Back in early April, I had written about the 50 day - 200 day Moving Average crossover in the Shanghai stock market. I think we should look at the Shanghai index as a ‘leading indicator’ to gauge US markets. This crossover happened a good 2 months before the US markets did. We also got an early non-confirmation of the March lows when the Shanghai index failed to make a new low at that point of time.

Since I believe this is a cyclical rally in a secular bear, I wanted to use Fibonacci analysis to gauge the retracement levels in the Chinese markets. This basically gets you an idea of how far this bear market rally retracement should go. While you might not believe in Fibonacci or technical analysis, it's still useful to keep these levels in mind as selling and buying pressure would appear around these levels from people following these trends. As can be seen from the chart below, we’ve already crossed the 38% retracement level, which means the 50% retracement at 3800 on the Shanghai Index is in play. This suggests further upside ahead.

It is widely accepted that a big reason for the Chinese equity rally was the massive increase in banking loans and money supply. Thus when the Financial Times reported a blockbuster June loan growth, I wondered if this would lead to a July-August surge in the stock markets, the last one. Looks like we might be getting one.

Here are two charts showing the credit and money supply surge:

The book "The Ascent of Money" actually talks in depth about the discovery of the New World Potosi mines by the Spaniards. Apparently, a great metal shortage was solved by this discovery. The Spanish ‘pieces of eight’ became the global reserve currency.

But obviously this did not make the Spaniards wealthy in the long term. The increase in money supply merely increased the prices of all goods and services. The period from 1540 to 1640 was the only period where annual inflation of about 2% per annum actually existed before the era of fiat currencies. Check out my earlier post on interesting quotes from the book.

It’s almost a foregone conclusion that General Motors (GM) is going to be replaced from the Dow. People have started speculating on possible replacements:

With an almost ~40% equity markets rally behind us, this bull market may still have some upside left. The bears sure got caught flat-footed on this one.

It’s always interesting to collate responses from different strategists. I find that recurrent themes makes it easier to filter out the noise. (Consider this to be similar to the "most widely held" consensus stock portfolio. Only in this case we’re trying to divine the "most widely held" very-smart money strategy.)

So Zero Hedge posted this incredible chart showing that the US dollar has lost 94% of its value over the past 76 years.

click to enlarge

The "Woodstock for Capitalists" occurred over the weekend. To capture the mood, I read the book Pilgrimage to Warren Buffett's Omaha: A Hedge Fund Manager's Dispatches from Inside the Berkshire Hathaway Annual Meeting by Jeff Matthews. Living in tumultuous financial times has increased the relevance of receiving sage financial advice, and who better to turn to than the “Oracle of Omaha” himself?

The book covers the 2007 and 2008 Annual Berkshire Hathaway (BRK.A) (BRK.B) shareholder meetings. It’s basically a collection of blog posts which Jeff wrote on his website. The book is divided into two sections (for 2007 and 2008). Jeff’s perspective as an outsider rather than a “Buffettologist" is valuable as he takes a more critical look at the events and adulation surrounding the firm and the man.

A couple of weeks back, I wrote a post summarizing what the experts were saying on the bull vs. bear market debate. (This article is also taken from my blog.)The S&P500 just broke out of resistance at 875, and the yields on the 10 year look to be rising straight to 3.7-3.8%. Here's what the gurus have been saying these past few days:

Disclosure: No positions

Background:

I’m an Apple fan. I own multiple Apple products, and am a regular visitor to the Mac store. I’ve thought of owning Apple stock (AAPL), but have not done so because everyone I know is so admittedly smitten by them. When a company is that well known and loved, a lot of its growth is already baked in.

Well, given that everyone's been trying to decipher the market trend, I’ve tried to cull together predictions from famous market investors and technicians. (Caution: lengthy!). A number of credible strategists have called this a bear market rally and not a new bull, with an intermediate term price target around 875-880. The markets could rollover in the next week or so.

So let’s see what they have to say:

Until sometime last year, betting on Indian rupee appreciation seemed like a sure shot one way bet. The BRICs 2050 hoopla certainly helped ignite the animal spirits. Corporations who should have been hedging currency risks actually started speculating instead, trying to “benefit” from their currency exposure. (See this paper and presentation which further explore the existence of one way currency bets amongst private sector companies in India.)

Well, I came across an article which documents the extent of this activity. It discusses the possibility that the Indian companies could face currency translation losses of approximately 20% of their profits in the current quarter. This number might actually be on the low side as companies do not disclose their foreign currency borrowings separately. (Note that Indian companies only have to disclose their balance sheet once a year, and the Indian fiscal year runs from April - March.) I suspect a few sectors/companies could face the brunt of these losses. From the Financial Express:

The investing pantheon has been famously negative for more than a year now. Plenty of people have compared the current banking crisis to a 100 year storm. From a Prem Watsa interview. :

History shows that there are 100-year storms and 50-year ones. In 1929, a 100-year storm, only 10% survived the market crash and it was only those who were negative in 1925 and did something about it.

BusinessWeek is out with a great article on the grim prospects for Indian equities and the economy over the next year.

To summarize:

Bill Gross is out again with a no holds barred punch at the administration and the current state of affairs. He predicts a trillion dollar deficit for the next administration, and a severe inflationary uptrend.

I had linked to his earlier excellent missive and CNBC appearance here. There’s also a discussion where I speculated that a mean reversion in the price-earnings multiple to ~12 could be the fat tail PIMCO is watching out for.

Over the past two weeks, the commentary from Europe has gotten decidedly bearish. And none of them are talking of a run of the mill bear market. The most cheerful of the lot is forecasting a 30% global equity markets correction; the others are warning of a once-in-a-century doomsday scenario. So without further ado, here’s the European bear market parade:

The parade really started with Royal Bank of Scotland (RBS) coming out with a warning about a full-fledged global stock market crash. With a call for the worst bear market in the last century, Bob Janjuah warned us that "a very nasty period" was soon to be upon us.

Sometime in late 2007, a ‘new paradigm’ seemed to have emerged; that of fast-growing developing markets to trade at a premium to the developed world. I was in India in December 2007, and was often befuddled at some of the articles and conversations I came across. Indeed, brokerage houses pompously proclaimed the dawn of a new era in emerging markets. Investors, it seemed, would pay up for the faster growth, disregarding country risk, currency risk, inflation risk, home bias, etc. Truly, a ‘structural change’ seemed to have occurred.

Fast forward six months, and it’s a completely different cup of tea. A lot of ink has been spilled on the under performance in the emerging markets YTD. Some reasons discussed include: