I'd like to write a comprehensive entry about the recent love for all things China and commodities in the past few days. (warning if you are not interested in China, global growth, commodities, or dry bulk shipping please move along to the next post, pass Go, and collect $200 now) Before I begin let me throw a few disclaimers out there: (a) I could be wrong (b) it doesn't matter what I think, as long as enough people "believe" anything can happen to stock prices in the short run - perception is reality on Wall Street and (c) ironically, I am arguing against myself.

Let me delve into (c) a bit ... unlike most of the punditry who take a very narcissistic view of "USA! USA! USA!" I was never on the bandwagon of "first in, first out" i.e. "the United States got into this mess first, so therefore it will emerge first". In fact I touted that as Kool Aid for all of 2008 as people told us this is why we must by stocks - the U.S. would lead the world in recovery because... well, it's the U.S. I outlined in (Dec 15, 2008: The "Recovery") why we have a long road ahead, but simply put let's split the world's countries into two. Those (a) facing recession and those (b) facing recession and financial emergency. Which group would you bet on would have an easier time coming out of this? A simple common sense answer would be group (a) - they only have 1 thing to deal with, rather than 2. But the view commonly thrown out is - as a special country who apparently exists in a parallel universe - we'll rebound first. The most common reason is the massive government interference. But isn't the better question to ask... how dire indeed are things if we need such excessive "help" from government? I would assume it must be terribly bad (it is).

I've theorized that Asia will indeed rebound first... so this post might sound like I am arguing with myself. But only partly. I do think Asia will rebound first.... but not yet. In fact I still think Asia is on a downward slope - even the magical place we call China. But Wall Street, in all it's need to find "something, anything" to play has seized on a rebound in the Baltic Dry Index, and nascent rebounds in copper and the CRB (a general commodity index). That, along with a Purchasing Manager report out of China (said report is in its infancy) that showed a slight uptick is enough to cause the bulls to roar: "we're baaaaaaack!" I think this is premature. So while agreeing with the general thesis, the timing is all off. These are the same folks who ignore all the evidence on the ground (both in U.S. and China) (Feb 4: China is Getting Bad) (Jan 26: NYT - College Educated Chinese Feel Job Pinch) (Jan 13: AP - China Trade Slump Worsens; Exports Fall - So Do Imports) (Jan 8: NYT - As Trade Slows, China Rethinks Its Growth Strategy) (Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists) to grasp to any one or two indicators that fit THEIR thesis, and run up stocks.... i.e. they fit the round peg to square hole to provide justification - rather than facing reality. That's my view but going back to point (a) I could be wrong, and point (b) it doesn't matter if I am correct if the herd believes otherwise. The herd moves stock prices...

But let's look at a bevy of data posts shall we?

The bulls have as evidence the fact that the Shanghai stock market is up strongly in 2009. We can see this via Morgan Stanley A Share Fund (CAF)


Bulls also point to the rally last week in iShares Xinhau China 25 (FXI)


Not to be a conspiracy theorist but the Shanghai exchange is a closed (to any outsider) exchange which restricts shorting. It is hard to call this a reliable indicator - especially since (if you want to go the full conspiracy route) it could be easily ummm... "supported" by the central government. In fact citizens of China were asking the government to do just this thing last year (buy stocks! prop em up!). So I have a hard time "taking this as a sign that things are on the upswing in China". As for FXI - you have traders jumping in on "thesis" the past 4 days... it should look familiar - see early January; they were buying on the same theory just a month ago. In fact the index was higher. Oh yeh - December as well. Why? Same theory. So if we want to take the ful monty of "stock prices are all knowing about the future!" am I to take it there was a stronger China recovery 4 weeks ago then the one we see now? But it then fell off a cliff during mid to late January? But suddenly restarted 4 days ago? (ahem)

Or am I to take it this is just idle speculation by HAL9000 and his hedge fund momo computers; and their human counterparts jumping in where the "trading is good!". I'll let you decide. (disclosure: let me say I do think the China stimulus will be more effective than the American version shall be; all things being equal)

There is also a nascent recovery in copper (a metal who is considered the best 'economist' of all) which at least is an open, global market.... and the much ballyhooed Baltic Dry Index. Oh lordy, an index that traded in the 3000 to 5000 range during "normal" times in 2005-2006 (don't even ask where it was in 2007 and early 2008) has now rallied from 700s to 1500 ...