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Bear on Wall Street: A Warning From Shanghai

Bulls have led the major indexes 50% higher since March. Next up, September, the worst performing month in the history of Wall Street.

The optimism that began in March has failed to continue in another major market, the Shanghai. For the month of August, Hong Kong’s index has dropped over 20% after gaining nearly 100% for the year. The Hang Seng has lost nearly 5% for August and it seems as though the US markets are next up for a correction. The recent beat and “meeting earnings estimates” for companies to me is a non-event. The majority of meeting analyst expectations was due to expense reductions and not profits. With consumers bank accounts dwindling the coming months will prove much more difficult once companies realize they can not slash costs further and new sources of growth must emerge. More importantly the rally in China was largely due to the half a trillion stimulus package unleashed, similar to the stimulus package released by the Obama administration. There is no real earnings power driving the rally but sort of a bonus check to citizens that is slowly winding down. The stimulus impact should be over by the beginning of 2010.

Many analysts view a peak formation in the current market. Some expect a 10-20% turnaround from current levels and witnessing the correction overseas, a pullback is not hard to fathom. Although one never wants to bet against a rally, now looks like a great time to begin hedging any gains realized over the past seven months.

Unemployment is still at 10%. Bank failures this year have reached 84, the fastest pace of bank closure in 17 years – reported by Bloomberg. With this in mind lets not forget the wise words of Warren Buffet, “Be fearful when others are greedy, and be greedy when others are fearful.”