For those unacquainted with the "Greater Fool Theory", simply stated it means there always a greater fool out there willing to pay more than you did for something. And it's the entire basis of the equity markets, where people pay extraordinary price for little slips of paper (generally electronic) that represent a percentage shareholdership in a company. And when you run out of people willing to pay more for your shares, you quickly find out who the "greater fool" really is (believe me, I've been there myself).
Now.. I've nothing against the stock markets. They are valuable sources of financing for companies requiring capital to grow, or just to bring new products to market. And when you are one of those lucky investors who buy pre-IPO stock in some company like Google (Nas:GOOG), you can really make a fortune as that company executes its business plan and increases both revenues and profits, thus increasing the public perception of value for the shares you hold. Heck, it the basis for my owning shares in Microvision (Nas: MVIS), because I see their miniature laser projection displays for eyeware and cellphones as a very disruptive technology that will, if they execute their business plan properly, reap them hundreds of millions in revenues and profits.
But let's face some facts folks.. There's a reason we have something called a "Price to Earnings" ratio (P/E for short). It assists we investors in determining if we're overpaying for a company's stock, or if there is hidden value. Analysts get worried when the S&P500 (SPX) has a P/E of 15-20 times earnings. If you listen to the news, everyone is worried about the US markets because the SPX currently has a P/E of 18.31.
But the Chinese markets? My goodness.. as some may have heard, the sum total value of public shares listed on the Shanghai stock exchange exceed that of all Asian markets combined. This includes Japan, the second largest economy on the planet, right behind the US. But the average P/E of China's markets is currently at 40 times earnings. Now granted, this is being matched by growth in many of these companies, but what is fueling this growth? Is it internally driven, or export driven? And if the latter, which is the likely the case with China, what happens when your customers come upon hard economic times? Who will buy China's products then?
Currently the Chinese markets, including the Hang Seng in Hong Kong, are on a tear as the Chinese government has authorized certain Chinese banks the ability to invest greater amounts in non-Chinese stocks. They are doing this as a pitiful attempt to drain money from the Chinese market bubble. Chinese investors are generally not permitted to purchase foreign equities, nor transfer large amounts of money out of China. This is all because Bejing strictly controls the value of the Yuan (currency) and they don't want people circumventing those currency controls by purchasing foreign stocks and then selling them (Chinese investors would have sell Yuan in order to buy foreign denominated equities, thus placing downward pressure on the Yuan).
Also, I've seen the first public mention regarding my previous comment regarding my belief that Bejing will do whatever is possible to avoid an economic disruption prior to the 2008 Olympics. Get a load of this:
And many investors believe Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics next year.
"We hear that before 2008, the government won't let prices fall," said Ding's sister, Ding Jingxian. "We're not afraid."
http://news.yahoo.com/s/ap/20070513/ap_on_bi_ge/china_stock_market_fever
Now the Shanghai market is currently trading around 4,000, which represents tremendous gains over the course of the past year. If you don't believe me.. look at this chart:
The Shanghai market has more than doubled over the past year. DOUBLED!!!
I suspect when that market hits the major psychological barrier represented at 5,000, millions of Chinese are going to look in the mirror and discover they have become the "greater fool". It may happen before it reaches 5,000, but if those comments are correct, the Chinese government will do everything to prevent a market correction from becoming a market collapse, including governmental repurchasing of stocks to place a "bid" under any market collapse.
On the other hand, the ability for savvy Chinese investors to invest in the markets of those countries who actually purchase the predominant amount of Chinese products (the US, Japan, and Europe) should bode well for our markets.
But god forbid we have a recession in the US within the next year. We're already seeing slower growth, despite our fantastic levels of low unemployment (which directly translates to consumer spending for all those cheap Chinese goods.)
I will be looking for ways to short the Chinese markets in a relatively conservative way when it approachese 5,000. I believe there is a Exchange Traded Fund that covers Chinese markets and those can be shorted like any other stock. But preferably my short position will be options based. Less money at risk, and if the market goes up, my potential for loss is limited to the cost of my options position.
The Scrutinizer
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