HK & China - Market Direction 01 (May08 - Oct08)

[millionairemind]

W,

Any reason Y HSI is tanking??? The day B4 DOW went up about 180pts.. HSI never moved.. now DOW gave up all the gains, HSI tanked 500pts??

I catch no ball...

mm

[winston]

Hi MM,

I think the rally over the past two weeks was due to short-covering and not due to long funds buying. Now that the shorts have covered some of their position, it is just a wait & see situation. Hence, there was no movement even when the Dow was up.

As for today, the drop in the US overnight did not help things. It's also a Friday so I think people may want to get out before the weekend. Or at least, there would not be a lot of buying today.

If the drop today is due to short-selling, they may cover by the end of today. I dont think they will want to bring their position over the week-end.

Am very tempted to buy a Call but I think I may pass this time.

Dol - what do you think ?

Take care,
Winston

[-dol-]

So far, the US rally is quite narrow and seems concentrated in the biotechs, medicals and education sectors. Sometimes, the rally is helped by the punters' favourites like the financials and energy/commodities complex. The US is a broad and deep market with a lot of diversity - therefore, there is always some sectors that will do well. Another key ingredient is that institutional funds are very established and provide important support to the markets. They are very long-term and are committed to finding opportunities in the US market. $ always have to flow to the productive sectors and there are always opportunites there (We might not see that in Asia - $ just stay on the sidelines, perhaps there just aren't enough compelling growth sectors to invest?). You can also have very new and innovative companies in the US who can rise above the general economy to find pockets of opportunities to grow even during tough times. This is the strength of the US - America is not all doom and gloom - to be written off yet.

I am not sure the HK market - despite being one of the largest and deepest in Asia can match that. It is broadly the China H-shares and the traditional HK blue-chips. It's almost 2-dimensional (Singapore is worst - with no mind of its own - and always taking its cue from others). China H-shares will also be influenced by Shanghai - which is not doing well now. What can one expect with so much uncertainty in the global economy for the traditional HK blue-chips like the property developers and financials - they have to take their cue from general economic conditions. HK is an open economy after all. I also think that many funds have been flowing out of Asia and emerging markets - so we cannot argue with the liquidity situation for now.

I have also been wondering exactly how attractively-priced are Asian equities at current levels. I got this feeling that downward revisions to earnings is still necessary - after all, this might not be your garden-variety recession/slowdown - this could be quite a debacle with a lot of negative feedback loops. We have enjoyed 2 decades of global credit expansion and now the taps are being turned off. If so, there could be more downside. May be that's why the market is not enthusiastically snapping up "bargains". I welcome people to comment on the fundamentals.

Just my personal observations, which can often be wrong.

[millionairemind]

Hi MM,

I think the rally over the past two weeks was due to short-covering and not due to long funds buying. Now that the shorts have covered some of their position, it is just a wait & see situation. Hence, there was no movement even when the Dow was up.

As for today, the drop in the US overnight did not help things. It's also a Friday so I think people may want to get out before the weekend. Or at least, there would not be a lot of buying today.

If the drop today is due to short-selling, they may cover by the end of today. I dont think they will want to bring their position over the week-end.

Am very tempted to buy a Call but I think I may pass this time.

Dol - what do you think ?

Take care,
Winston

W,

I got to hand it to you. YOU ARE GOOD!!!

That comes with YEARS OF EXPERIENCE in the mkt..

Glad we have you as a founding member in this forum.

Cheers,
mm

[winston]

Hi MM,

If I'm good, I would have bought a call, which was what my instinct told me to do today. Unfortunately, I listened to my logical mind, who told me to be careful as it is Friday

I think the HK market went up because Shanghai turned positive. And Shanghai turned positive becuz of the extra loans that the banks would be giving out. Thereafter, the shorts had to cover. I dont think any long funds were buying.

There is a perception in the market now that the authorities would continue to provide market friendly policies to support the market. So it should be quite safe until the middle of the Olympics.

Take care,
Winston

[-dol-]

The market also chose to like President Hu's comments about going for growth instead of inflation fighting.

As long as the US rally stays, there's always a chance of a NDP rally and Beijing Olympic rally. If enough people want it badly enough, we can have it. But these funds can be quite fickle.

[winston]

HSI may get lift from final runup to the Olympics
Benjamin Scent
Monday, August 04, 2008

Hong Kong shares may initially fall after Friday's recovery, but analysts said the local bourse could get a boost from the mainland market later in the week as government authorities want to support China stocks in the final days before the Olympics.

"The Olympic Games will be starting, and most of the investors believe the China government is trying to stabilize the market," said Sun Hung Kai Financial strategist Castor Pang Wai-sun.

"For this week, the upside momentum will be a little bit stronger."

First, though, the Hong Kong market may come under pressure following Wall Street's decline on Friday, KGI Asia chief operating officer Ben Kwong Man-bun said.

Although mainland markets may bring positive momentum to the local bourse, US indicators still have negative momentum, Pang said. Upside for the Hang Seng Index this week is likely to be capped at 23,300, he added.

"The market will have some sort of positive bias ahead of the Olympic Games," Kwong said. "But of course, it depends very much on some of the major events like the results announcement by HSBC."

Investors will also look at the post- meeting statement from the US Federal Open Market Committee, to be released after the FOMC meets on Tuesday and Wednesday, according to Kwong.

If HSBC's results are not too bad, the blue-chip index may approach 23,400 or 23,500 by the end of the week, Tung Tai Securities associate director Kenny Tang Sing-hing said.

"There may be some more technical rebound this week," Tang said.

"The market hopes the mainland government is going to loosen some macroeconomic measures ... so it should help the sentiment in the Hong Kong market."

The Shanghai Composite Index could rise about 50 points today, Tang said.

The index could end the week at 3,100 points, he added, as rumored policies designed to stimulate economic growth and support the stock market are likely to materialize.

[winston]

China Cosco May Join Hang Seng, Yue Yuen to Leave, Nomura Says
By Hanny Wan

Aug. 4 (Bloomberg) -- China Cosco Holdings Co., the world's largest operator of iron-ore and coal ships, may join Hong Kong's Hang Seng Index and sports-shoe maker Yue Yuen Industrial (Holdings) Ltd. may be removed as part of a quarterly review, according to Nomura Holdings Inc.

China Cosco, based in Tianjin in northeastern China, would become the 11th company from the mainland to be included in the Hang Seng Index. Hong Kong-Based Yue Yuen may be dropped because it has the lowest trading level of any stock in the gauge, according to Nomura, Japan's largest brokerage, and Fulbright Securities Ltd.

Adding China Cosco would ``reflect the trend that an increasing number of large companies tend to be from mainland China,'' said Francis Lun, general manager at Fulbright, a Hong Kong-based brokerage.

Mainland companies that trade in Hong Kong, known as H shares, made up 25 percent of the value traded on the Hong Kong stock exchange's main board at the end of June, up from 1.5 percent at the end of 1997. The city's $2.12 trillion stock market is Asia's third-biggest after Japan and China.

HSI Services Inc., which compiles the benchmark indexes, said in February 2007 that it plans to expand the Hang Seng Index to 50 companies from 43. The changes, based on criteria such as market capitalization and trading volume, may prompt funds that buy shares based on the index to adjust their holdings. HSI Services will announce the changes on Aug. 8.

China Cosco Declines

Shares of China Cosco fell 15 percent this year, less than the 18 percent decline in the Hang Seng Index.

About 31 million of the company's shares traded daily this year, up from 25.8 million in the same period a year earlier. It ranks 59th among all the companies listed on Hong Kong's exchange by average market value, Sandy Lee, a quantitative analyst at Nomura in Hong Kong, wrote in a research note dated July 29.

Yue Yuen slumped 27 percent this year. Castor Pang, an analyst at Sun Hung Kai Securities in Hong Kong, said Yue Yuen may be kept on the Hang Seng index.

``There's no urgency in deleting Yue Yuen, given that the goal is to increase the membership to 50,'' Pang said.

China Railway Construction Corp., based in Beijing, may join the Hang Seng China Enterprises Index, which tracks H shares, while Shenzhen, China-based Guangshen Railway Co. may be removed, according to the Nomura report.

China Railway, builder of more than half the nation's railroads, climbed 14 percent since its March initial offering was priced at HK$10.70 ($1.37) a share. Guangshen Railway, the operator of trains in China's richest province, plunged 31 percent this year.

[winston]

Timing will be crucial to profit from index change
Benjamin Scent
Monday, August 04, 2008

Some analysts expect changes to the Hang Seng Index and Hang Seng China Enterprises Index after compiler HSI Services meets on Friday. But investors who want to profit from index shuffling will have to be smart about their timing.

Mainland shipping giant China COSCO (1919) stands a chance of inclusion on the Hang Seng Index inclusion this time, according to Nomura.

"While we see an opportunity to accumulate long/short positions on the companies, there is no free ride," Nomura analyst Sandy Lee said. "Skill is required to find the best entry and exit strategies."

First Shanghai Securities strategist Linus Yip Sheung-chi said speculative buyers wanting to play with changes to the HSI may want to sell China COSCO stock on Wednesday.

"Sell it at a high level before the news comes true," Yip said. For the stock will have a big correction after the news is announced.

At the same time, the likelihood that Yue Yuen Industrial (Holdings) (0551) will be deleted from the blue-chip index has risen after it breached the liquidity threshold in the second quarter, Lee said. "But unless things deteriorate quickly, there may be no urgency to act."

Cheung Kong Infrastructure (1038) breached the liquidity rule for three consecutive quarters before it was finally removed.

Yip said there is little chance for punters to profit on any shuffling by shorting Yue Yuen - although he recommends investors stay away from the stock anyway since it will be hurt by an export slowdown.

"There's no history that a stock which will be dropped from the HSI will have a big drop," Yip said.

A potential reorganization of the China Enterprises Index may warrant more attention than usual amid the rise of the H-share segment in Hong Kong, according to Nomura.

Lee predicts China Railway Construction (1186) will be added, while southern China-based Guangshen Railway (0525) may be deleted.

While China COSCO has already risen some on shuffling speculation, China Railway Construction has not.

Investors who buy China Railway Construction now can benefit from index funds' buying of about HK$118 million worth of shares after the changes are announced, Lee said.

[winston]

From UOB-Kay Hian:-

Strategy
China stocks: Ready, steady, run

Summary. Just as almost everyone has given up hope that there will be an Olympics relief rally, news flows about economic policy fine-tuning to prop up the ailing economy began to trickle in last Friday, sparking an amazing reversal of morning losses to closing gains in the Hong Kong and China markets. Beijing appears to have changed tack in trying to rev up the markets:
it is staggering newsflows on policy shifts for the needy industries instead of bunching them up together.

In this way, it would stand a good chance of ensuring that there is enough puff in the bull to last through August. It is not too late for investors to participate in the imminent rally, and then sell into strength, as there should be price hikes for power and refined products post-Beijing Olympics, which will hurt margins. Re-accumulate solid stocks at the end of 3Q08 or early 4Q08, as inflationary pressures peak, and further economic policy support for the badly hit industries by the economic downturn will translate into strong earnings visibility for H-shares in 2H09.

Positive news flows. Since July, investors have waited anxiously for Beijing to announce supportive measures to rev up the mainland stock markets in the run-up to the August Olympics. Fed-up with Beijing’s “no action, talk only” stance, investors threw up their hands in despair, and investor sentiment was volatile. So, last Thursday, when Beijing announced a two-point raise in the
export rebate for the textile and garment exporters, investors did not think much of it and continued to sell. But, in the afternoon, a widely reported rumour in the mainland and overseas media about a 5% credit loosening and Party Secretary Hu Jintao’s remarks about supporting economic growth to the foreign press turned the stock markets around.

Staggering news flows to ensure a longer rally. Instead of announcing too many goodies in one go that will trigger a short but powerful share price spike, Beijing appears to be testing the markets’ reaction by releasing one piece of newsflow after another. It appears to be building up momentum at a measured pace so that it will last beyond the Olympics to the end of the month. We expect that more measures –one at a time – will be announced as we go into the Olympics and to the end of the month.

Potential measures. There could be two types of measures – those for supporting economic growth, which will improve investor sentiment considerably on a longer-term basis, and those which target the stock markets. Rumours are rife that there will be the imposition of stamp duties only for sale but not purchase of stocks, the introduction of T+zero trading, which allows intraday trade, and the setting up of a market stabilisation fund.

The most potent will be the stabilisation fund. We believe any of these measures could be introduced if the markets fall flat along the way.

Economic measures. For a fundamental change in investor sentiment, economic prospects have to brighten. Here, more concrete measures should come through, especially given last Friday’s news that the Jul 08 Purchasing Managers’ Index (PMI) – which measures manufacturing activities – fell below 50 points for the first time, its lowest since the index was compiled in 2005.