Stock Market: Shanghai Blues - An Invitation?

This morning the stock market in Shanghai fell to its lowest level since 2009 (bloomberg). This is surprising because the economic indicators suggest that China`s economy has reached its bottom in the 3.rd Quarter and is now gaining speed again (reuters). Industrial companies’ profit grew 20.5% in October, while factory output and exports both rose last month by the most since May, reports Bloomberg (bloomberg).

But the Chinese stock market market ignores all this improvements. Regarding to Bloomberg Chinese investors are very gloomy and have "no confidence in long-term growth prospects" (bloomberg).

This reminds me of spring 2009 as stocks on Wall Street fell in a deep hole. The sentiment then was equally gloomy and many dumped their stocks because they didn`t believe in a economic recovery. With the benefits of hindsight we know that the gloom & doom created a huge opportunity. Since spring 2009 the US stock market, represented by the S&% 500, gained more than 100%.

I reckon that the Chinese stock market offers now similar rewards. The gloomy sentiment & the ignorance of the economic improvement create very low prices which are very good opportunities. The Shanghai stock markets trades at 9.5 times estimated profit for 2012, compared with the 17.7 average multiple since Bloomberg began compiling the data in 2006 (bloomberg). I reckon that the Chinese economic improvements will continue in the coming months and will lure the investors back to the stock market.

Investing: Hedge Fund Managers - Just A Bunch Of Swashbucklers?

Hedge fund managers are the rock stars of the investment world (money-markets-blog.amazon.com). The whole industry is called "smart money"; they often juggle with billions of dollars and collect absurdly high fees. Journalists are gluing at their lips and are quoting any comment of a hedge fund manager as it would be the epiphany of a messiah.

But in reality hedge funds don´t rock much. In fact, their performance is quite pathetic. This year hedge funds underperformed severely compared to the S&P 500, which represents the US stock market: "The average hedge fund has made its clients 4.86% this year, data from industry tracker Hedge Fund Research shows, far below the 12 or so % investors would have got if they bought a fund tracking the S&P 500", wrote Reuters on November 2nd (uk.reuters.com/).

And this isn´t an exception. "Over the past three years the average fund is up less than 4 percent while the S&P 500 is more than 30 percent ahead" (uk.reuters.com). Joe Sixpack who bought just an ETF on the S&P 500 and has been sticking to it (buy-and-hold strategy) did much better.

Also striking is a comparison of the total returns of the HFRX Global Hedge Fund Index versus the Vanguard Total World ETF, which represents a global stock investment.  "Had you invested $10,000 in both indices at the beginning of 2009 when the global economy was starting to recover you would have a total return of 11.12% in the HFRX versus 53.41% in the Vanguard Total World fund", writes the blog Pragmatic Capitalism (pragcap.com).

This underperformance signals that there must be something wrong with these allegedly rock stars.

The continuous underperformance shows that the hedge fund majority has been too pessimistic. They have been underestimating the recovery of the global economy and ignoring signs of strength like the solid US consumer spending. The fact that the bulk of the hedge fund managers have been missing the opportunities for years shows that they lack the superior economic understanding they claim to own.

Many of the portfolio jugglers have a very short time horizon. They don care much for the long term growth of the economy and are ignoring the merits of long term investing. Instead many hedge fund managers are just betting on short term events and alleged opportunities. This leads very often to mistakes and causes high costs - at the expense of performance.

Many hedge fund mangers are simply following the herd (michael-roberto.blogspot.de). They buy when others purchase and they dump when others sell. Hence they very often liquidate their assets on weak days and buy them back on strong days - which causes hefty losses of course.

In face of their failures hedge fund mangers usually are making a lot of noise and appear in the public as allegedly financial gurus. This seems to me as the typical behavior of people who overestimate themselves. Maybe we should just call the average hedge fund managers just "swashbucklers".

Economy: A Virtuous Circle?

It looks like that the economic recovery is speeding up again - at least in the US, the leading economy of the world. On Friday we got news that the job growth there is accelerating. "The U.S. created a better-than-expected 171,000 jobs in October and hiring rose faster in prior months than previously believed", reports Marketwatch (marketwatch.com). "Revisions added a total of 84,000 jobs to the employment count in the previous two months and brought average gains since June to 173,000", writes Bloomberg (bloomberg).

The job market is predominantly fueled by the solid consumer spending I have been frequently reporting on this place. Many retailers, car producers and other consumer focused companies are hiring to keep up with the rising demand. They are responding to the solid retail sales and car purchases of the recent months.

In turn the solid job growth fuels the consumer demand again because people get more money for purchasing. I reckon that this leads to a virtuous circle in which job market and consumer demand are amplifying each other. This should bring the whole economy on a solid growth track and could fuel further gains on the stock market.

Stock Market: Looking Forward To Christmas

Being an investor I`m looking forward to Christmas. The reason: This morning we got news that "retailers generally posted better than expected same-store sales reports in October, adding to conviction that consumer confidence is indeed increasing in the U.S. Excluding drug stores, same-store sales rose 4,7%, ahead of expectations for 4.3% compiled by Thomson Reuters" (blogs.barrons.com).

The encouraging retail sales are a good omen for the coming holiday business which usually kicks off in the last week of November. The numbers for October promise solid holiday sales that could strengthen the sluggish economy.

Helpful is the job market, which is healing as today´s job market numbers show. More tailwinds are delivered by the recovery of the home market and the gains on the stock market in the recent 12 months.

I reckon that a good holiday reason isn`t priced into the stock valuations yet and should therefore fuel more gains on the stock market.