Bear Markets Rallies outlined in yellow

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Melvin Ellis
5 years ago
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Yet 4 million new brokerage accounts are being opened each week, compared to 70,000 just a few years ago.

1 May 9, 2015 Bulls, Bears & Bear Market Rallies Chinese stocks are at a 7-year high, while the economy is shrinking. From 12% growth 5 years ago, now a 7% expansion seems highly optimistic. This is the TOP! Yet 4 million new brokerage accounts are being opened each week, compared to 70,000 just a few years ago. Margin balances recall the US 1929 excess speculation with 1.6 trillion Yuan (approximately $258 bn), only a year ago margin was less than one-fifth or 300bn Yuan. These are the universal telltale signs of a terminal Bubble. Bear Markets Rallies outlined in yellow Page 1 of 6

2 The average P/E ratio is 50x earnings - 40% at over 100x earnings. What do these numbers mean? If there is no growth, then it would take 100 years earnings to equal the current market price. Rather than long-term investing, this is insane. When ever market multiples rise to the sky like this, they must take a Dive before recovering to match this level. That s something that often requires 20 years or more. In the meantime, stocks must come down to earth, to imply losses for most. When P/E ratios are high, new issues take advantage of the feeding frenzy to sell shares at overblown prices, so that yesterday s overnight profits turn into tomorrow s bankruptcies. This is analogous to the dot-com Bubble Bust in the US, after the free-fall in 2000, many newly public companies went belly-up. The same will occur in China, smaller and lower quality companies with less depth are being brought public. When the music stops, these will be many casualties. While Small companies are the high fliers in an economic expansion, Bull Market, they are the most likely to fail in economic contractions, bear! Not only are growth expectations highly inflated and valuations at Bubble proportions, but high margin borrowing it s like a fault line in the market. Anything could set off a cascade of selling pressure, as one stop begets at least two more until it increments like a nuclear reaction into a falling knife, that no one is willing to catch on the way down. This is not a buy and hold for the long-term market, no matter how you perceive it. With margin in excess of 8% of the market valuation, a plummet is an confrontation waiting for any excuse to occur in the blink of an eye. Economists and strategists are either in denial or in the dark about history s lessons, rather than a Bull Market, this is a Bear Market, sucker s Rally. How can we tell them apart? Well, Bull Markets rise in five waves and correct in 3 waves, when what appears to be a bull Market is really a Bear in Bull s hide, you better watch out. Why? Because for one you have grossly miscalculated and the legitimate Bear is far bigger than the previous Bear Market Rally to which you associate its proportions. At major turning points, many things look rosy, and lagging indicators are mistaken for leading indicators. That means that earnings will always be highest just before they begin to swiftly swing to the opposite extreme. While China is opening its markets to western investors, to invest in China under these conditions, defines you as a fool a Page 2 of 6

3 fool and his money are soon parted that s how many former investors wise-up finally wise-up. Bear Market Rallies in Yellow Deflationary Contagion Fat tail risks, otherwise called Black Swans or Noah events are all the same. They are highly underestimated and un-like the last drop in 2008, but rather like the nose dive of similar magnitude in 1929 for the US China s market does not go back that far, and as a relative teenager, a fall can be better handled the one Old Man Uncle Sam is about to experience. Yet never before has the world been so flat, as Thomas Friedman described to e-commerce without borders. On the other side of the coin, without the insulation that borders previously offered there can be no isolation from deflationary contagion. The world s economies are all now intimately interconnected. To grow, China needs to export. Unlike spendthrift American middle class saves maybe 5%, the Chinese save at least 30% of their incomes, there s far less probability of prolonging the Bear Market Rally through QE. Page 3 of 6

In Bear Markets, one bubble begets another Note how one bubble begets another in the US the 2000 tech bubble resulted in a flow of funds into Real Estate, the real estate bust diverted investment to

4 In Bear Markets, one bubble begets another Note how one bubble begets another in the US the 2000 tech bubble resulted in a flow of funds into Real Estate, the real estate bust diverted investment to Emerging Markets. Similarly China s bricks and mortar bubble and the clamp down on wealth products has funneled money into the Chinese domestic stock market. As only those with more than $80,000 to invest have access to Hong Kong, where many of the same stocks sell for 1/3 of the Mainland prices. Those who will lose the most are usually those who can least afford it. It s analogous to a stampede of wildebeest, being spooked by a pack of lions and stampeding away from danger in knee-jerk reaction, rather than through logic. Bear Market Rallies in Yellow Note that after the Final Bear Market Rally comes the killer Crash! Bear Market Rallies are always 3-wave, while the final Crash is always 5-wave, and corrections to the upside are mere pauses! The Roaring Twenties in the US were one Big, Fed-fueled Bear Market Rally. (the Fed was instituted in 1913) Page 4 of 6

5 The next Tsunami is Global Deflation The next wave is Deflation. Consumption cutbacks on the part of the American middle class by will result by force rather than by choice. Adjusting from two incomes to one is not so easy, those that fail to adjust, only end up in bankruptcy, there s no going back to free-spending, carefree days. Since the US Bull Market began gearing down, the Fed under Greenspan & Bernanke tried and failed to turn the tide, by merely forestalling the inevitable. You cannot spend your way out of debt, neither as an individual nor a sovereign nation. Exports are already dropping, as a result of the sky-high dollar, but that s merely a head-fake, the drop will accelerate once the dollar collapses, so the two are not cause and effect, as linear thinking would have us delude ourselves. While the Chinese have backed off buying US Treasuries, like the Japanese before them, they have turned to buying foreign Real Estate. Just as the Japanese bought Rockefeller Center at peak prices, akin to the high multiples for new issues in China, there s too much money chasing deflating goods, that will all be cheaper if they just wait. Of late, the Chinese have bought the Grecian port of Piraeus near Athens, Smithfield Hams in the US, including hundreds of farms and AMC, American Movie Classics and the allied movie theatres. The have likely overpaid for all of these. In 3-5 years the same assets will be worth 10% or less of what they just paid. Despite Warren Buffet s so far highly successful modus operandi, times of Deflation are hardly the time to buy hard assets. While the free float stock that s available for trading in China is only 39%, with the rest belonging to the state, versus 94% in the US, this did not stop the 2008 collapse in China. I was feeding the squirrels in the park at lunchtime with two little 3-year-old twin girls and their nanny. When I arrived they were chasing after the squirrels screaming, I told its much more fun if your have them eating out of your hand like my first German Saxon boss on Wall Street taught me about stocks, don t chase stocks, let them come to you, with a limit price. Otherwise, you push up the price without getting filled. Similarly I told the twins, sit perfectly Page 5 of 6

still and hold out one cashew at a time, so they can almost taste it, no acorn will match a perfectly roasted cashew, then wait until they finish the first before you offer a second, let them come

6 still and hold out one cashew at a time, so they can almost taste it, no acorn will match a perfectly roasted cashew, then wait until they finish the first before you offer a second, let them come to, if you chase them they elude you, just like boys when you get older.soon they had the squirrels eating out of their little hand and licking their fingers to get the salt. The Yuan as a Reserve Currency Yet another piece of the puzzle is that Chinese Premier, Xi Jinping, wants the Yuan globally accepted, to that end, they have appealed to the IMF to approve the Yuan as an official reserve currency, when it next meets in November. Once accepted as such, the option of devaluation is off the table. As Mexico has done numerous times to stimulate exports, the hard knocks in Greece could have been largely avoided had it not joined the European Monetary Union. Since the Euro cannot be devalued by decree and is on its way up Greece s problems will get worse. One day the Yuan will be the strongest global currency but not before substantial growing pains of a teenager. If you subscribe to Stockcharts, please vote daily, this link will take you directly to our page where you can see the weekly interval charts in our allocation. Eduardo Mirahyes Page 6 of 6

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