JudeJin

Shanghai's Own Stock Market Rules

i'd add one more perspective. if you look at chinese companies listed in hk, you might be tempted to think they are cheap because average p/e is around 15. but i beg you to examine the "e" a little more careful.

china life for example, in spite of a fall from 60 to 25, is still up 150% from about two years ago. i suggest you to examine its earnings history to see whether this company has suddenly improved its business by 150% for real over just 2 years!

the best growth period of china mobile is over. so watch out from below for china mobile too.

i bet HK will go to 15000, china mobile 75, china life back below 20!

Shanghai's Own Stock Market Rules

the unlocked shareholders have waited 10 plus years for the day to sell, especially those holding over valued garbage stocks. the garbage stocks have 80% more downside from where they are now. garbage stock-heavy shenzhen index has 50% more downside.
mark my post.

Shanghai's Own Stock Market Rules

people don't understand party leaders actually don't have control over the "market".
the "market" takes advantage of government policies.

in the beginning of 05, the government signaled tightening on real estate and started the so called full-float stock reform. back then, your favorite merchant bank is trading at 5 RMB/share(right now it is still over 20 RMB/share, 4x p/b), about 1x p/b, 10x p/e.

smart money naturally diverted some of their windfall from real estate
to the stock market.

the reform required the locked-up shareholders to pay compensation to the float holders in order for them to get unlocked. since the float was so little and so cheap, smart money rushed into the stocks to get the windfall compensation. on average, 10 float shares got paid 3 shares(some by cash) by the locked-up shareholders. so they pushed the stocks about 30% before the payment and crashed down 30% after the payment. but after a while, the market started to forget about selling down 30% after the payment because the market started to really like the stocks.

because the economy was still in a nice up swing. so earnings kept going higher. so the market went up from 1000 to 4000.

the stupid government raised stamp duty tax to stop the mania at 4000. the market crashed, but people who haven't missed the boat couldn't stop imaging the windfall their neighbors got, so more peopled lined up to buy the mutual funds. the stupid government approved a lot of mutual funds after the crash caused by the stamp duty hike. but i think even without these mutual funds, the market would still be pushed up by retail buying because the float was still very limited. smart money had mad 5-10 times profit. the market was in full control.

so the market reached 6000 in october. as 6000 made some big institutions and smart money very dizzy, some chose to leave the market. at the same time, unlocked shareholders who promised 1 or 2 years additional lockup period in the reform contract started to unlock officially one after another. thus started the viscious down cycle.

after the market broke 5000, 4000, the stupid government started to panic and cut back the stamp duty tax. but just like it didn't do the job in the boom phase, it just couldn't make any difference in the bust phase.

now the index was back below 2500, the majority of retail investors were down 50% or more. the amount of unlocked shares are still coming to the market. smart money understand that if they push stocks up, they would be the ones holding the bags for the unlocked shares.

lately the stupid government kept talking up the sentiment for no avail because
1. the real estate bubble is finally popping; banks and steel stock look cheap on P/E. but nobody dare to buy them.

2. 50% of stocks are still very very expensive, trading at 50x P/E. stocks are still trading at over 30% premium to their H shares listed in HK.

3. unlocked shares are still coming to the market.

4. smart money wants an absolute safe price to get back in again.

5. retail investors have very little money left to put back into the money.

6. people that do have money are scared of the market.

if you think the government can pull off another bull run, you'll totally be mistaken. (unless the government wants to buy up the shares itself, that's not gonna happen!)
nobody dictates the market. the market takes advantages of the situation.

Shanghai's Own Stock Market Rules

i think you no longer live in shanghai. if you do, you'll be worried about the popping of the real estate bubble. the stock market is still overvalued because:
1. there's an ongoing nationwide bust of the real estate bubble; many of the big name homebuilder's debt are trading at junk spread. we'll see a couple of them go belly up soon.
2. banks of course will be saddled with bad debts from the real estate sector.
3. concentrated unlocking of huge amount of shares are flooding the market after the "success" of the full-float stock reform. many garbage stocks will drop 80% from where they are now.
4. many stocks are still trading 30%+ premiums to their H shares listed in HK.
5. millions of mutual fund newbies bought when the index was in 4000-6000, now they are under water by 40-50%.
6. we're still far from the bottom in the US housing and stock market
7. if HK properties collapses and HK stock market goes down further, they add more downside pressure on china's properties and stock market. a lot of high-end condos in shanghai are bought up by investors from HK.

conclusion: china's stock market has a lot more downside than many foreigners think possible. be patient, you'll be able to get in when it reaches 1000 again.