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February 27, 2007 (5:00PM)
Want To Buy Some Chinese Stocks?
Following an 8.8% plunge in China’s Shanghai Composite Index overnight, equity markets around the world declined sharply today. For anyone that remembers the tumultuous market declines in 2000 and 2002, today’s 500-point intraday decline in the Dow was not all that scary. However, given that the markets have essentially been trading without volatility for almost a year, that the Dow closed down by more than 3% is highly notable. Quite frankly, and dare I say it, today’s decline may mark the beginning of a major correction in stocks.
All Stocks Succumb To Selling
As stocks plunged at the open some of the more defensive equity issues held up much better than the average. As a quick example, Wish List stock, Brown-Forman, was actually up to begin the day, and utility stocks saw considerably less of an outflow than the broader U.S. indices.
But alas, by the end of the day every major grouping of stocks was down, including the recession resistant BUD, BF.B and MO. For the record, BUD performed the best out of the select sin stocks worth following, losing only 1.63%.
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While it is difficult to glean much from a single trading day, it should nonetheless be noted that talk about ‘defensive’ stocks is simply that. To be sure, companies like Brown-Forman may drop less than the S&P during a bear market, but make no mistake they will nonetheless drop. Today also serves as an excellent example of why gold stocks may not do well during a severe global recession and/or bear market: if gold wants to make the leap from inflation hedge to crisis hedge the crisis is going to have to come first...
One Day Wonder?
“The Chinese market might grind a bit lower, but it won't create a general emerging markets contagion”
Cameron Brandt, global markets analyst at Emerging Portfolio Fund Research.
Having watched the markets calmly (and quickly) deal with periods of volatility in recent history, it is far from certain that today’s declines will mean much of anything come six months from now. Nevertheless, with tightening credit conditions in subprime threaten to spillover to other areas, margin debt recently reaching a new all-time high (much like in March 2000), and emerging markets having dropped the ball, bears and value investors have reason to watch near term developments closely.
As for China, having speculated and been wrong about a 2005 pause in China, it is difficult to use a 1-day plunge to manufacture a dire outlook. What can and should be said is that the vast majority of analysts and research material published on China is extremely biased, and nearly everyone has ignored the significant anecdotal information that has arrived since late 2006 that suggests Chinese stocks are in a mania. What exactly do I mean by biased? Well, when a fund manager says to Bloomberg that Chinese stocks are worth buying on weakness it would help if it was disclosed that that manager is already fully invested in Chinese stocks.
In short, the vast majority of analysts hollering about how brief the pause in Chinese stocks will be are not buying shares because they already own them. Who or what will show up to capture falling Chinese stocks remains the question of the day...
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