CSI 300: How High Can it Go, Let’s Ask Greenspan

Alan Greenspan, otherwise known as Inspector Magoo, is on the scene of the huge rise in China’s CSI 300 Index. Well, sort of on the scene. Greenspan, speaking via satellite to a conference in Madrid, told investors that China’s stock market boom is “Clearly unsustainable…There is going to be a dramatic correction at some point.”

“At some point.” Interesting choice of words. Are we at some point yet? Or is some point a few years away?

On December 15, 1996, Greenspan said the stock market was showing signs of “irrational exuberance.” The Nasdaq closed at 1,289 that day. Four years and a 291% gain later for the index, the Nasdaq closed at 5,048 on March 10th, 2000.

So let’s say Greenspan is right about Chinese stocks and the CSI 300. Let’s also say that rational people always underestimate how long markets can sustain irrational behaviour. Let us further say that while China will surely face a correction soon (this month we believe), the men and women who manage China’s economy would like to see it keep on melting up, at least until after the summer Olympics in August of 2008.

By the way, on the day the Nasdaq reached its all-time closing high, CNNMoney reported, “The divergence between the blue chips and is symbolic: The Nasdaq finished above the key 5,000 mark, while the Dow ended below 10,000. Analysts see the trend continuing.”

This shows you the worth of most analysts. Most believe either that something will keep happening because that’s what happening now, or that something can’t possibly happen because it hasn’t happened yet. But things change. And the statistically unlikely event actually happens with more frequency in markets that mathematical models would suggest. Financial accidents happen, especially the more complex and leveraged the world gets.

In any event, Greenspan managed to talk down Chinese and American markets for a day or so. But you can’t keep a good mania down. In an entertaining article called “Chinese learn the language of money,” Geoff Dyer of the Financial Times reports that the, “Chinese have combined a traditional delight in word-play with their new-found passion for stocks to create a rich supply of colloquial jargon for investing that is bandied around brokerage offices.”

“Ghost shares,” are those considered highly risky. “Black horses” are shares that have beaten expectations (this must be nearly all shares these days.) “Buying cheap to sell high later is known as ‘fighting for the hat,’ while selling at a loss to avoid further losses is ‘meat slicing.’ Investors who think a piece of news will boost prices claim to be, ‘lifting the sedan chair.'”

A bull market is a great thing. Even the language is enriched. But this may not be your old fashioned bull market, according to new Chinese jargon. It could be a “deer market” where, “a large group of amateur, short-term speculators causes markets to move in erratic jolts.”

We know what happens to Bambi, don’t we?

In percentage terms, there is no rational way to determine how far China’s market and the CSI 300 can go. Heck, shares of Kerr Neilson’s Platinum Asset Management were up 76% in one day from their debut price. Platinum has real holdings in global blue chips. Investors are so confident in the company’s future performance as a wealth manager that they are willing to $24 today for every dollar’s worth of earnings. The deer run in global asset markets is on.

Perhaps we should have called our 2004 book about investing in global markets “The Deer Hunter.” This is this! And this is a bull market. Oh well. There’s always a sequel….

If you can manage to drag your eyes off the CSI 300 for a moment, you’ll see some interesting developments in the local energy market. Shell, licking its wounds from its unceremonious dumping from Russia’s Sakhalin II liquid natural gas project, is back in Australia looking for projects. The Federal government would like Australia to become the world’s second largest LNG supplier (Indonesia is the top exporter, controlling nearly 50% of the export market.)

The main customers of Australian and Indonesian LNG are Asian electric utilities who prefer LNG to coal-fired electric power. We expect exploration for more Australian energy assets to ramp up in the coming years, not just in LNG but obviously uranium. And of course, the boom in fossil-fuel energy will keep the mini-boom in renewable and alternative energy going strong too, expanding the number of investment opportunities in small exploration and development companies.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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