Sunday, February 19th, 2017

A World of Hurt, of PIIGS, and “Mispriced” China Stocks


“Flat World”, famously observed by economist Thomas Friedman

Why China’s Property Bulge is Nothing Like the US Mortgage Implosion

The “flat world”, famously observed by economist Thomas Friedman, is also very much a hurting world, at least as far as most shareholders are concerned.

In Friedman’s vision of a “flat world” the entire planet is economically interconnected. Events in one region are felt instantly around the world. That principle has never seemed more true than it does this week among stock markets in the world’s financial capitals. In addition to the much-discussed European crisis, there are other critical stresses affecting stock markets.

About: Thomas Friedman, “flat world”, South Korean, PIIGS, Dow Jones Index, Hong Kong’s Hang Seng Index, Japan’s Nikkei Stock Index, Taiwan’s Taiex, Australia’s S&P/ASX 200, India’s Sensex, Indonesia’s JSX, Thailand’s SET Index, North Korea’s Kim Jong-il,
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Western media have all but ignored the growing threat of war between North and South Korea even though the danger there has been increasing steadily, and alarmingly, for almost a month. Stock markets have paid much closer attention.

Ending a month of regional jitters and uncertainty, Asian markets took a beating when South Korea officially accused the North of sinking one of its warships and tensions spiked. Seoul has now broken off the last vestiges of contact with the North and is ramping up propaganda. Officials in Pyongyang are reportedly discussing a war involving the 1.2 million man army of North Korea. The U.S. has troops, armaments and strategic interests in this hotbed of tension.

This perfect storm of uncertainty is global. Thousands of miles away, the stability of European economies remains in question despite a trillion dollar bailout to save the euro and rescue the deeply indebted countries known as PIIGS (Portugal, Italy, Ireland, Greece and Spain). Concern about European debt has raised simmering fears about U.S. deficits and Washington’s ability and willingness to prevent a crisis.

The U.S. economy still isn’t out of the woods either. In the latest discouraging sign for the housing market, home prices fell 3.2 percent in the first quarter from the fourth quarter of last year but did manage to rise 2 percent versus the first quarter of 2009.

As the Dow Jones Index fell below the psychologically significant 10,000 mark, most Asian market indexes suffered even more due to the Korean crisis.

  • South Korea’s Kospi dropped as much as 4.5 percent at one point as tension spiked.
  • Hong Kong’s Hang Seng Index fell 3.5 percent.
  • Japan’s Nikkei Stock Average dropped 3.1 percent.
  • Australia’s S&P/ASX 200 fell 3 percent.
  • Taiwan’s Taiex lost 3.2 percent.
  • India’s Sensex dropped by 2.7 percent.
  • Indonesia’s JSX plummeted by 3.7 percent.
  • Thailand’s SET Index tumbled 3.1 percent.
  • Singapore’s Straits Times Index fell 2.7 percent.

China’s Shanghai Composite index suffered the least in the troubled region, giving up 1.9 percent.

Why China’s Property Bulge is Nothing Like the US Mortgage Implosion

I recommended that China Stock Digest subscribers purchase specific shorting equities to protect their portfolios from volatility on May 21st. I also published a blog  shortly afterward, available to non-subscribers, suggesting the wisdom in principle of shorting Asia for portfolio protection as market forces grew more volatile.

Morgan Stanley has just released a report calling Chinese stocks “mispriced” due to exaggerated fears about withdrawal of China’s economic stimulus and inflation. Calling this slump “overdone”, Morgan Stanley predicts a correction.

We are awaiting a turnaround and have instructed subscribers to pay attention to this fluid situation. As unpredictable as North Korea’s Kim Jong-il may be, we don’t expect that he would risk launching an unwinnable and costly war. We will alert subscribers to withdraw their short positions immediately when we sense a turnaround in the economic atmosphere, an event that is likely to happen with surprising speed in the current environment. Holding shorting instruments during a sudden rebound could be extremely expensive.

We advise all investors who read our blogs or hold short positions to remain extremely alert to market changes in this volatile period.

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