STOCK ISLAND

[Jaxon2010]

Here's extreme intervention! From Dent's weekly.

Chinese Equity Markets Freefall, Then Rebound… Chinese stocks appeared impervious to government intervention, falling day after day even as the government introduced new measures to stop the carnage. The markets finally turned around when the government announced it would criminally prosecute “malicious” short sellers.

What it means – For a while, it seemed like there might actually be limits to what governments can do. Chinese officials provided brokerage firms with billions of dollars to buy stocks, but that didn’t stop the rout. Then the government provided new margin funds so investors could borrow more to buy equities, but still no relief. So the Chinese banned their national pension fund from selling equities, banned their newspapers from using phrases like “mounting stock market losses,” halted trading in stocks that fell more than 10%, and banned large shareholders from selling. None of it worked. Then they got nasty.

The government announced it would prosecute “malicious” short sellers. What makes a short seller malicious versus simply astute? That’s up to the government to decide. And they won’t tell you until after your arrest and conviction. The Shanghai index fell another 3.8% on Thursday before the announcement on short selling. Afterwards, it rose 5.8%, for a round trip of 9.6% in one day, and bounced even higher on Friday. It’s anyone’s guess if it will hold.

With property prices in the deep freeze and equity prices falling off a cliff, there aren’t many places for the Chinese to create another asset bubble. This could be the beginning of a major leg down in developing markets. Commodities are already dumping, since it looks like the Chinese economy won’t bounce back anytime soon.

Be careful in Australia, particularly in the property markets. If commodities keep falling and things get worse in the land down under, then the incredible housing bubble in Australia could finally burst. When it does, it’s going to hurt!