5. August 2009 by Dan Walkow, CFA, CMT.

In recent posts I have been interested in some of bubble like activities showing up in China and giving some thought to the ramifications of another China meltdown. Here is an insider’s view of what is going on:

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued…. Read more here.

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29. July 2009 by Dan Walkow, CFA, CMT.

The recovery rally in China has been nothing short of spectacular! However there are signs that the rally is long in the tooth with the recent IPO of China State Construction Engineering Corp surging 56% over its issue price. In addition we are seeing more and more concern over forced bank lending policies in China funding poor credits.

The stage is being for bubble like conditions and a correction at the very least would appear to be in the cards. This will have an effect on other markets around the world so plan accordingly.

As always, Jeremy Grantham of the investment management firm GMO writes a mean quarterly newsletter and he is very concerned about China at this point. Time to pay attention here.

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25. July 2009 by Dan Walkow, CFA, CMT.

Ever feel that you get the raw end of the stick when you trade stocks? When it comes to the quality of fill prices the the odds are stacked against you unless you understand how the system works.

Did you know that stock exchanges “sell” information where sophisticated traders and their computers “can see the order flow” in advance? They can see you coming!

These days the hot thing is computer assisted or “black box” trading systems which analyze order flow and take advantage short term fluctuations in the market.

These are known as “Algo systems” and are used in Canada and the USA by institutional players who, with these “rapid fire” computer trading systems, can clip a few points at the expense of unknowing traders and especially individual investors.

Individual investors, to be successful, have to understand that at any point in time there are professionals and moreover computer systems on the other side of the trade who can see you coming!

Here is a recent piece in the New York Times which explains how it works;

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets. More here.

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22. June 2009 by Dan Walkow, CFA, CMT.

For interesting insight into what is really going on in China this is a must read. Well written and insightful by Terence Doherty.

“ This is a singularly ominous combination that makes China’s economic future outlook over the next 25 years very grim. And that, in turn, will lead to acceleration of civil unrest. In fact, that has already happened: incidents of violent civil unrest have accelerated markedly all across China over the past year or two. But I think this could well get far more noticeable and disruptive. Some economists have said that in order to avoid disruptive amounts of civil unrest (as opposed to the more manageable baseline levels of unrest that are a constant), China’s economy must grow by 8.5% per year or more, just to keep enough people quiet. I suspect that is probably more or less approximately true in principle, although I don’t know where they came up with that number. But regardless of what that magic number might be, when that economy gets really bad—–watch out. That’s the seeds of civil war, if you ask me. If you have a very large group of desperate people coupled with an extreme polarization of wealth, you have a classic “haves” vs. “have  nots” Marxian confrontation that is the underpinning of most if not all major revolutions. Then, the only missing ingredient is a charismatic leader (like Mao, for example…..).”

This is a must read here.

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20. June 2009 by Dan Walkow, CFA, CMT.

Current rally from early March nothwithstanding if we take a standback look at global markets and ask the question “are markets cheap” on a historical basis, you can see that using a price earnings measure, that they are.

In fact you have to go back to the early 1980’s to see similar valuations.

Of course all depends on the “E” which is earnings. In the context of the P/E right markets may be a bit ahead of themselves right now but in the bigger picture and over the longer term equities have a lot of room on the upside.

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17. June 2009 by Dan Walkow, CFA, CMT.

As a proxy for US stock market valuation it is worthy to note that the Standard & Poors 500 Index is currently trading at 16 times “normalized earnings”. Without doing the math I would suggest most major markets around the world including Canada trade at fairly rich valuations given the current earnings projections. First yellow flag.

Our technical indicators, after hanging in at high levels for a few weeks, have now started to indicate a market correction is a very strong possibilty. Second yellow flag.

IPO (new securities financings) have been hot and heavy over the past month as companies raise capital, taking advantage of higher prices. Third yellow flag.

Insider buying, (company executives buying their own stock) has been almost non-existent over course of the rally since early March. Fourth yellow flag.

See John Hussman’s comments on market valuation.

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