Thursday, May 24, 2007

Greenspan sell-off

There are many reasons for profit-taking in the equity markets and a reappraisal of values. Today's sell-off is not because of that. Alan Greenspan, former Fed head, is choosing to use his considerable influence to impact the securities markets. There has, to the best of our knowledge, never been such a role taken by a retired Fed governor, and the celebrity of such an Alan/Andrea nexus

To the point. Greenspan yesterday said that the Chinese equity markets would eventually correct in a significant manner. That may be a good assessment, but it is not news. The New York intellectual, part of the late '40's and 50's Ayn Rand inner circle, has clout beyond any Fed role. While aging, the leadership of equity departments at firms like Neuberger Berman(now owned by Lehman) and Third Avenue Value(and many more) listen to him carefully. In libertarian New York, the largest capital market in the world, his opinion is really important. His point is not news. China is going through an equity bubble in its own equity markets which are not, and can not, be widely held outside of China. China is gearing toward the 2008 Olympics and almost every nation on earth wants them to succeed, because for China it is a coming out party that must succeed at all costs. Face saving deal big time. No problems from North Korea, no precipitous action on Taiwan, trade concessions with the U.S. in slow motion progress, it's in place for a couple of years. After that, it's not economic risk that's the issue, but political risk. If enough progress can be made in the interim on economic risk, the political risk diminishes. Go Hank Paulsen. Please shut up you self serving attention seeking Chuck Schumer.

Back to the point. China and the U.S. are in a symbiotic relationship that is beneficial for both(to be tackled in another post). A contributor, Doug Kass, described the China/Blackstone deal as bubble meets bubble. That may be a reasonable perspective, but it's not correct. China is an emerging market which will go up and down with more volatility than an established market, of course. On the domestic front it seems to be ahead of itself. Blackstone, a leader in the U.S. private equity market, is making rational decisions based on financial analysis and when access to capital markets pulls back they will pull back. There is nothing magic or mysterious here. China will participate in Blackstone's results and their own market.

The U.S. equity market is trading on earnings and growth prospects. Barring other factors mentioned in a prior post, it will continue to do so. China is an important part of the global economy, but their domestic stock market is not. Step back, and the issue is whether there is a bubble in some sectors of the U.S. markets. That's the issue. On a P/E basis assuming a slight positive bias to the future, there does not seem to be a problem. On an individual stock basis, some lucky folks are making a lot of money on individual stock picks. That luck may not continue but there is no immediate reason for market stability to be in doubt, Greenspan notwithstanding.


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