The Shanghai Composite fell 6.7% this morning!

I mentioned our love of FXP (ultra-short China)in ourAugust Market Reviewand the short sale of FXP puts (a bullish play) was our primarycover in the last $100KP since early August for exactly the reason we are seeing play out today. Of course China’s problems were my theme on Friday and on 8/16 we warned that China’s GDP wasn’t real and on 8/7 we pointed out that China’s 2009 growth was nothing more than an accounting trick after my August 6th article in which I pointed out that GS was desperately working to pump China up at the top (likely while they were dumping their own shares on unsuspecting suckers).Do funamentals matter? Sure they do — evenutally. But we had to roll andDDour AugustFXP short puts (big winners now)as it always pays to remember the words of John Keynes: “The market can stay irrational longer than you can remain solvent.”

We nailed the move in the Shanghai, which is nowdown 25% since we turned negative on it but the Hang Seng, which is much easier to manipulate as it’s controled by foreign IBanks (our beloved gang of 12), has mysteriously flatlined near their August highs, maintiaining the myth of the Chinese recovery so Uncle Rupert could run his almost daily articles telling youhow great the global economy is on the other side of the world, where you can’t see it. Interestingly, in China he’s running stories telling them how the US economy is leading the way back and in Europe he has total control of the media so whatever he wants to tell them is the truth anyway.

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China stocksLer’s see how rational the markets get as mainland China falls to it’s lowest level since May and let’s keep in mind that “limit down” on the Shanghai is 10% so a 6.7% drop in one day indicates that scores of companies were likely halted at 10% down. It’s going to take some really big plate spinning by GS et al to get this one back on track. As I keep saying – the one thing “THEY” can’t fight is a volume sell-off, that is just beyond their phsical ability to manipulate so we’ll be keeping a close eye on market volumes to see to what extent the US markets are likely to participate in…
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