China Leads Declines

Stocks are selling off around the world. And China is in the lead. The Shanghai Composite is down 23% since August 4. Former Morgan Stanley Asia economist Andy Xie says Chinese stocks have been in bubble mode and there are more declines to come. 

The main issue for China is the same as it is here in the U.S.: prices are getting ahead of fundamentals. At least, that’s the fear. It’s funny, though, that nobody looks at AIG‘s moonshot and concludes the U.S. stock market is a bubble.  
I sure hope this isn’t the end of the rally, because I’m really growing fond of my new term, the Cash for Clunker Stock rally.  
*****In his morning missive to his TradeMaster Daily Stock Alerts readers, Jason Cimpl offered the following advice: "Pay close attention to any weakness in our early warning sign groups such as small caps, technology, oil and bonds, as ways to gauge a top in the US indices." 
For clarification, if the Cash for Clunker Stock rally is over, we will see bonds rally as investors move into safe-haven investments. So far today at least bonds are down right along with stocks. And since U.S. stocks are down only slightly, I think it would be prudent to consider the current action profit-taking for now.  
******We should probably add shipping stocks to Jason’s list of stocks to watch. The Baltic Dry Index, a leading indicator that measures shipping rates, is down 28% this month.  
Shipping rates are down mainly because China is buying less iron-ore. And new ships being delivered is expanding supply and helping drive prices lower.  
The Baltic Dry Index was absolutely decimated at the outset of the global recession. SmallCapInvestor PRO readers made 65% on shipping stock Genco (NYSE:GNK) as shipping rates recovered. We took profits on July 22, as the Baltic Dry Index was showing signs that it would roll over.  
If shipping rates fall another 50%, as some are expecting, it will mean two things. One, the bloom will be off the global economic recovery and the Cash for Clunker Stock rally will have ended. And two, it will be time to buy shipping stocks again. 
*****Before we get too bearish, though, please note that two M&A deals were announced today. Disney (NYSE:DIS) is buying Marvel (NYSE:MVL) for $4 billion and oil services company Baker Hughes (NYSE:BHI) is buying BJ Services (NYSE:BJS) for $5.5 billion.  
Mergers and acquisitions are generally considered bullish because they indicate that the acquiring company feels prices are attractive and there is growth ahead.  
That’s especially significant in the case of Baker Hughes. There’s not an analyst out there who hasn’t been saying that oil prices have risen too high in the current environment of growing supply and falling demand.  
Oil is an important indicator of investor expectations for the economy. And now, it seems, even the "insiders" are getting more bullish on oil prices.  
Oil is trading below $71 today. That’s a far cry from the $50-$60 range that some say is fair value. And a move to these levels is looking less and less likely.
Until tomorrow, 
Ian Wyatt
Daily Profit

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