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Five Things You Need to Know: CHINESE STOCKS COLLAPSE!!!; So What?; Revealing the Dandelions Within; Department of Anti-Self-Serving-Propaganda; Minyanville Presents: What Will They Think of Again Next?!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:


Shanghai Composite Index Now Up Only 50% Year-to-Date; Just 5% for the Month of May

SHANGHAI -- Chinese stocks collapsed 6.5% in heavy trading as the benchmark Shanghai Composite Index plunged to 4053.09, its lowest level since last Monday, erasing the gains of all six of the previous stock market sessions. It was the worst performance for Chinese stocks since the notorious "Shanghai Surprise" earlier this year.

The 8.8% "Shanghai Surprise" decline on February 27 wiped out a total of seven days' worth of stock market gains, forcing many investors who had intended to retire immediately on that week's massive stock market investment gains to wait a full day-and-a-half to get back to even.

The massive decline caught Chinese stock investors by surprise and many expressed their fear stocks may not recover anytime soon. "Oh dear God, when will this bear market ever end," said one investor who wished to remain anonymous. "At this rate I'll be forced to work well into my 30's," one teenage investor cried bitterly. "Those are supposed to be the golden years."

The disastrous plunge in Chinese stocks was blamed on a decision earlier yesterday by China's finance ministry to triple the stamp tax on stock trades from 0.1% to 0.3%. "This stamp tax increase spells doom for Chinese stocks," an analyst in Beijing said. When asked why the stamp tax spells trouble for stocks, the analyst exclaimed, "Why?! Why!? We have no idea why, but... look at the market! Just look at it!"

The stamp tax on Chinese stocks, first initiated in July 1990, was lowered from 0.2% in June 2001 to 0.1% in January 2005 to help boost stock prices during the four-year 2001-2005 slump.

WARNING: The following image may be shocking.

Shanghai Composite Stock Index

2. So What?

The Chinese stock market "collapse" raises a more serious philosophical question. If a financial market ever were to seriously decline in China, what's that got to do with us?

  • First off, there's this: an article this morning on Bloomberg noted that foreign investors now own a record 80% of the U.S. Treasury notes due in three to 10 years.
  • According to a 2005 Federal Reserve study by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, long-term interest rates in the U.S. would be about 1.5 percentage points higher without foreign capital flowing into
    our Treasuries.
  • Ok, so what? They like our debt. That's a vote of confidence, right?
  • On the bright side, the answer is "yes." But think for a moment about a situation where you own someone else's debt.
  • Beyond the fact that you're loaning money to someone who pays you for the use of it, what exactly does that mean?
  • If that's too difficult to conceive, then think about what it means when you owe someone else money?
  • Being in debt removes a layer of autonomy in your decision making.
  • Try selling your car with a lien attached.
  • The fact that so much of our debt is owned by foreign interests means we have less control over our own decision-making.
  • In fact, on the scale of the the U.S. Treasury market, it means the U.S. could conceivably even be held hostage by economic decisions made in places like Beijing, or Tokyo.
  • According to Alan Taylor, a professor of economic history at the University of California, Davis, not since the 19th century have foreigners held so much
    American debt.
  • Back in those days we were an emerging market.
  • That debt financed small little ventures such as the Louisiana Purchase and the westward expansion, the construction of railroads, canals, infrastructure projects.
  • By comparison, what's our debt financing today?

    3. Revealing the Dandelions Within

The Center for Responsible Lending forecasts that the subprime boom will result in a total of 2.4 million foreclosures nationwide, most of them on homes people owned before taking out the loans, according to the Wall Street Journal.

  • The Journal article looks a bit closer at some of the market most affected by "well-contained" subprime lending.
  • While Florida and California draw the most press, it turns out a surprising amount of subprime money found its way into America's poorer and, according to the Journal, "more-troubled" local economies.
  • For example, in 2006 alone, subprime investors from all over the world injected more than a billion dollars into 22 ZIP Codes in Detroit... that despite the fact that even as the money was pouring in, statistics show that home prices in the area were falling, unemployment was rising and the foreclosure rate was already the highest in the nation.
  • Fourteen ZIP Codes in Memphis, TN, attracted an estimated $460 million, the article says.
  • Seventeen ZIP Codes in Newark, N.J., pulled in about $1.5 billion.
  • In all of those ZIP Codes, subprime mortgages comprised more than half of all home loans made.
  • "When I see dandelions, I worry," Sylvia Hollifield, an instructor at Michigan State University, told the Journal.
  • Dandelions mean her neighbors are losing interest in their lawns... because they're losing their homes.

4. Department of Anti-Self-Serving-Propaganda

Yesterday we ran with a bit about the Chinese government acting to cap pork prices. Made sense to us. After all, the Chinese government is notorious for intervening in free markets, right? Maybe not exactly right. Certainly, China is far from the budding democracy as it's sometimes characterized by bullish propagandists with a vested interest (say a $3 billion vested interest) in perpetuating that view for financial gain. But it may be equally inaccurate to characterize the country as fully victimized by rampant price controls as well.

Minyan Bryan, who has been living and working in the Yunnan province for more than seven years now, had this to say about the price of pork in China... with photos to boot.

  • Kevin -

    Read with interest Number 5 in Five Things. Why just yesterday I bought 8 lbs of pork here in rural China for under $8 USD – clearly a big price difference from Shanghai. Why the price discrepancy? Good old fashion supply and demand. There's a common misconception outside China that the government sets food prices. I think they do set some prices, like gas, but in general stuff on the east coast is way more expensive than stuff everywhere else. My economics professor described China as being in two different economic cycles. I can confirm this from experience.

    Minyan Bryan
  • Note: By the way, why were you buying 8 lbs of pork, Bryan?

5. Minyanville Presents: What Will They Think of Again Next?!

Microsoft at a technology conference today will unveil a computer designed like a coffee table!

  • The table computer system, called Surface, allow users to buy tickets to events, wirelessly retrieve and display photos and play games, according to the Wall Street Journal, which is also sponsoring the technology conference.
  • The table computer features a 30-inch horizontal monitor embedded in the table, where users can move screen objects around with their fingers.
  • The coffee table computer is the result of five years' research and is being launched by Microsoft's Entertainment and Devices division, home of the Xbox console and Zune portable media player.
  • "This is a big breakthrough for Microsoft in terms of evolving the notion of what a personal computer is, as well as the type of experiences you can get from one," Jupiter Research analyst Michael Gartenberg told the Financial Times.
  • Will you pardon us for just one moment.
  • Oh. Now we remember.
  • See, if your tabletop area is a computer screen, then how can you use it as a table without covering up the screen?

Extra: Five Things Double Album Contest?

Congrats to Minyan Monica Huselton who correctly identified all 10 double LP's in yesterday's Five Things You Need to Know Live at Buddakan Double Edition. Claim your critter t-shirt Monica.

"The Red and The Black" - Blue Oyster Cult's "On Your Feet Or On Your Knees" and "Extraterrestrial Live"
"The Weight" - The Band's "Rock of Ages"
"I'm so Tired" - The Beatles' "The White Album"
"London Calling" - The Clash "London Calling"
"If You Don't Like the Effects, Don't Produce the Cause" - Funkadelic's "America Eats Its Young"
"Houses in Motion" - Talking Heads' "The Name of This Band is Talking Heads"
"Take Some...Leave Some" - James Brown's "The Payback"
"Don't Fear the Reaper" - Blue Oyster Cult's "Extraterrestrial Live"
"Won't Get Fooled Again" - The Who's "Who's Next" Deluxe Edition (2003) and The Ultimate Collection (2002), also The Kids Are Alright
"Double Trouble" - Lynyrd Skynyrd's "One More From the Road", also "The Essential Lynyrd Skynyrd" 1998 reissued as "Gold" 2006

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