China Stock Market, the new Global Risk factor for stocks!

[Dennis Ng]

Global Stock markets plunged in the last 2 days. Intereestingly, in the past Global stock market plunges are typically triggered by U.S. stock market. However, the unique thing about this round of plunge is it was triggered by plunge in China's stock market by 9%, the single biggest drop for more than 10 years.

Many people are discussing about the market correction. Some view it as a chance to "bargain hunt". However, I really don't see much bargains. Singapore stock market itself has risen from 1,300 level in year 2003 to over 3,300 points before the plunge. that's more than 153% rise. Many stocks have also risen more than 100% in last 3 years. Thus, despite the "recent correction", most of the stocks are still trading at high prices, hardly a bargain at all, in my opinion.

Looking at China's market, it is scary to me. The index was 1,700 in July 2006 but crosses 3,000 point in less than 6 months. Reminds me of Nasdaq doubling from 2,500 points in 1999 to over 5,000 points in Jan 2000.

U.S. latest report of low home sales also does not reflect well on U.S. Housing Market.

Next week, market might be dragged down by margin calls and contra losses due to market weakness in past 2 days.

According to The Wall Street Journal One possible reason why Tuesday's plunge in global stocks happened so fast lies in the "unwinding of yen carry trades".

From year 2001 to July 2006, Japan's Central bank kept its short term interest rate at zero, and even after rate increase last week, the rate is only 0.5%.

That compares with 5.25% in U.S. and 3.5% in Euro zone. The interest differential enable investors to profit by borrowing money in yen to buy higher yielding assets denominated in other currencies.

On Tuesday, what might have happened was investors grew nervous and they began to sell off their holdings in everything from Indian stocks to the Australian dollar. Then, they used the proceeds to buy back yen, in order to pay back the Japanese yen loans that they had borrowerd.

The rush by investors to buy yen helped push up the yen against dollar by more than 2% on Tuesday, consistent with the "effect of unwinding of yen carry trades".

How big is the yen carry trade worldwide? Nobody really knows. Some put the figure as US$170 billion to US$220 billions.

If yen carry trades were unwound on a large scale, it would create chaos in currencies and stock markets...

I'm now 65% in cash. I've decided to "take profits" during yesterday's rebound.

I might be totally wrong and look like a fool in future, but I decided to take profits, might move some of my money into buying a property in Singapore instead. I'm more positive on the property market than stock market of Singapore in the next 2 years.

Please note that I specialise in property financing, not a property or stock investing expert.

[Dennis Ng]

I shared at another forum that I graduated in 1993 super bull run. During that year, I started "investing" by listening to hot tips and rumours. I made money thinking I know about investing.

However, 1994's correction came, not only did I gave back all the "winnings" but I also lost money. The only consolation is since I only started working in 1993 I had not much money to lose.

1994's correction can also be deemed a crash, definitely worse than what we experienced in the last week so far. Even May '06 correction is worse, in terms of total percentage down.

Thus, in my opinion, a correction of up to 20%, taking STI down to 2,700 points is not inconceiveable. Of course when STI is down 20%, some "weaker" stocks can drop as much as 40% to 50%.

Try to document down your thoughts/comments/opinions. It can serve as useful reference to "learn" from your past experience/mistakes in future.

In 1994, some of the "towkays" that gave me "hot stock tips" went bankrupt. That gave me a rude awakening that "chasing hot tips and hot stocks" can lead one to "hot soup". We don't have to go bankrupt to learn from the mistakes of those who did.

The worst crisis I experienced so far is the 1997-98 Asian crisis. During that period, even the "bluest of the blue chips" in countries such as Indonesia and Thailand also "defaulted on their debts". Can you imagine the equivalent of "City Development" of Indonesia defaulting on debts? But that was exactly what happened. That's how Cycle & Carriage managed to buy "Astra International", one of the "blue chips" in Indonesia for a bargain in the depths of the crisis.

Past crisis taught me that it is important for us to have "Opportunity Fund". One thing I found in common amongst rich people is they all have Opportunity Fund. Examples include Oei Hong Leong. Without Opportunity Fund, can Mr Oei went in to buy Natsteel? Citiraya etc, etc? Of course not.

I've raised my cash position to 65%. I am watching events closely. Even if this correction leads to an eventual crisis, I would be there ready with Opportunity Fund to bargain hunt.

Many people say "Crisis is an opportunity".

I have to disagree. A crisis is "only" an opportunity to those who have Cash, not for anyone who is 100% invested.

[Dennis Ng]

perhaps people are sick and tired of me saying that China Stock Market is a bubble that will get bigger and bigger before its eventual burst.

If Chinese govt have it their way, they will delay the bubble bursting till after Beijing Olympics in Aug 2008.

Let's hear it from www.Fool.com then.

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

http://www.fool.com/investing/internati ... l-can.aspx

70% of Chinese market activity comes from regular people. One-sixth of all Chinese individual brokerage accounts have been opened in the past year; the fact that the indices have more than doubled in value during the same period should come as no surprise.

Eastday, a Chinese government-run website, announced in April that 10% of all the maids in Shanghai have resigned because day-trading stocks became more lucrative than traditional work. Here's a quick rule of thumb to remember in investing: When everybody and his or her mother is rushing to get in, it's time to pack your bags and head for the exits.

Below shows the PE ratio and 1 year returns of some high-flying China stocks:

Company
P/E
1-Year Return

China Finance Online (Nasdaq: JRJC)
629
660%

Baidu.com (Nasdaq: BIDU)
191
276%

Sina (Nasdaq: SINA)
70
125%

Sohu.com (Nasdaq: SOHU)
72
102%

China Unicom (NYSE: CHU)
67
101%