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Chinese Bubbles

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05/31/2007

It seems like every week we have some news out of China which affects the rest of the world's markets. In last week's Alert, we addressed the U.S.-China trade talks and how that could influence the market. We also told you that when China sneezes, the world now catches a cold. Well, it didn't take long for our China thesis to be born out.

Chinese stocks plunged earlier today after the government raised a tax on share trades. This apparent effort to try and cool the booming Chinese stock market stems from concern that prices are just too inflated. Read another way, it means that Chinese banking officials are worried about a bubble. The main Shanghai Composite Index tumbled 6.5% on news of the tax. The Shenzhen Composite Index for China's smaller second market fell even more, closing the day down 7.2%.

"This policy change reveals the government's concern about a possible stock market bubble," said Minggao Shen, a Citigroup economist, during an interview with the Associated Press. Hey, there's that dreaded "bubble" word again.

I guess it should come as no surprise that China's market dropped sharply on negative news. After all, the Shanghai Index is up over 50% for the year, and that's following an incredible 130% jump in 2006.

Interestingly, China's market gains have been fueled by solid corporate earnings and a deluge of money from millions of new individual investors in China who have abandoned savings accounts in search of big returns in stocks.

I recently read a stunning statistic that the number of Chinese stock trading accounts has risen to about 100 million, with tens of thousands being opened every day. My friends, if this isn't a recipe for a market bubble, I don't know what is.

In the above chart of the FTSE/Xinhua China 25 Index, we see that today's drop in Chinese stocks now has pushed the FXI down to its 50-day moving average (blue line). This fall toward the short-term trend line is often a precursor to more pain ahead and that pain could possibly extend itself into another bubble-like market -- our very own Dow Jones Industrial Average.

The Dow has been the strongest major market index this year, up 8.6% year-to-date. On a short-term basis, however, the Dow has registered a Moving Average Convergence/Divergence (MACD) sell signal (see chart below). This is a trading tool followed by many analysts on Wall Street, and it's when the MACD's black line dips below the red line.

Because of this and other technical signals that indicate a pending sell-off in the extremely overbought Dow, I've been prompted to take a short position on the Industrials in my ETF Trader advisory service. If we're right about the Dow and its potential sell-off, we stand to gain big profits over a short period of time, as corrections in an overbought sector are often fast and furious.

Want to learn more about how to profit from short-term reversals in the market? Want to see how we use ETFs to leverage the trends in the equity, gold and currency markets? Then you'll want to click here to learn more about my ETF Trader advisory service.

Click here to learn more about ETF Trader

BLOGS AWAY 3

Most of you probably already know that I am no longer broadcasting a daily radio show. But that doesn't mean I no longer have much to say about the markets and other financial matters. In fact, I now record a special message to Alert readers each week on my new, free audio blog.

In this week's blog, I'll be discussing the hot topic of private equity. I'll explain what it is and why it matters to the markets and to you, the individual investor.

I'll also discuss interest rates and what's going on with the cost of money. Plus, I'll be covering the ins and outs of investing in emerging markets. If you are currently allocated to emerging markets, you'll want to tune in to find out about the potential warning signs in this high-flying sector.

To listen to this week's audio blog, click here.

ETF NEWS: HEALTHY HEALTHSHARES

One sector of the market I am really excited about is health care. The demographics of an aging population alone are reason enough to be bullish on health care stocks over the next decade. However, you don't have to stick with investing in the old, boring stocks of big pharmaceutical companies.

Thanks to a new ETF provider on the scene called HealthShares, you now can narrow the focus of your health care sector investing and thereby hone in on the hottest sub-sectors of the overall trend toward greater health care spending.

At the recent Las Vegas Money Show, I spoke with representatives from HealthShares about their company's new ETF offerings. These guys offer an impressive array of health care ETFs that specialize in things such as cardio devices, testing and diagnostic equipment and various other specialized medical fields. Below is a list of the 17 HealthShares ETFs currently available.

This list of tightly focused ETFs is by no means complete. In fact, the very smart people over at HealthShares have plans to expand their offerings at a very rapid rate -- meaning that there likely will be many more new health care ETFs on the market very soon.

In my opinion, we are at the very cusp of a huge bull market in health care. Let me quote from the HealthShares Web site regarding one reason why this sector is going to be so huge.

"A short 25 years ago, health care was only 6% of the nation's gross domestic product (GDP). Today, U.S. health care is a $2 trillion industry, representing 17% of the country's GDP -- the sector's highest proportion of U.S. GDP ever. The nation's health care bill has grown substantially by almost three times the overall national inflation rate to increase by 7.9 percent in 2004, the most recent year with near-final numbers. The overall cost of health care -- everything from hospital and doctor bills to the cost of pharmaceuticals, medical equipment, insurance and nursing home and home-health care -- doubled from 1993 to 2004. U.S. government economists are projecting that spending on health care will reach $4 trillion -- or 20% of GDP -- by 2015. The exploding cost of health care may be the single greatest economic challenge facing our country."

I totally agree with this analysis, and it's just one reason why I like health care and the HealthShares funds.

If you are interested in finding out more about what HealthShares has to offer, I invite you to go to the company's Web site.

COMMON ANNUITY QUESTIONS

I am pleased to report that my annuity coaching sessions have been a huge hit with those of you who I have spoken with, and quite frankly, and me, too. You see, when I learn from you what's on your mind with regard to annuities, I am able to better address the wider audience out there that most likely has similar questions and issues with their own annuities.

In conducting these coaching sessions, I've found that two big issues continue popping up. The first is whether clients should buy index annuities, which promise to keep a lid on losses and which offer big stock market gains. The answer is complicated, but one way to help answer the question is to cast a skeptical eye on things.

Think about what's in it for the annuity salesman. He or she likely is going to make a commission north of 10% through the sale of an index annuity. If you opt for this investment, you'll also be saddled with severe surrender penalties if you decide to get out of this account before the agreed upon 10-year holding period. In my opinion, this investment is a bad deal. I say stay away from index annuities all together.

The second-most discussed topic coming out of my coaching sessions involves annuity rollovers. Should I move my annuity to the latest offering from my sales guy since my surrender charges are up? My answer is no, no, no, no, no. Did you get that?

You see, annuities pay their sales agents big commissions. If you're hearing from a bozo salesman who wants you to rollover your annuity, you're just getting hit with another round of big sales commissions. Fortunately, there are other options such as no-load annuities. If you are getting swamped with annuity sales pitches, please call me for a second opinion. I don't sell annuities, but I do advise you on how they can best be used.

Remember that understanding annuities requires experience and knowledge. I want all my Alert subscribers to know all of their options before making decisions. If I can help you with your annuity questions, please just pop me an e-mail and let me know.

If you would like to get your FREE annuity coaching session with Doug Fabian, simply send an e-mail.

ON CIRCUMSTANCES

"He is happy whom circumstances suit his temper; but he is more excellent who suits his temper to any circumstance."

—David Hume, philosopher

Whenever you're faced with a challenging dilemma, be it financial or otherwise, it may behoove you to remember the words of the great Scottish philosopher David Hume. You see, how we react to circumstance often determines our ability to make decisions conducive to a favorable outcome. Suit your temper to circumstance and you'll be one step closer to making the world in your image.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.

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