The Asia Times had a piece describing the potential of a Chinese bubble in their highly inflated stock market. One of the items indicative of speculative behavior has been the tremendous change in daily transaction volume.
It has risen from some $5 billion per day six months ago to some $50 billion per day recently. While that by itself may not be enough of a reason for an upcoming bubble, Michael Shedlock’s deeper analysis called “Stir Fried Stocks” offers some interesting sound bites:
Wanting a “piece of the action”
Opening an account but not knowing what stocks to buy… “I don’t know. I’m still learning.”
Mortgaging homes to buy stocks
Dipping into retirement savings to finance a frenzy of trading known as chao gu, or “stir-frying stocks.”
“We are opening 40 to 50 new accounts a day. Six months ago, it was four to five a day.”
Stock prices are 30 to 40 times earnings
“Earnings growth is very, very strong”
Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in
late 2007 and the Beijing Olympics in 2008.
“We hear that before 2008 the government won’t let prices fall”
“We’re not afraid.”
If that isn’t the same speculative babble I have read about before the crash of 1929, I don’t know what is. If you look at my post from yesterday, you may be able to conclude that this type of behavior may very well be the “Point of Maximum Financial Risk” (Euphoria). Of course, in regards to timing, it is possible that we may stay at this point for a while.
What can you do about it? For one thing, don’t consider investing in the Chinese Market at this point. Track your stop loss points on all of your positions and, most importantly, execute them when those price levels are reached.
From my perspective, this is also not the time to become overly aggressive by restructuring your portfolio just because one of your friends has had a better return than you because he used more aggressive funds. When the pendulum swings again, those top performers will go down the fastest.
Contact Ulli
Comments 4
Stock markets can’t be controlled by governments. Those sisters in that article don’t know what they’re getting into. When a scare happens and everyone hits the exits before they even know something happened they’re screwed. That’s just plain sad.
I’m afraid that when a turn in that market happens it will be suddenly and catch most investors unprepared, especially those inexperienced speculators.
Ulli,
Shades of the tech bust in 2000!
I was constantly amazed at the euphoria around the stock market at that time. Especially on tech-stocks that had no prospect of ever making a profit.
We were told that this was a “new paradigm” and that only the number of “eyeballs” viewing the websites mattered, not old-fashioned ideas like profits and PE ratios! It seemed like every telecom and internet stock was headed for the moon…..but of course it wasn’t.
I know people who heavily margined their accounts and built them up to several million dollars. They then kept buying as the market kept falling, in spite of my pleas to sell. They eventually ended up with almost nothing after the margin calls started. and some had to postpone their retirement….very sad indeed.
The China bubble looks even worse, and a lot of ordinary people will get hurt. Only question is how much higher will it go before the crash?
Sanjoy
Sanjoy,
Yes, it looks like déjà vu. I agree, the timing is unknown, but the risk to be exposed to that market is too high. When the tide turns, it will happen quickly and the fallout will be felt worldwide.
Ulli…