The Shanghai Composite Index soared by 8% last week to its highest level since 2008 and is up about 130% over the last year.
The Shenzhen Composite Index jumped by 12% last week and is up 166% over the same period and is now trading at 66x earnings according to Bloomberg, three times the level of the Shanghai Index.
How do you spell "bubble" in Chinese?
In China, the "Casino" Was Open Last Week
What caught investors' eyes last week was the plunge in Hong Kong listed Hanergy Thin Film Power Group's (OTCMKTS: HNGSF) stock, which collapsed by 47% and cost China's richest man $15 billion.
Hanergy is a maker of thin-film solar panels whose stock has soared by 600% over the last two years. The company is controlled by privately held Hanergy Group, which is headed by founder Li Hejun, who was listed by Forbes as China's richest person before last week's stock collapse. Most of Hanergy's sales are made to its parent company, which should raise questions if anybody was worried about the fundamentals of the company. But in China's stock market, fundamentals don't matter. The only thing that matters is momentum and whether the government is perceived to be supporting a stock. This isn't investing, it is gambling.
While the millions of uneducated Chinese who are opening trading accounts may not know better, American investors should know better. Yet U.S. investors got burned by Hanergy last week nonetheless. A U.S.-listed exchange traded fund (ETF), Guggenheim Solar ETF (NYSearca: TAN) held 12% of its $439 million of assets in HNGSF stock and lost 8.6% on the week. Investors need to understand their ETF holdings to avoid these kinds of blow-ups.
Stocks are Expensive and Fed Meddling Won't Help
Back in the U.S.A., markets were quiet. The Dow Jones Industrial Average lost 41 points or 0.2% to close at 18,232.02 after closing earlier in the week at a new record of 18,312.39. The S&P 500 rose 3 points or 0.2% to 2,126.06 after also hitting a record high of 2,130.82 a few days earlier. The Nasdaq Composite Index, powered forward by Apple, Inc. (Nasdaq: AAPL), added 41 points or 0.8% to 5089.39.
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