Overheating Global Markets

♠ Posted by Emmanuel in , at 5/22/2007 02:40:00 AM
Despite raising reserve requirements, interest rates, and even its voice over rampant speculation, China has had trouble reining in money rushing into its stock markets. Here is the latest on the madness:

Chinese stocks rebounded from an early tumble on Monday, undaunted by the latest tightening measures - a simultaneous increase in interest rates and bank reserve requirements.

The benchmark Shanghai Composite Index gained 1.04 percent to close at 4,072.23 points. The Shenzhen Composite Index went up 1.45 percent to 1,181.41 while the Shanghai and Shenzhen 300 Index of major companies rose 1.45 percent to 3,831.44.

In response to the tightening measures, the Shanghai Composite Index opened at 3,902.35, a decrease of 3.18 percent from Friday's close. However, it quickly recovered the lost ground as investors saw the dive as a good opportunity to buy.

Bank stocks were weak, with China Minsheng Banking Corporation being the biggest loser, falling 1.72 percent to 13.18 yuan per share. The Industrial and Commercial Bank of China declined 0.73 percent to 5.45 yuan, while Bank of China dipped 1.03 percent to 5.75 yuan.

Coal shares showed strong performances. Datong Coal, Anhui Hengyuan Coal Industry and Electricity Power, and Shanxi Xishan Coal and Electricity Power jumped their daily limits of 10 percent.

Air China soared 9.2 percent to 11.28 yuan. In the insurance sector, Ping An Insurance of China gained 2.03 percent to 63.46 yuan while China Life was up 0.36 percent to 39.2 yuan.

Trading was heavy, with the volume in the Shanghai Stock Exchange hitting 211.4 billion yuan and turnover in Shenzhen reaching 106.2 billion yuan.

Mike Shedlock has more on China's stock craze, which is even more bubble-icious than the American Internet craze of the late Nineties. Likely, it won't have a pretty ending with ordinary folks mortgaging their homes to buy stocks. Nor, for that matter, will things back in the good ol' US of A. The equity bubble Stateside is somewhat different in that private equity and a resulting M&A bubble have sent stocks soaring while the US economy drags along in the gutter. Nevertheless, Bill Fleckenstein sees a (surprise!) nasty ending and again points out similarities to 1929, when a stock market crash led to the Great Depression:
The economic and financial landscape of 2007 bears striking similarities to 1929. Back then, there were large, unregulated pool operators and other insiders constantly muscling the tape in whatever direction they chose. The public, too, was involved, thinking the country was experiencing a new era. Meanwhile, business began deteriorating in the spring of 1929, though the partying in stocks lasted until the fall.

To give you a flavor of those times, I'd like to quote from Frederick Lewis Allen's "Only Yesterday," which is one of my favorite books about 1929: "Mergers of industrial corporations and of banks were taking place with greater frequency than ever before, prompted not merely by the desire to reduce overhead expenses and avoid the rigors of cut-throat competition, but often by sheer corporate megalomania. (My emphasis.) And every rumor of a merger or a split-up or an issue of rights was the automatic signal for a leap in the prices of the stocks affected -- until it became altogether too tempting to the managers of many a concern to arrange a split-up or a merger or an issue rights not without a canny eye to their own speculative fortunes."Obviously, I don't need to point out how similar that is to the practices we are seeing today.

Today, too, there are pool operators, in the form of leveraged-buyout (LBO) and hedge funds, both of which borrow money to invest. And, just like their predecessors, who ignored macroeconomic and corporate deterioration, they are partying as never before. In reading the following passage from Allen's 1931 book, you have to remind yourself that it's a portrait not of 2007 but 1929:

"One could indulge in all manner of dubious financial practices with an unruffled conscience so long as prices rose. The Big Bull Market covered a multitude of sins. It was a golden day for the promoter, and his name was legion."