Orgy of Speculation
Alan Abelson
BLAME IT ALL ON MA. NO, WE AREN'T TAKING shots at anyone's dear old Mom. The Ma we're talking about is Ma Yaohai, a 50-something Chinese computer-science professor. Never heard of him? Well, perhaps you're more familiar with the signature moniker he used in Internet chat rooms of a certain kind -- Roaring Virile Fire.
Mr. Ma preferred to pass his idle hours arranging and, of course, participating in orgies featuring partner-swapping, group sex and that sort of icky stuff. A serial swinger, China-style. Renowned for their Puritan streak, the authorities in Beijing frowned on Ma's recreational preferences, and just this month he was sentenced to 3½ years in the hoosegow for committing "crowd licentiousness."
Reading about poor Ma, we realized how lucky we are that our proud nation doesn't send folks to jail for crowd licentiousness. We mean, if libidinous behavior were punishable by incarceration, why, half the Congress would be behind bars. Which, if nothing else, would make it difficult for our chosen representatives to assemble a quorum to vote themselves a raise or go on vacation.
Just about all of China was transfixed by the accounts of Ma's orgiastic endeavors. Abruptly bereft of such enjoyable diversion, the populace felt a natural letdown and, to fill the excitement gap, some of the more imaginative among them began spreading wild rumors of one kind or another, for the most part about the usual glamorous celebrities -- famous ping-pong players and movie stars. But the rumor mongering also spread to other forms of popular entertainment, like casinos and, of course, what has in recent years become one of the country's great pastimes, speculating in all manner of assets.
So it was that some mischief-maker, bored to tears, just for kicks passed the word to a credulous reporter (is that redundant?) that the powers-that-be had decided to dump some of China's pile of Eurobonds. And as the story with the speed of sound crossed the Pacific, whammo! it caused a bit of havoc on Wall Street. A smart triple-digit rally in Wednesday's trading turned on a dime and was wiped out in the final hour or so.
Happily, the bigwigs in Beijing, including most notably the chaps in charge of the nation's tidy little trove of foreign reserves -- a mere $2.5 trillion worth -- denied China had any such dastardly plan. And, first chance it got, on Thursday, the market took off on one of its now-familiar leaps upward.
That, at least, was the apparent happy ending to what had all the makings of an implausible episode in any case. For when the baleful rumor first surfaced, it struck us as downright fishy. As evidenced by that humongous hoard of foreign reserves the Chinese have accumulated, they're not exactly financial babes in the woods. If they were really poised to unload their European holdings, why would they ever advertise their intentions in advance, since they couldn't help knowing that such a disclosure would cause the value of those holdings to crumple like papier-mâché in a firestorm?
But this remains a market that can't stand prosperity or adversity for more than a day or two, so following that sharp advance it felt obliged to meander lower on Friday. Besides a reluctance of investors to embark on a three-day holiday with an overly heavy portfolio, some tepid news on first-quarter profits -- they weren't as robust as expected -- and consumer spending in April -- it held to March's level, despite a rise in income -- inclined traders to tread more cautiously.
The market's action following the recent mini-massacre has hewed remarkably closely to the analysis and prophecy by our old buddy, a very astute technically oriented market watcher, that we shared with you last week, including the possibility of a brief relapse. He felt a temporary bottom was being formed and a rebound was in the cards, but it would likely come up short of setting a new recovery high. And his conviction remained firm that the big, bad secular bear market was in absolutely no hurry to call it quits.
Sounded good to us when our friend laid it out and sounds even better a week later. Whatever its other claims to fame, the Dow's performance in this fading month was the worst for any May in its history and the poorest monthly showing since the dark cold days of February 2009. Whoever coined that little ditty "sell in May and go away" may have been an indifferent rhymester, but we sure wouldn't mind his managing our money.
WHILE WE FEEL NO CONSTRAINT ABOUT pooh-poohing the cockamamie story about China giving the boot to its euro-zone debt holdings, we must confess that its awesome real-estate bubble and its attempts to let some of the air out as well as signs that its growth might be easing off its torrid pace are genuine causes for concern. And our unease on those scores is only reinforced by the dodgy movement of its equity markets, which, of course, had been world beaters up until this year.
Our concern, moreover, is echoed in the recent economic commentary by Northern Trust's savvy Paul Kasriel and his able sidekick, Asha Bangalore. They even venture that while the investment world has been in a state of high anxiety about the financial woes of Greece, Portugal and Spain, it would have been better advised to be more worried about what could happen in China and, specifically, about that nation's efforts to slow bank lending in order to damp down inflationary pressures in the prices of goods and services as well as property values.
As Paul and Asha point out, "the historical record with regard to a managed deflation of asset prices is not too encouraging," to say the least. While asset prices often continue to shoot up merrily, real economic activity slows significantly. Which is why, in their view, global investors have particular reason to fret when an important economy like China's suffers a double whammy of rising inflation in the price of goods and services as well as of asset prices.
And that's also why they contend that the Sino restrictive economic policies (in league with India's similar approach) "could have a much more adverse effect on the U.S. economy and stock market than the goings on in Greece, Portugal and Spain." Although it seems to us they may be downplaying some of the larger and truly nasty implications of Greece etc., theirs is certainly a novel view and commends itself for that alone as well as the track record of its exponents. And we certainly have no quarrel with their argument that worrywarts might shift their attention to China.
A similar foreboding about China is expressed by David and Jay Levy in their latest edition of the Levy Forecast, which we find an invariably rewarding read. They point out that "when the global economy got clocked in 2008 and 2009," China was hard hit, but the government steadied the economy via a combo of vast fiscal stimulus, extraordinary monetary policy and meaningful prodding of "the banks to pump loans into the economy like mad." The result was a strong upswing in asset values and a full-blown real-estate bubble.
Not entirely comfortable with what its strenuous exertions have wrought, Beijing has set about containing the massive bubble in property values. Alas, as the Levys warn, asset-price bubbles tend not to stop expanding and hold; rather, they just keep expanding until they run out of steam or are unexpectedly popped, and then, as we still have rueful reason to know, they collapse.
It's conceivable, the Levys concede, that China's real-estate bubble might float on for another year; but if it doesn't -- and we'd give odds on that -- the omens for its own and the global economy are both pretty dire.
POWERSHARES QQQ (whose symbol is QQQQ; the extra Q, we assume, is for cute) is the exchange-traded fund for the Nasdaq 100. To be frank, we don't spend a lot of time mucking around the ETFs. Nothing personal, you understand; they're an interesting, explosively growing, immensely popular and mostly worthy new investment phenomenon. But once you've connected them with the sector, subsector or seemingly limitless variation of such, there really isn't much to say that couldn't be said in greater and far more enlightening detail about the industry, say, or group for which they're a proxy.
What leads us to talk about PowerShares QQQ (you thought we'd never get around to telling you) was Alan Newman's CrossCurrents advisory letter, published a fortnight ago. More particularly, his survey of insider transactions in the top eight issues in the ETF. He performed the exercise on May 10 and what he discovered was rather astounding.
There were 231 sellers and three buyers, which works out to a somewhat lopsided ratio of 77 to 1. All told, the insiders sold 59.8 million shares and purchased 15,200 shares, a sell/buy ratio of 3,933 to l. Not exactly a resounding vote of confidence in the prospects for their companies.
Moreover, Alan notes, analysts are just as positive on the QQQ leaders as they were back in March 2008 before a 37% fall in price. At that time, 74.1% of the recommendations were Buys and 2.9% were Sells. As of May 10, 2010, 77.7% were Buys and 3.6% Sells. The more things change, we guess, the more things stay the same, especially on Wall Street.
Insiders are hardly infalliable investors and, as Alan observes, their investment habits are not a timing indicator. Still, they do tend to know a bit more about the company and its outlook than the analysts or the folks buying the stocks they're so determinedly selling.
BLAME IT ALL ON MA.