next 5 years than China is. Likely? I don't think so.
That puts China's expected growth at 0.2%. Historically, ignoring the first year of this data series because it had unusually high PE ratios, the P/E ratio of the Hang Seng is about 15. The index is set to double. And that's just a reversion to the mean. Is the S&P set to double using this analysis? No way.
What would Buffett say if he realized that the only-child Chinese consumer is a lot more into spending as opposed to saving than his or her parents? Remember, Buffett doesn't just buy the index. When he buys companies, he gets good companies at great prices. So, he's not blindly buying American companies like the articles about him portray. Either way, I think Buffett will make money. I'm merely suggesting that he could be set to make more. He could buy Zhongpin (HOGS). That's an easy industry that even he would understand.
What companies do I like using this analysis in China? EJ, AOB, SOHU, and YGE. I expect to see growth stocks exploding back to their old PE ratios. My favorite companies have stocks that have fallen 80% or more and have stock fundamentals that have continued to explode and have no reason to stop growing as fast as they have been. I wrote this in reply to a technical analysis article that didn't have much substance.
Disclosure: I own EJ, AOB, SOHU, YGE.