The 360
360 Degrees on China's Selloff
RealMoney Staff
05/30/07 - 11:13 AM EDT
Editor's note: In this edition of "360 Degrees," Jim Cramer, Rev Shark, James Altucher, Barry Ritholtz and David Merkel weigh in on what the Shanghai Shenzhen Composite's overnight drop means to U.S. investors. Catch the latest insights on this developing situation in Columnist Conversation.
TheStreet.com has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions. In that spirit, we bring you "360 Degrees," a feature that takes advantage of our varied stable of RealMoney contributors, who offer analysis of stocks and the markets from all angles.
Wait Out the Market's Panic Over China
By Jim Cramer
5/30/2007 8:29 a.m. EDT OK, let's do some first-class panicking off the Shanghai Shenzhen Comp's drop: Let's crush the brokers; they are levered to China, aren't they? Got to sell the mineral stocks -- don't they get killed if the Chinese stock market goes down? Remember how all the infrastructure stocks got crushed after the last China decline? Have to sell them before everyone else does! Why not sell the banks, too? They have to be related. Oil, too, because China can't use as much oil if the stock market slows down. Ah, panic. How great is panic? It is the panacea for all that ails you. It makes you feel so good after you jettison all of those stocks. Yes, the sweet smell of panic is in the air, and panicking can only be the right thing to do, right? Yeah, I am being facetious. But you know it will happen. If you think you can get out at last night's prices, be my guest. Always terrific. But I believe you have to think about tomorrow's prices. What I would say to do is wait, just wait. Wait it out, buyers and sellers. There will be a better price to sell coming. Yet, there might not be a better price to buy. Random musings: Last time around, the first stocks that bottomed were the Cokes(KO Quote) and the AT&Ts(T Quote). With this buyback, IBM(IBM Quote) is also a place to go, but only if it opens relatively unchanged. Keep an eye out for those to see if they slow their decline faster than others. At the time of publication, Cramer had no positions in any of the stocks mentioned in this post.
By Rev Shark
5/30/2007 8:08 a.m. EDT "Those that set in motion the forces of evil cannot always control them afterwards."
-- Charles W. Chesnutt The indices are under some pressure this morning as Chinese stocks dived 6.5% following the increase in a "Trading Tax," which I discussed yesterday. Although the tax is quite small and mostly irrelevant in view of the level of gains that have been produced in the China market, it is significant because it indicates the Chinese government's intent to cool off stocks. No one seriously questions the fact that China stocks -- particularly the Shanghai "A" shares -- are in a speculative bubble. The A shares are traded in a closed market and have performed far better than their counterparts on the Hong Kong exchange. The A shares are up a whopping 74% so far this year following a rise of 126% last year. The average PE is over 40 but the most worrisome aspect of the market is that new accounts are being opened at a staggering rate of 300,000 a day, and stories about average individuals sinking all their assets into the market and giving up jobs to play the market are appearing every day. The problem for the Chinese government is to cool speculation without killing the market. They don't want stocks to go down; they just don't want them to go up at such a ridiculous pace. Unfortunately, it is nearly impossible to control markets in that manner. Once the beast is released there is no way to stop it. At times things will become excessive and eventually some folks are going to suffer some real pain. It is obvious Chinese officials are trying to keep things from getting too hot so that when the inevitable correction comes the pain won't be quite as bad. One additional issue that complicates things is the widespread belief that China is anxious to paint a positive, progressive picture as host of the 2008 Summer Olympics. A stock market crash would be a very shameful event and many believe that will keep efforts to cool the stock market somewhat contained. China is important to our market because it has helped keep worldwide speculation perking along. Who can say that our market is too expensive when you have China trading at much higher multiples? This morning we have a pretty good-sized hiccup in China and that is causing weakness worldwide. We had a very similar breakdown back in early February that led to a week of weakness but that was soon shrugged off and we moved higher even faster than we had been before the correction. You can bet there will be plenty of folks looking for another very short-lived correction, but let's keep in mind that conditions are changing as we enter summer and the recent climb in the market shows some signs of stress. We have a sharp dip indicated at the open. Overseas markets are down across the board with most of Europe trading down about 1%. Oil is stable after taking a big hit yesterday and gold is down slightly.
By James Altucher
5/30/2007 8:58 a.m. EDT There are several reasons why the other Asian markets ignored the Shanghai 6% slip and why I think the U.S. markets should do the same (whether or not it does, is a different question): 1. Clearly even a 9% slip is meaningless since not only did the U.S. market get back to all-time highs after the Feb. 27 9% down move in Shanghai (the Dow, at least), but the Shanghai market went another 20% beyond all-time highs.
2. A 6% move in the Shanghai market represents a slip of about $90 billion in market cap value. That represents about 0.7% of the total market capitalization of the U.S. market. In other words -- nothing.
3. This move in the Shanghai market has nothing to do with the Chinese economy. The market itself represents only a small sliver of the economy and the down move is reflective only of a tax regulation and nothing to do with the economy.
4. The private-equity market here is still booming, removing shares from the U.S. markets almost every day, on top of the shares being taken off the shelf by the massive amount of share buybacks happening (see, for instance, IBM's news this morning). This is hard to ignore. All markets are supply and demand and we are potentially on pace in the U.S. for the slowest IPO year in the past 10 years (2003 might be lower, but that's it). Who knows what happens today? But knee-jerk dips will probably create buying opportunities among takeover targets, short squeezes, and stocks with heavy insider buying.
Shanghai Surprise?
By Barry Ritholtz
5/30/2007 6:24 a.m. EDT Shanghai was down 6.5% this morning. The alleged cause was news that Chinese officials were raising the tax on stock transactions from 0.1% to 0.3%. They have been trying to reduce the speculative bubble there, but to no avail. Marketwatch reports that "Outside of China, global markets declined on Wednesday, but not precipitously -- the Nikkei 225 closed with a 0.5% loss in Tokyo, and the FTSE 100 declined 1.1% in London." What will be interesting today is whether or not it sticks. Here in the U.S., markets have, up until very recently, been clawing back from any negative opening. It's only over the past two weeks that we have seen tired trading, with an inability to sustain a strong open. The failure of the SPX at the prior highs -- 1527 on closing basis -- and an inability to make a new high has some technicians wondering if we are looking at the mother of all double tops (I have no opinion on this). Whether the straight up market is merely tired, or overdue for some sort of pullback, or if this is the start of something else is unknown for now. Futures are in the red, with the Dow down 70, the Nasdaq off 10, and the S&P500 off 7.5. Today's trading will be quite interesting to say the least.
By David Merkel
5/30/2007 10:11 AM EDT Back in February/March, I counseled readers not to panic. Those calls, along with my concerns over subprime and homebuilders have largely (but not entirely) been validated. So Shanghai was down 6.5%? Looking at all of my systemic risk proxies -- swap spreads, corporate spreads, option volatility, emerging market equities and bonds, the yen, Swiss franc, etc., all indicate lack of concern. But is this lack of concern warranted? The stamp tax has been adjusted in the past in China, and it has not had as large of an impact. Further, the way that China affects the global economy is through:
- Purchase of raw materials from abroad.
- Deployment of cheap labor into industry, which produces relatively cheap goods for export.
- Purchase of foreign assets, particularly U.S. bonds, to sop up excess U.S. dollar/euro claims from running a trade surplus.