The Chinese Economy Isn’t to Blame for the February 27 Market Correction

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ADELAIDE AUSTRALIA (Daily Reckoning): Well, well, well.  What can we say.  We have apparently been hit by a ‘correction.’  Of course we are not allowed to call a decline in the stock market a ‘crash’ until it falls by 10%.  Your correspondent has always been a little apprehensive about using the term ‘correction.’  It just rings of investors or market participants attempting to deny that anything is wrong.

It has a touch of the Basil Fawlty’s about it – “Don’t mention the war!”  At the moment nobody seems prepared to mention it.  Perhaps if we don’t call it a ‘crash’ then it won’t happen.  Instead we may like to comfort ourselves by saying that it was a “shake-out” that the market needed.  However, if we’re being honest, if it smells, looks and sounds like a CRASH, then whisper it is a crash!

For the Dow Jones Industrial Average to lose over 400 points in one day is no mean feat.  It is the largest single day drop in over four years

February 27 2007 Dow Jones Industrial Average

It was supposedly brought about by the 10% fall in the Chinese market yesterday.  But can we necessarily blame it all on the Chinese?

Shenzen 300
Shanghai February 27 2007

 It wasn’t the Chinese piling head over heals, buying up US, European and Australian stocks over the past three years.  They have merely been going about their business, expanding their economy and using and producing the things that the West has or needs.

It would be very simple for commentators to start blaming the Chinese economy for the sliding stock prices without looking at the fundamentals domestically, and the attitudes of investors globally.

As a reporter on CNBC stated this morning, “the market had become over complacent.”  A perfect example to illustrate this fact is the Chicago Board Options Exchange VIX index which measures volatility in the market.  Effectively, prior to last night the VIX had been flat lining at ridiculously low levels.

We and others have mentioned before – and you don’t need to be an Einstein to work this one out – that it is at the point when everything looks perfectly fine, and the complacency has set in, the market is sure to take everyone for a ride.

Maybe today has been the beginning of a very bumpy ride.  The Australian market has naturally followed suit with the All Ordinaries falling by 3.5% in early trading.  Again, not surprising seeing that BHP Billiton (ASX: BHP) shares traded in London had fallen by 6.5% overnight.  In trade today the Australian listed shares have fallen by over 5%.  Shares in Rio Tinto (ASX: RIO) which fell by 4% in London have fallen by nearly 5% this morning.

All Ordinaries February 28 2007

Oh to have been on the short side of this!

And quickly back to the energy debacle as we wind things up in Adelaide, with South Australia’s access to vast quantities of uranium, and its swathes of desolate outback, the State has the potential to become a complete end-to-end supplier, processor, generator and disposer of nuclear and nuclear related energy.

However, as we have espoused on countless occasions previously, it is far more likely that anyone in any position to do anything about nuclear energy as an alternative to fossil fuels will run for the hills.

In fact, no sooner said than it has been done already.  South Australian Premier Mike Rann has ruled it out.  So has Victorian Premier Steve Bracks.  And, get this, even the company that has proposed it has backed away.

So much for genuine discussion and proposals for alternative energy.  Instead, wait for someone to come up with an idea and then get as many inept politicians as possible to stand up and scream against it.  The even bigger shame is that Ron Walker, Hugh Morgan and Robert de Crespigny have denied interest in nuclear power generation.

Wouldn’t it have been nice if they had said, “well, yes, actually we are looking at doing something, would you like to see what we’ve got so far?”  Fat chance of that ever happening.  Instead the looming energy crisis grows bigger and bigger every day.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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IIMPR
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International Institute of Management (IIM) released a new report warning about the U.S. economic health status. The report provides the following:
1. Uncovers the forces behind today’s stock-market decline and the Chinese reaction to U.S. Economy’s outlook.
2. A detailed analysis of the economic, social and geopolitical risks facing the U.S.
3. Forecasting the behavior of the U.S. and global markets.

The complete text of the report is available at:

http://www.iim-edu.org/u.s.economyrisks/index.htm

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