Thursday, June 28, 2007

China at 45 Times Earnings Fed by `Herd Mentality,' Government

As is wrote yesterday this feels more and more like a deja vu. Herd mentality at its best.....

Wie bereits gestern bemerkt erinnert das gnaze doch immer mehr an die wilden "Neuer Markt/Nasdag Zeiten". Der Begriff "Herdentreib" umschreibt das ganze ziemlich gut.

Aspiration and envy are key emotions driving China's stocks boom as investors ignore warnings of a growing bubble to pursue quick riches and gain respect from friends and neighbors. Rapid recoveries from two government-triggered sell-offs this year have deepened investors' belief that the market is immune to a crash. ....

Unlike business people who amass wealth through political connections and corruption, successful stock traders are respected for winning on their own merits, Shi says. ....

Such is China's investing frenzy that an average of 300,000 stock-trading accounts have been opened every day since April, according to China Securities Depository & Clearing Corp. Trading by individual investors accounts for about 60 percent of market volume, estimates the Shanghai-based brokerage Guotai Junan Securities Co. In the U.S., individuals account for only 5 percent of trading as institutional investors dominate.

Soup Shop Dream
Since a four-year bear market ended in the third quarter of 2005, the CSI 300 has quadrupled. While the index fell as much as 16 percent the week of May 30, after the government tripled a share-trading tax, all the losses were recouped by the close of trading June 18. The index has fallen 1.4 percent since then because of concerns the central bank would raise interest rates.
[shanghai-index.png] At Shenyin & Wanguo Securities, human-resources consultant Guan Fengxian checks her stocks at one of the terminals small investors line up to use.
Nearby is a chef from the adjoining restaurant and the building's cleaning lady. Guan, 30, says her dream is to make enough money to open a soup shop with two friends -- and quit her job.

Guan opened her trading account in early June, during the market sell-off. She bought 1,000 shares in Hunan Valin Steel Tube & Wire for about 7 yuan apiece; they have risen to 9.18 yuan. Guan says she's waiting to plow an additional 160,000 yuan, most of her savings, into the market.

``I'm not afraid,'' says Guan, tightening her clutch on a pink Mickey Mouse wallet. ``Our economy is doing so well; nothing could possibly go wrong, right?''

Foreign Vultures
Such confidence defies warnings from former Federal Reserve Chairman Alan Greenspan and Hong Kong billionaire Li Ka-shing who last month said shares were too expensive.

Xu says he ignores such comments from abroad.

``These foreign interests want to get in on the action themselves but can't because the market has risen too much,'' he says. ``That's why they are talking down the market, so they can swoop in and pick up some cheap stocks.''

Government support for the stock market is guaranteed because it is selling state-owned shares to pay for future pension obligations and education programs, Xu says.

``If we take a beating in the stock market, the government takes a beating too,'' he says. ``There's no reason the government would want to smash the stock market.'' ....

Chinese shares are among the most expensive in the world, trading at about 45 times reported earnings. By comparison, shares trade for an average of 17 times earnings on the Hang Seng Index in Hong Kong and 18 times on the Standard & Poor's 500 Index in the U.S.

Only Chinese nationals are allowed to buy yuan-denominated shares traded in Shanghai and Shenzhen, except for 52 authorized foreign money managers that are allowed to invest a combined $10 billion in Chinese stocks, a fraction of the nation's $2.27 trillion market capitalization.

``Herd mentality prevails in Chinese society,'' Shi says. ``If they see everyone around them -- neighbors, friends and colleagues -- trading stocks, they would want to follow.''

Ironically, government-triggered market declines may provide the impetus for future surges.

Chastened by Declines
``With each plunge, investors become more immune to market volatility,'' says Yao Maogong, chief trader at Shanghai Securities Co. ``Chinese investors don't pay much attention to ratios; as long as the market trends up, they think it's safe.''

Some Chinese investors are chastened by the recent sell-off. Retired school teacher Wu had ``tens of thousands'' wiped off her portfolio. While she hasn't sold stocks, Wu has stopped buying and talks gravely of the stock-market plunge in 2001 that cut the value of her holdings in half.

Xu says: ``There's no way the government would let the stock market crash.''
> Today the stock market in cghina tanked over 4%.....Good opportunity for Xu to buy the dip......
> Heute ist der Markt n China über 4% eingebrochen.......Also gute Nachkaufgelegenheiten für Xu und co.....

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Anonymous Anonymous said...

You have to be careful about using P/E ratios to say something is overvalued -- it isn't that easy. Otherwise more people would be rich -- just short companies that are 'overvalued'. (In general, the same is true for technical analysis -- if it was reliable more people would be rich.) It also depends on the rate of growth in earnings -- whether 'investors' are willing to pay a premium for growth. GOOG is a good example here -- you'd be foolish to say GOOG is overvalued, and on that basis try to short it.

Also, it should be clear that you can be right about the fundamentals, and take a position based on that, and still not make money. Because the only thing that matters is the direction of the tape. A good, but not perfect, recent example is the homebuilders. They seem to attract buying interest no matter how bad the news is. In fact Legg Mason is one of the institutions taking a big stake in the HBs -- propping them up by bottom fishing.

You have to be a trader, and react to the tape.

4:26 AM  
Blogger jmf said...

Hi Anon,

i totally agree. this was my comment from yesterday

This feels more and more like a deja vu.....But with so much liquidity tied to the yuan this can easily go on for much longer than we might think. From a fundamental and investor sentiment point of view this market looks as a beautiful short. But with all the liquidity it is way too dangerous.

4:41 AM  
Anonymous Anonymous said...

There's no way the government would let the stock market crash.

Exactly, there is an almost implied threat under the surface. A game of chicken between the people, who will riot if the market crashes, and the government, which is facing a growing faction of disgruntled people. Investors have a legitimate reason to believe the Chinese government will not allow a market crash.

8:13 AM  
Anonymous Anonymous said...

Oh, and if you want to talk about called bluffs, the Shenzen took a dip last night, but the average P/E on the SME is still 59X. Here is a piece I wrote on the Shenzen back in January. The madness of crowds vs. the resolve of the PTB. It should be fun to watch.

8:27 AM  
Blogger jmf said...

Hi Edgar,

indeed. fascinating!

Every morning my first view goes to the Chinese Market.

After the two bigger "corrections" i thought that this would take some steam out of the mania.

But some Chinese Stock with a pe over 50 maybe still better buys than some us housing/mortgage related stocks with a pe under 10..... :-)

Some of them won´t have any earnings down the road.....

8:53 AM  
Blogger jmf said...


China tanked over 5%.

Time for Mr. Xu do buy anotehr dip.....

5:54 AM  
Blogger jmf said...

Finally we have found a market that is more expansive than China´s

Slovenian Shares, Top World Performers, Cost More Than China's

5:57 AM  

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