14 replies to this topic

[Tor]

Those accounts are still growing for now. Your Daily Stock Market Links: Monday's Stock Market Update - Tuesday's Stock Market Update - Wednesday's Stock Market Update - Thursday's Stock Market Update - Friday's Stock Market Update Updates are posted every morning by 9:15 AM on Monday thru Friday. _________________________________________________________ Friday, April 27th. - Stock Trends, Charts, and Commentary __________________________________________________________ China Report: Part 4 How and Why the Chinese Shanghai Index could implode ... This week, the Shanghai Composite Index has maintained its bubble trajectory angle, and if the angle continues to hold, the Shanghai will hits its 12 year major resistance in the latter half of next month. Why is the Shanghai continuing to move up at such an incredible pace? Because of supply and demand of investors. From the supply side, over 10,000,000 Chinese citizens opened new stock trading accounts during the past 4 months. Last week ... over 1,000,000 opened new stock trading accounts. No matter how you calculate it, that has been an average of 1 million new investors per week for 13 straight weeks in China. This week, I had a discussion with a Hedge Fund manager about it. I asked, "How long do you think the Chinese market can go up by adding 1 million investors per week?" His answer was, "Practically forever ... because they have over 1.3 BILLION people". Logic versus REALITY ... Logically, it seems to make sense. They have 1.3 billion people. At 1,000,000 per week, it would take 25 years for every Chinese person to have a stock trading account. But, a statistical analysis shows a DIFFERENT reality for this reason ... An implosion has nothing to do with how many people live in China. An implosion has everything to do with the Week-over-Week average number of NEW investors moving into the market ... and right now, the average has been 1 million per week for 13 weeks. They can't seem to move above that average, and part of is has to do with how many Chinese can continue to mortgage homes and draw cash our from credit card accounts. The reality is, that if a universe adds 1,000,000 to its base every week, then the growth rate of the base continues to diminish at a rapid pace. Consider this: In the first week, 1 million open a trading account. The second week, another million open a trading account. What was the increase in the size of the new trader pool in week 2? The answer: 100% Now let's go to week number 6. At this point, there has been a total of 5 million new traders added to the pool (at a rate of 1 million per week.) Now, at week six, another million are added. What was the increase in the size of the new trader pool in week 6? The answer: 20% (1 million new divided by 5 million existing accounts.) This is now the 14th. week since the new trading accounts have been reported. So, if another million are added this week, then this week would have only increased the pool size by 7.14%, a far cry from the 100% added in week 2. Below is a chart to show you how the percentage of the investor pool size decreases even though 1 million is added every week. If you look at the chart, you see how the first 5 weeks astronomically increases the size of the pool with a fast growth rate. The red bar on the chart is week number 20. At week 20, another 1 million only adds 5% to the size of the pool. The point is this ... Every time someone in China gets a second mortgage, and draws his charge card credit down for cash to use in the stock market, he has tapped the Big Portion of his assets/credit. The only way to get new money for the stock market after that is from the left over discretionary income from his monthly wages ... not much in comparison to his initial amount. So, in this Ponzi scheme of things, the 13,000,000 that had trading accounts relied on the new 1,000,000 to buy their stocks and drive the price up higher so that they could make their expected get rich profits. Here is the big question: At what point does the pool get too large, where another new 1 million investors is now too small an amount to keep the overly large base of investor holdings from moving up? At week 52 on the chart, the new 1 million addition of investors only increases the total investor base by 1.92%. In week thirty three, 3.03% of new investors are added to the base. Here is the next big question: What happens, if in week thirty three, 6% of all the investors decide to take profits? Let's start the answer with what would have happened in week 2 when 100% new investors were added. 100% buy and 6% sell. Assuming the average investor amounts are the same, then the market would have still had 94% new money inflows. Now, lets go to week thirty three. What happens when 3% buy and 6% sell? The selling outpaces the buying by 2 to 1 and the market goes down. The point is, that as time goes on, the leverage shifts from a bullish low-risk condition, to a high-risk bearish condition. When we get too far out on the curve of the chart I posted above, there will be a point where people can't bail out of the market without it imploding to the downside.

[flyers&divers]

Fascinating. I like the idea of the trading universe expanding. The implications of this will be far reaching. For comic relief think of the tens of millions of new investors going through the process of learning the ropes or following their version of Cramer. F&D

[Sentient Being]

The reality is that china is full of poor people who are more worried about feeding themselves than in investing their "free cash" in the stock market. Every bubble has it's ending. When you hear people bragging it up, saying it's different this time, it can go on forever......you are getting close to the end!

[Tor]

Fascinating.
I like the idea of the trading universe expanding. The implications of this will be far reaching.

For comic relief think of the tens of millions of new investors going through the process of learning the ropes or following their version of Cramer.

F&D

Its incredible. One thing I would say. In my mind bubbles "create" interest in the markets and so I have to remain long term bullish now. I may be wrong, but this level of population participation, year of the pig.

The reality is that china is full of poor people who are more worried about feeding themselves than in investing their "free cash" in the stock market. Every bubble has it's ending. When you hear people bragging it up, saying it's different this time, it can go on forever......you are getting close to the end!

Interesting view. Did you know that China is the biggest importer/buyer of luxury cars globally? I mean Rolls, Bentley's etc. Its interesting the game of numbers I think.

[Sentient Being]

Tor, I'm not denying the reality of a large group of people in China who have recently aquired wealth. I'm merely pointing out that there is a LARGER group that is poor, far larger. I recently read an article that indicated that the average wage of a factory worker in China in 2004 was 64 cents an hour. Good over there, if you can find a factory job. I also heard their factory jobs are now being outsourced to cheaper labor markets! Can you imagine? Now how much stock do you think people who are growing their own food to survive or who are making 64 cents an hour in the local sweat shops are able buy? The vast majority of chinese are in no shape to keep a stock bubble alive.

I remember when money poured into Russia after the wall fell. The next great investment opportunity, oh the industrial paradise they told us Russia would be. The pent up demand! Get in on the ground floor! Wow, did a lot of people lose their behinds there when that bubble burst.

Tullips, canals, Railroads, Florida land, Tech, Japan, Russia and now China. The fate of all bubbles is the same. China has limits. The hundreds of millions of people over there who are just barely getting by know it. Not to mention the corruption, the inefficiencies, the games the government plays with the currency, etc.

I'm no predictor of the movement of stocks, at least not one with a good record! But I feel I can say with confidance that as long as humans buy stocks, these bubbles will come and go.

Here's an interesting link on China wages compared to US.

Edited by Sentient Being, 28 April 2007 - 07:54 AM.

[Tor]

Its true all bubbles end, just so tricky to spot them IMO.

[ed rader]

Its true all bubbles end, just so tricky to spot them IMO.

there's plenty of denial about the bubble we are currently in, for example .

ed rader

[pdx5]

At P/E of 18 for SPX is hardly bubble country. But if earnings decline significantly from here, then we are looking at dangerous territory. The most amazing thing about the Shanghai stock market is the fact that low income earners are using CREDIT CARDS to borrow money to buy stocks! It's gonna be a doozy when this thing implodes. And speaking of doozies, does any one remember the Dusenbergs?

[skott]

where did this info that the chinese are getting second mortgages and using credit cards to buy stocks? I did not know this. A "logical" place for a top seems to be either 4000 or 5000. It is really stretched now but of course it can go higher. Just look how far above it's 200 day or 200 week moving average Shanghai is. what is the etf for china? or is there one?

[skott]

edit feature did not work this time. My question was, "where did this info come from that the chinese are taking out 2nd mortgages and using credit cards to buy stocks"? I had not heard this before.