Wednesday, April 2, 2008

What is that sound? It’s the market bubble bursting in China

Previous Hingefire articles in 2007 outlined the increasing risk in Chinese stock markets and how the Chinese indexes were not strongly correlated with other world markets. The Plunge Continues – China in June 2007 warned of the risk that the Chinese markets were in a bubble and it was just a matter of time till they burst. The lack of correlation to the world markets was discussed in August. A HingeFire article in November recommended ETFs to short the Chinese market.

Fast-forward the clock to April of 2008, the Chinese stock market has become the world’s leading example of a bursting bubble. The Shanghai composite index has plunged 45 percent from its high, reached in October 2007. While markets world-wide have been down since this time, other major world indexes have all dropped less than 20% in the same time period.

The frenzy that surrounded the upside of the market in China has now dissipated leaving many investors angry and demanding that the government take action. A good number of the speculators lost their entire savings. Many have learned a harsh lesson in how quickly a bubble bursts.

To See a Stock Market Bubble Bursting, Look at Shanghai

“Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”


Anonymous said...

"A HingeFire article in November recommended ETFs to short the Chinese market"

It's a little unfair to say "I told you so" when your article just gave half the picture. I've been wanting to short the China market for a while, but the question always was "when?". To be fair, market timing isn't possible... or is it ? ;-)

GregB said...

I agree that it is difficult for most investors to time the market. Unless you live, eat, and breath the market every day, then you are unlikely to be successful in timing the market. Most investors would be best off keeping their money in a properly diversified portfolio.

I have previously warned folks about putting all of their 401K portfolio in foreign markets. A good number of people were attempting to time markets, especially China, with their retirement portfolios. This HingeFire post was actually driven by an email I received from an investor stating how burned he was after he placed 80% of his money in China and now has lost half of it in a matter of months.

I will note that the recommendation for the ETFs to short the Chinese market came basically at the peak of this bubble. Anyone who took this advice at that time (several people did) as a speculative play have profited quite handsomely.

I would note that real market professionals search for investments which are mis-priced rather than guessing the direction of the market. The HingeFire blog recently outlined the mis-pricing of several Muni Bond CEFs and small banks in February and demonstrated the results of the plays one month later in March.

- Greg B.