Its not China, its the Economy (Stupid!)

Tuesday, February 27, 2007 | 03:30 PM

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/27/2007 11:15 am;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

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The consensus seems to be that "pressures by a big drop in the Chinese stock market" is behind today's market plunge. The Shanghai's Composite Index plummeted 9%, widely described as the "biggest decline in a decade." 

Getting the blame? "Efforts by investors to cash in on big gains and avoid any government attempts to cool the markets." As a reminder, the Fed did not attempt to do the same in 1999 / 2000.

Now, why the drop in China's benchmark stock index on fears of increased margin requirements should impact the US or Europe is food for thought. 

Quite frankly, I don't believe its that.

What's more likely is the growing recognition that inflation remains "worrisome," that growth is slowing, and that the sub-prime mortgage housing  debacle will no longer remained "contained."

The market is fortunate that sentiment levels are only frothy, and not completely exuberant. Also potentially containing this pullback: The support levels for the Nasdaq 100 remain steady.

Two recent research pieces discuss these elements in detail: Our Sentiment Review, and the most recent update of the Nasdaq 100 Composite.

Both research pieces can be found at the site here.


Shanghai_index

Source: WSJ



UPDATE: February 27, 2007 12:30pm

Consider the following headlines, dominated by today's news:

Freddie Mac to Tighten Subprime Rules -- (2.27)

See also: Video: Freddie Mac chairman and CEO Richard Syron discusses new subprime mortgage standards, which will be implemented September 2007.

Orders for Durable Goods Tumble  (2.27)
A key barometer of business-equipment spending -- orders for nondefense capital goods excluding aircraft -- fell by 6.0%, after increasing 3.6% in December.

No Worries: Banks Keeping Less Money in Reserve (2.27)
Every Dollar Set Aside Can Cut Into Profits

Subprime Game's Reckoning Day (2.27)
Risky Lending Fallout Threatens to Spread;
Uncertain ARM Strength


Home Lenders Cut the Flow of Risky Loans (2.26)
Default Fears Drain Subprime Pool, Adding To Pressures on Prices 

Mortgage Hot Potatoes (2.15)
Banks Try to Return High-Risk Loans To the Originators

 
Default Jitters Batter Shares of Home Lenders (2.9)
Risky Mortgages Spark Concerns, Uncertainty About Fallout on Bonds

 

If you want to believe that some bureaucrat in China changing the margin requirements for local speculators as the cause of the US selloff, then go ahead.

Me? I prefer to believe what is right before my eyes: Decaying economic fundamentals, a complacent market that is overbought and way overdue for a correction. Add to that the single biggest positive contributor to the economy over the past 4 years – Housing – showing no signs of being anywhere near a bottom. A few more jiggles on the screen, and we there will be significant technical deterioration.

China? Yeah, I guess its China . . .

Tuesday, February 27, 2007 | 03:30 PM | Permalink | Comments (44) | TrackBack (1)
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Listed below are links to weblogs that reference Its not China, its the Economy (Stupid!):

» Open Thread from The Left Coaster
Was it a problem with China's stock market that caused the US stock market drop today? Barry Ritholtz says no. Your turn now.... [Read More]

Tracked on Feb 28, 2007 3:08:32 AM

Comments

Perhaps the Chinese market declined because of a belief that the US economy is slowing and their exports will slow with it

Posted by: Ryan | Feb 27, 2007 3:31:12 PM

The comments to this entry are closed.



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