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Pompano Frog
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Background: Former securities analyst and brokerage firm owner and Currently doing contract research for Investment Advisors Undergraduate degree from Northwestern, Economics Taught Advanced Financial Markets Class at a University in Chicago In to Yoga.
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  • CHINA READY FOR A 50% MOVE

    June 25, 2013

    S&P 500 1573.09

    FXI 31.70

    The Shanghai Composite closed last night at 1959.51. That is down 14.8% for the month of June, 2013. That is a large drop. Since 1991 there have been only three times in a 12 month period where you have had a drop of that magnitude in a single month.

    The Bank of China fully understands that large stock market movements are the transmission mechanism of financial liquidity and monetary policy to the real economy. They will do whatever needs to be done to move this market higher.

    Chart forSSE Composite Index (000001.SS)These are the previous three periods of large one month drops:

    1993.05 -31.2 935.48

    1994.07 -28.8 333.92

    2008.10 -24.6 1728.79

    2013.06 -14.8 1959.51

    To outperform the market indexes it is necessary to anticipate the future moves of the global asset allocators. What are these institutions using as a basis for making radical changes in sector and country allocations?

    Let me suggest that they are using factors that fall into two categories consisting of valuation factors and monetary factors. The main etf for the Chinese market, the "ishares FTSE China 25 Index Fund" is trading at 9x trailing earnings and 2.2x cash flow. This is in an economy with a 7% long term growth forecast.

    Chart foriShares FTSE China 25 Index Fund (NYSEARCA:<a href='http://seekingalpha.com/symbol/fxi' title='iShares China Large-Cap ETF'>FXI</a>)

    On the second front, monetary factors, the Bank of China is going to respond to the market panic with exactly the same massive liquidity expansion as they used in 2008.

    2008 September 2293.78

    2008 October 1738.79 Panic

    2008 November 1871.16

    2008 December 1820.81

    2009 January 1990.66

    2009 February 2082.85

    2009 March 2373.21

    2009 April 2477.57

    2009 May 2632.93

    2009 June 2959.36

    2009 July 3412.06

    On the first page of the Wall Street Journal is the headline "China's "Shadow Banks" Fan Debt-Bubble Fears ." The Wall Street Journal hates China. How do you explain to your followers of the "small business man made America great with free markets" to the reality of 2.5% long term economic growth when a communist oligarchy is able to churn out 7%.

    The important thing to remember when you are talking about China you are talking about a country with a household savings rate which was 16% in 1990 and was 30% in 2010. You have massive amounts of new domestic capital flooding the investment system every year. A country expanding at 7% needs massive amounts of capital to maintain the investment rate to support that growth rate.

    I highly recommend a 2008 book by the Korean economist Ha-Joon Chang, "Bad Samaritans, The Myth of Free Trade and the Secret History of Capitalism." This is a solid, well documented, easy to read, presentation of the case for state managed capitalism and explains clearly the Asian economic model. The book sells for $10 in paperback or on kindle.

    The Bank of China is going to be under enormous pressure from their political bosses to do something. They will err on the side of making sure they are not sent for reeducation. To the Chinese Central Committee capitalism is a tool to provide resources for the party. Those resources create social stability and an expansion of military power.

    FXI (China ishares ETF) is the investment idea for the next six months.

    Disclosure: I am long FXI.

    Tags: FXI, CHINA
    Jun 25 5:13 PM | Link | 8 Comments
  • Budget Deficits Bullish for the Stock Market

    As usual the talking heads in the media are constantly assaulting us with information on the budget deficits. The implication being that the fiscal position of the U.S. is bearish for the stock market. As usual nothing could be further from the truth.

    Anyone who works with economic data should be able to know immediately that this could not be a negative. And of course, with a quick 30 minutes we have created a spreadsheet that shows the reality.

    I took the CBO data (Congressional Budget Office) from 1968 to 2007 and ran the numbers. Over the entire 40 years the average return was approx 8%. The best years of budget surplus were 1999 and 2000. The top quintile of budget surplus years averaged a return of 1.6%.

    The worst years for budget deficits were 1983 and 1985. The highest quintile of budget deficits over the 40 years averaged a return of 15.5%. How could this be? What could explain it?

    This is the same issue we face with unemployment. Stock markets do well during periods of high unemployment and they can get killed with a great economy. Making money in investing is not just choosing the stock or the bond, but understanding the liquidity cycle.

    All economies have business cycles. In a democracy the political process almost guarantees that during periods of recession the central bank is required to flood the financial markets with liquidity. Since the “real” economy doesn’t need all of the funds, financial markets rise. This rise in the stock market, bond market and usually the real estate market is how monetary policy is transmitted to the “real” economy.

    Investing with the media can be deadly for your financial health.

     

     

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Aug 24 9:53 PM | Link | 1 Comment
  • 400 POINT DOWN DAYS NOT NEGATIVE EVENTS FOR MARKET
    David Rosenberg, the perpetually bearish analyst was quoted on Bloomberg yesterday that “90% of 400 point declines, since 1987, have taken place in bear markets.” As the table below indicates the net result 20 market days later was zero. It looks like data mining to me.

    I also object to using the nominal decline rather than a percentage number, such as 3%. This use of the nominal number in economic series results in exaggerating the most recent data.
                                                        
     
    DJII
    20 DAY%
    1987.10.19
    1738
    12.1
    1997.10.27
    7161
    8.5
    1998.08.31
    7539
    7.2
    2000.04.14
    10305
    4.9
    2001.03.12
    10208
    -3.6
    2001.09.17
    8920
    4.8
    2007.02.27
    12216
    1.5
    2008.09.15
    10917
    -14.0
    2008.09.17
    10609
    -19.1
    2008.09.29
    10365
    -21.1
    2008.10.07
    9447
    1.9
    2008.10.09
    8579
    1.4
    2008.10.15
    8577
    -3.4
    2008.10.22
    8519
    -6.1
    2008.11.05
    9139
    -8.3
    2008.11.06
    8695
    -0.7
    2008.11.12
    8282
    3.4
    2008.11.19
    7997
    7.6
    2008.11.20
    7552
    13.6
    2008.12.01
    8149
    6.4
    2011.08.04
    11383
    2011.08.08
    10809
    2011.08.10
    10719
    2011.08.18
    10989
     
     
    I have also run the data for a 50 day market period and with the same result- zero.

    The Rosenberg claim is based on the few days in 2011.08 and the negative market action which followed. Without those days the results would be positive for buying the market following large down days.

    Every long term indicator of market performance (12 months into the future) is signaling double digit upside returns. Money supply in 2008.08 was running at a 12 month growth rate of 2%. Since zero growth is the lowest decile over the last 40 years money growth was tight.

    Currently money growth is 20%. My research indicates that all of the long term profits in the stock market are made during periods of market chaos. That means periods where the central bank is increasing money at double digit rates. This is a top decile event. They would only engage in this action if they saw the economy and the market not responding to more moderate policies.

    My research indicates that monetary policy is transmitted, to what the public and the media define as the real economy, through the financial markets. This is a March, 2009 moment and the stock market will explode to the upside.

    Just as in 2009, you wanted to overweight the sectors that had been slaughtered. Here you want to overweight financials.
    Aug 19 10:16 AM | Link | Comment!
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