A Look At China and The Shanghai Composite

The Shanghai market has made a vast amount of people some very good money.

It seems that everywhere you turn you here this pundit and that pundit talking about all the

opportunities in China and how these opportunities have just started to be tapped.

All of this is true, it was never a question of the long term viability of china's developing into the 21st century.

The question is..... Are the current valuations in Chinese companies in line with their fundamentals? Is the Chinese Market Overvalued?

These questions I really cannot answer because what is going on in China and how it is unfolding is a rather new event.

I do know this though. Through all of this time, there really has not been a strong hiccup in prices. You know, those scare declines that make everybody think the bubble has burst and the world is coming to an end.

Sure, the Chinese market has had a 10% correction here and a 10% correction there, but really nothing on the panic side. We know from past markets, whether foreign or domestic, that panics are all part of the system and actually are a necessary evil to keep thing balanced.

If you look at the current chart of the Shanghai Composite and then the S&P 500 in 1987, you see a rather eerie correlation between the two. It is not perfect, but the general structure seems to fit very well.

So what does this all boil down too?

Well, if I have a heavy exposure to Chinese stocks, I would certainly decrease my allocation considerably, perhaps get out of them altogether.

Then wait for the potential meltdown in prices and jump back aboard.

What about the effect this would have on our markets here at home.

Notice that the fallout from a debacle in the Chinese market typically only has a very short term effect on our markets. Sometimes our market just shrugs it off completely.

However, if the Shanghai is to decline in the manner that our equity markets declined in 1987, we would be foolish to think that there would be no carryover into out indexes.

However, I think the spill over will be very limited, 3-5% and being as Chinese stocks should be on the order of a fairly quick recovery (3-5 months), our markets should be able to whether the storm. It may just coincide with a test of the most recent lows in the S&P 500, but time will have to be the judge on that one.

Personally, my exposure to Chinese stocks at this writing is a big fat goose egg.

To much correlation for me and to much current risk.

There are better places to put your money right now, like right here at home.