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Could Chanos be right?

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by Peter Switzer

It should be a hard day at the office for local investors with Wall Street down, commodities down, miners down and, not surprisingly, the Aussie dollar down to a more surprising 107-US cents level.

If you want to get a sense of what significant things are happening, well, silver is down 17 per cent this week!

And this poses the question, could Jim Chanos — the China contrarian, who is tipping a Chinese implosion — be right?

To quote Little Britain, “computer says no".

What we’re seeing is profit taking after a very big positive run since September last year. Also, there was a bit of negative economic news that had to be used by prudent short-term traders as an excuse to take some profit off the table.

Wall Street overnight

Just to get an idea of how negative the Wall Street session was, the S&P 500 lost nine points, or 0.7 per cent, to close at 1347.32. As you can see, nothing too disastrous but what we have to work out is, could this be the start of something big in the wrong direction?

The triggers for negativity came from concerns that India and China have inflation problems that will need higher interest rates and an economic slowdown to make it happen.

This knocked onto commodity prices, hurt the likes of BHP Billiton and ricocheted into the Oz dollar, sending it down solidly.

Commodity prices fell amid concerns of an economic slowdown in India, China and the US, on news of weakness in the service sector and jobs.

Adding to the gloominess was a weaker-than-expected private sector jobs report and the Institute for Supply Management's services index fell to 52.8 in April from 57.3 in March. This was much lower than expected.

Market to move lower?

My favourite tech analysts say the market is heading down and I wouldn’t be surprised to see this persist for a month or two until we find a reason to break out to the high side again.

By the way, oil prices are falling, which won’t help our share indexes but it helps the real economies of the world as oil is an important production cost.

Buying opportunity?

So my reading of what is going on is that the market should have a few challenges in the coming months and this creates a buying opportunity. However, the long-term trend still looks positive based on earnings and the expected trajectory of the US economy.

One US analyst who has been on the money for two years is Tony Dwyer, chief equity strategist at Collins Stewart and he told CNBC overnight that he sees the S&P 500 going to 1500 this year “and I still think this is too low”, he added. That means he can see another 11 per cent left in the market for the rest of this year.

This is based on his belief that company earnings largely drive share prices and I think he’s absolutely spot on.

Watch China

Of course, if China implodes, it will hurt earnings of companies right around the world but I think the Chinese are acting responsibly and are trying to engineer a slowdown instead of courting a potential hard landing. There’s speculation that China will again tighten its monetary policy and this has hit shares.

As Bloomberg reported: “The Hang Seng Index dropped 1.4 per cent to 23,315.24 in Hong Kong, the biggest loss in percentage terms since March 17. The benchmark measure of Hong Kong stocks has fallen 3.4 per cent in the past six trading days, the longest stretch of losses since August. The slump has pared the year-to-date advance in the index to 1.2 per cent.”

If China was not acting like this, I could see some merit in the Chanos China view.

All of this makes me think, as I predicted some weeks ago, we’re in for a choppy ride for a time but I think this will provide rally believers with a buying opportunity.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Thursday, May 05, 2011

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