The Plunge Continues - China

The rest of the world markets yawn as Chinese speculative bubble continues its plunge. Most global markets opened either flat or slightly down....

Chinese Stocks Take Big Fall
Chinese Stocks Tumble 8.3 Percent, Biggest Daily Drop Since February Plunge

BEIJING (AP) -- Chinese stocks plunged Monday following government efforts to cool a market boom, recording their biggest one-day fall since a February drop that triggered a global sell-off.

The benchmark Shanghai Composite Index tumbled 8.3 percent to 3,670.40, falling for the third time in four sessions since the government raised a tax on trading last week. The index had dropped 2.7 percent Friday. The Shenzhen Composite Index for China's smaller second market fell 7.9 percent to 1,039.90.

http://biz.yahoo.com/ap/070604/china_markets.html?.v=6

"There is the risk that this snowballs into a crash. Sentiment is so fevered that a bubble could burst," said Claire Innes, an economist in London with the consulting firm Global Insight.

Chinese Market Plunges - barely causes a ripple outside of China

The recent correction of the Chinese markets today barely caused a ripple in stock markets outside of China. The main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 Wednesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45. Most of the other world indexes closed up by more then 0.7% on average in response; largely ignoring the Chinese market plunge. This is another sign that the stock market bubble in China is irrelevant to the rest of the world. The stock market in China represents only a small fraction of the overall worldwide markets and the overall capitalization is minuscule on a comparative basis.

From a big picture perspective, the combined capitalization of the Chinese stock markets was US$786b at the end of 2006. The total for all the global equity markets is over $33Trillion; the NYSE alone is at over $23T (Sept 2006). The US represents over 1/2 of the global equity markets capitalization.

The Chinese government holds over $1.2T foreign reserves, and are increasing these reserves at over $12B per month. The Chinese product exports (not overall trade) are now at over $1.2T per year. While the Chinese national gross GDP was at about $2.6T; compared to the US at about $13.2T (notice that the US stock market capitalization is 2x bigger then the national GDP).

The size of the Chinese stock market is a small percentage (2.3% at best) of the overall world-wide equity markets (ignoring the size of the futures, commodities, options, bond, debt, and other markets), and just a fraction of the Chinese foreign reserves or export trade size. The overall stock market capitalization places the country in a distant sixth place slot for overall national equity market size. The stock market capitalization in China represents a mere 60% of their GDP.

From the math, the stock market is an insignificant (and non-critical) component of the overall Chinese economy. This minimizes the risk that a meltdown in the Chinese stock market would have any international impact.

From a broader economic perspective, most analysts expect the sizzling economic growth in China to slow a bit because the government is deliberately tapping the brakes. Most do not expect the slowdown to be very significant despite these efforts. There is still a huge demand in China for building materials, energy, raw materials, etc.... and the economy is still growing at greater then 9% per year. The economy in China remains strong.

The stock market situation in China however is another story. The local equity markets are in a speculative bubble that is doomed to burst; the question is when rather then if. The good news is that the size and capitalization of these stock markets are insignificant from a global perspective. The bad news is that the bubble pop will take a lot of unknowledgeable individual investors located in China down with it.

One recent article also looked at the Chinese market situation:
Greenspan's China-Stock `Contraction' May Not Spread
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ281g_cfnWI&refer=home

Some quotes:

"That's the conclusion of a number of international economists and former government officials around the globe. They say China's economy shows little correlation with its stock market, foreigners are mostly excluded from owning shares and Chinese participation is limited to less than 10 percent of the population, reducing the effect of a bursting bubble."

``This is a relatively small casino,'' said Edwin Truman, a former director of the Federal Reserve's international finance division and now a senior fellow at the Peterson Institute for International Economics in Washington. ``Even the implications for the Chinese economy should be minor.''

"Total stock holdings in China account for just 25 percent of domestic wealth, and in Asia only Indonesia has a smaller market capitalization than China's 60 percent of GDP."

So in summary, the Chinese stock market melting down (which is likely to happen) is a non-issue from an international perspective; the Chinese economy having issues would be another story.

More Dark Pools: The Secret Stock Market

Story from MarketWatch...

The secret stock market
'Dark pools' and other new-age exchanges rewrite the rules, under the radar

NEW YORK (MarketWatch) -- Fourteen floors above Seventh Avenue, in an office more than a mile from the trading floor of the New York Stock Exchange, a trumpet sounds reveille over a loudspeaker.

Liquidnet Holdings Inc., an alternative trading system used by institutions, has just executed a block trade of a million shares or more.

Unlike the bulk of trading in stocks, this trade was made anonymously and was executed outside of the market where retail investors and institutions meet. And unlike a trade on the floor of the New York Stock Exchange, no one will ever know who put a million shares up for sale and who just bought them.

Liquidnet is one of dozens of new private trading networks that -- in just two years' time -- have ushered in a sea change that challenges Wall Street's top institutions while posing vexing questions for regulators and investors alike. [more at below url]

http://www.marketwatch.com/news/story/secret-stock-market-upstart-systems/story.aspx?guid=%7B11EB6EC9%2D6D71%2D43C9%2DADD2%2D59C6B9E3C5D1%7D

Everyone is jumping into Dark Pools

Just a quick update on dark pools...

"The number of dark liquidity pools has doubled to more than 40 since the start of last year. The big names are jumping in. Goldman Sachs, Merrill Lynch and Credit Suisse are among those who have started more dark pool services. Goldman's Sigma X is a good example. The proliferation of dark venues has come as institutions have found it particularly vexing to execute small- to mid-cap stock trades." - from FierceFinance

Dark liquidity pools make a splash with US traders
http://www.financialnews-us.com/?page=ushome&contentid=2347636817

What’s coming up !

I would like to thank folks for their feedback asking when some more posts are coming. I have been buried under between soccer and delivering programs at work recently. However there is some good information coming soon! Here is a list of some of the posts I am in middle of putting together:

1) Investing for Global Warning
Global warming has been a topic that is increasingly in media reports recently. There is significant debate if man-kind generated global warming exists and what it’s impact will be. One of the truths however is that politicalization of “global warming” will drive government mandates that require investment. Which sectors and companies will be hot in the coming years as the business sector contends with this situation. Should you be investing in alternative energy companies, water firms, uranium firms, or power-related semi-conductor tech firms?

2) Portfolio Design for your 401K – Part 2
What are all the questions and details of designing a portfolio. Why does modern portfolio design lead to more questions then answers. Delve into the depths of the problems an investor will encounter when attempting to look at the details of creating the optimum fund mix.

3) Real Estate Update
The summer selling season is almost here. Will poor sales this summer finally break the back of the real estate market in most localities and result in a climate with more “fear”? What are the possible outcomes? Does risk exist beyond the subprime and Alt-A meltdown?

4) Screening for Winning Stocks
At times investors seem to be divided into two camps; fundamental and technical. An approach to selecting stocks involving both fundamental information and technical indicators appears to get the best results for investors. Most investors should have both methods in your arsenal. Does it not make sense to use all the tools at your disposal to get as large as an edge on the market as possible? This summary will discuss some of the criteria, both fundamental and technical, which I use when screening for stocks.

Interesting Take on Entrepreneurship

This article is interesting because it reflects the changes in perspective regarding Entrepreneurship. It draws some interesting comparisons regarding the old and new ways of thinking when it comes to starting your own business.

Mastering the New Entrepreneurship
http://finance.yahoo.com/expert/article/careerist/27680