Shanghai Index Declines 4.7%: Bubblevision Permabulls vs. Web Permabears

Last night, according to Bloomberg, “China’s stocks tumbled, with the Shanghai Composite Index entering a so-called correction, on concern a slump in exports and new loans will undermine the country’s economic recovery. The benchmark index fell 4.7 percent to a four-week low as the commerce ministry said China’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset falling export demand.”

Seeking Alpha readers were given a heads up on a possible China market correction in my Aug 9 article, “Key Market Factors: Global Melt-Up, Consolidation or Correction?” Its lead “Market Status” section begins:

“My key market question remains the same as last week's, “can fundamentals start improving fast enough to keep up with markets, or are the latter increasingly at risk of running too far ahead of the former?” … China’s market may have started to say yes to the latter, with the Shanghai Composite on Friday closing down for a third day in a row for the first time since mid-May … China is expected to report strong urban fixed investment (+34%) and weak exports (-23%) on Aug 11 … Small signs of change may be starting to appear regarding China, e.g. in lower bank loans in July.”

For a regular weekly thorough update of all the key factors affecting U.S. and global markets the past week and what might impact them in the upcoming week, please look for my “Key Market Factors” article, usually under “Market Outlook” and “Economy” at the end of the week. In it, I summarize major market trends and upcoming issues in my lead “Market Status” section. I also update 16 key market factors with all the latest developments and revise their ratings accordingly, and finish with charts of the week’s most important economic data and market internal strength.

U.S. Market Watches “Bubblevision Permabulls vs. Web Permabears"
The Mar-Aug rally’s progression so far:

"The sky is falling-financial Armageddon" phase ended Mar 6-9 at SPX 666 low; then "the recession will soon be over phase," whose end can be dated no later than Apr 29-30 when ECRI made that call, though the market had it figured out much earlier than that; followed by a May-June market consolidation; then "the better-than-expected 2Q earnings" phase, starting July 13 with Meredith Whitney’s pre-opening Goldman call on CNBC; followed quickly by "the better-than-expected 3Q GDP phase," which just ended as at least six major banks raised their estimates to around 3%.

The permabulls vs. permabears debate continues to rage during the slow trading days of August. So far, bullish economic and market trend followers have had the upper hand, see my two articles on these respective battles, July 26 "ECRI vs. Roubini, Round Two," and Aug 4 "Trend Following: Hussman vs. Swenlin."

It is easy to find strong bullishly-biased arguments in favor of the continuation of this historic 50% SPX rally off its March lows, they abound on bubblevision and Wall Street, with the more “free market” types now tending to forget that largely unregulated frenetically speculative finance nearly self-destructed the global economy last Sep-Oct, if not for massive government intervention, which they also now seem to be conveniently in denial about (as Krugman likes to remind his readers, e.g. his Aug 10 NYT Op-ed).

And it is just as easy to find strong bearishly-biased arguments against the continuation of this rally as just another, albeit huge, bear market rally, they are very common on web investment sites, whose proponents at the more extreme almost seem to be in their own denial that such a huge rally has actually just occurred.

So, in the mass media and on the web, the raging debate between permabears vs. permabulls tends to dominate, perhaps in part because it makes more exciting viewing and reading and helps drive transactions, with mass media bubblevision overrun by recently chastened but now newly resurgent bulls (mirrored politically by a populist backlash and invigorated right-wing push against Obama), while bearish arguments still seem to be drawing far more popular and vociferous support on the web than you’d expect during a 50% market rally.

To get all the facts behind the bulls vs. bears viewpoints, so that you can judge for yourself, see my Aug 9 "Key Market Factors" article mentioned above.

Comments

[Owen B]

Good article.

Reading this passage i found myself out of step with your description, but then figured being out of step is what makes a market.

"The sky is falling-financial Armageddon" phase ended Mar 6-9 at SPX 666 low; then "the recession will soon be over phase," whose end can be dated no later than Apr 29-30 when ECRI made that call, though the market had it figured out much earlier than that; followed by a May-June market consolidation; then "the better-than-expected 2Q earnings" phase, starting July 13 with Meredith Whitney’s pre-opening Goldman call on CNBC; followed quickly by "the better-than-expected 3Q GDP phase," which just ended as at least six major banks raised their estimates to around 3%."

My sense is similar, but with slightly different timing:

=The sky is falling/Armageddon phase lasted well into May.

=Sometime in May, following ECRI "end of recession this summer" call, I think Armageddon did come off the table for most.

=Then in June as the market fell, bears gained some control, with variations on an "Armageddon light" story.

=Armageddon light then passed away with the GDP and report on July jobs, and people need to decide if they want to finally buy in when the markets up 45% from its lows.

2009 Aug 12 06:28 PM

[John Furlan]

Thanks.

I'll just mention a few things about the Mar 6-9 SPX 666 low, which I called the end of "the sky is falling-financial Armageddon" phase, I won't go through the other phases that I mentioned here. This is from memory, from what I recall in real time, so it might be a little off.

Before the opening on Tues, Mar 10, an "internal" memo from CEO Pandit was leaked that said Citigroup had earned an "operating" profit the first 2 mths of 2009. That was a big clue that something was up. That was shortly followed the same day by comments from Sen. Dodd (and perhaps Rep. Frank) putting very explicit pressure on FASB to allow banks to not be held to "mark to market accounting," FASB bowed to the threat a few weeks later, a very major change that helped banks raise much needed capital. A week later, Wed, Mar 18, Bernanke's FMOC indicated that it would start buying $300 b of Treasury bonds, so called quantitative easing (QE) and double its program of purchases of mortgage securities to $1.5 tr. That, btw, is when Swenlin's and other intermediate-term trend-following technical models started flashing buys. A week after on Mar 24 Geithner's Congressional testimony on the stress test went much better than his initial efforts, and it became increasingly clear that the tests were designed to be used to help banks raise equity capital, as they were also doing in the bond market with huge FDIC guarantees, something that was under-reported and under-appreciated.

From memory, that is roughly how the tide was dramatically turned, I may not have the exact dates and details correct and omitted a few, as I don't have time right now to google to check. Anyway, that's why I said Mar 6-9 was end of "the sky is falling-financial Armageddon" phase. Btw, some professional investors such as Doug Kass and Marc Faber who had been appropriately bearish during most of the crisis, immediately sensed the big change around Mar 10 and, especially in Kass' case, made a very strong bullish call. I hope this chronology helps a little. JF


On Aug 12 06:28 PM Owen B wrote:

> Good article.
>
> Reading this passage i found myself out of step with your description,
> but then figured being out of step is what makes a market.
>
> "The sky is falling-financial Armageddon" phase ended Mar 6-9 at
> SPX 666 low; then "the recession will soon be over phase," whose
> end can be dated no later than Apr 29-30 when ECRI made that call,
> though the market had it figured out much earlier than that; followed
> by a May-June market consolidation; then "the better-than-expected
> 2Q earnings" phase, starting July 13 with Meredith Whitney’s pre-opening
> Goldman call on CNBC; followed quickly by "the better-than-expected
> 3Q GDP phase," which just ended as at least six major banks raised
> their estimates to around 3%."
>
> My sense is similar, but with slightly different timing:
>
> =The sky is falling/Armageddon phase lasted well into May.
>
> =Sometime in May, following ECRI "end of recession this summer" call,
> I think Armageddon did come off the table for most.
>
> =Then in June as the market fell, bears gained some control, with
> variations on an "Armageddon light" story.
>
> =Armageddon light then passed away with the GDP and report on July
> jobs, and people need to decide if they want to finally buy in when
> the markets up 45% from its lows.

2009 Aug 12 10:00 PM

[Mad Hedge Fund Trader]

fsdgh. Traders are keeping a laser eye focus on two bellwether markets, which are starting to roll over like a cheap date. The red hot Shanghai stock market has dropped 10% in the past few weeks, putting in an ominous double top on the charts. The Baltic Dry Index, an indicator of Chinese bulk raw material importing expectations, put in its worst week in a year, off a bone chilling 40% from its recent peak. What are these markets telling us? Best case, the market is going to sleep. Worst case, we are seeing the red skies of a global sell off. Better trim back you're long exposure of every size, shape, color, taste, and smell. This year’s mini bubble is over.

2009 Aug 13 11:21 AM

[Alphameister]

Looks like a normal (and overdue) correction for the volatile Chinese market, and a normal correction of the exponential portion of the BDI's rise to levels (that remain sharply from the lows of the year). Contraction of the BDI does not inherently imply a weak economy in China nor invalidate the global recovery theme; it's partly a reflection of more ships competing for available traffic.

2009 Aug 13 11:53 AM

[Owen B]

JF, I agree with you that there were a few individuals that called end of Armageddon in early March, but I was thinking more of market sentiment as a whole.

Have you seen this? www.reuters.com/articl...

2009 Aug 15 07:09 AM