Current forecasts: 6% growth. Current situation in sectors previously driven by China: below bottom. Commodities are easiest to track, nothing good is going on there. Spot shipping prices, according to CNBC talk, are below costs. Good information from Diana Shipping Inc (DSX): Fleet Employment. As you can see, 7 of 12 Panamax class ships don't have contracts beyond Feb 2009, which is 3 months from now. A year ago, all ships were contracted at least one year forward. This is one of the best dry bulk carriers in the world!
Then we have the stimulus package from the Chinese government. It's scary. It tells me that building activity in China stopped cold and needs government money to continue. The package itself is OK, it will help the economy. But the only possible reason for it is a hard drop of business building activity. Half a year ago, China was building like crazy. That's the country which produced half of the steel in the world and consumed most of it. Businesses stop building for one reason: they don't need extra capacity. Which means: they don't see growth in the near future. If the recession in Europe and USA spreads to China, we might get full blown global depression.
I might be too scared right now. But there are good reasons to be scared. Total lack of reliable economic data from China doesn't calm me down.
Can we make money from this? The best I can come up with: don't buy any Chinese stocks or companies with sales in China. Wal-Mart (WMT) can get better deals from suppliers, one more reason to invest in it.
Full disclosure: at the time of publication author did not have any positions in DSX, WMT or any China based company. Positions can change any time.
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This article has 20 comments:
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investor88
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732 Comments
Nov 17 07:56 AM-
Echo To All
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78 Comments
My Website
Nov 17 08:26 AMprobably not. the export activity came grinding to a hault, and the domestic consumer driven aspect of the chinese economy is not large enough yet to smooth out chinese economic activity. So they created this massive stimulus, which they can easily afford. A most likely scenario of their stimulus package will be that their domestic consumer economy will be in overdrive, which is in direct conflict with the thesis of ur article.
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Bo Peng
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64 Comments
My Website
Nov 17 08:57 AM1. Their banks do have some shaky assets which will get worse as the economy slows, but look like angels compared to those in the developed world. There's no chain reaction mechanism tying the real economy to the banks. It's to a large degree an isolated problem, and a much smaller problem. Nothing the government/GDP can't handle.
2. There's a housing bubble there in the process of busting. But it's nothing like the ones here and in Europe. There's no subprime or Alt-A. Some here have compared the housing price to income ratio in US vs China. Those people obviously know little how the newly emerging home-owner class in China live, their day-to-day cost structure, and where their real income come from.
3. The oversized package doesn't mean, as you feared, that everything stopped cold. It's not. It's the Chinese government's way of showing their resolve and capacity in avoiding China becoming a victim of contagion. The message is this: if the world stops consuming, then we'll create some consumption to get through the worst time. Many governments would like to send similar messages, unfortunately not many have the same back-up, therefore carry similar credibility.
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jse17
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53 Comments
Nov 17 09:10 AMBottom line, worry less post secular market crashes and increase your ultimate profits! Your progeny will thank you.
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Josh Stern
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75 Comments
Nov 17 09:36 AMIn earnings reported over the last two months, results from domestic focused Chinese companies are holding up a lot better than the overall market while the stocks are doing a lot worse than the overall market - a good percentage are posting huge year on year gains while the stocks are down 50-90% and trading at outrageouly low valuation levels relative to trailing earnings/sales/cash flow/liquid assets. At the same time, many domestic facing Chinese companies reported blowout earnings, though many also cautioned about a sudden demand drop in October that clouded near term forecasts. From everything I've read, the lack of bank lines of credit for importers continues to be a huge problem for international trade and hurts Chinese exporters and manufacturers. At the same time, this factor is presumably temporary and causes indices like the Baltic Dry to severely underestimate even current low cyclical end demand for dry bulk shipping.
Taking all of the above together, I see the category of being a domestic facing Chinese company as currently a big investment plus when looked at purely from a macro POV. Bears counter that they think fraud is much more widespread. I don't see fraud as being plausibly common enough to come anywhere close to making up the huge discount in valuations these companies are getting now. I'd suggest instead that they deserve some discount because the immature investment culture tends to result in mgmt. that sees investors as more of a source of potential/past funding and less like actual owners of the company. As a result, I don't see valuations getting to par until dividend paying, share buybacks, and corporate buyouts become much more common than they are at present. But valuations are so compressed that Chinese companies still represent excellent opportunity for investors with longer time horizons.
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finmah@yahoo.com
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46 Comments
Nov 17 09:38 AMChina is very large and more basic ala America in the 40's. This will be the test if they are another export based economy like Japan or something else. I am betting on the latter if one goes by history. They aim to be the crossroads of markets. Watch their chip and biotech industries they are getting tired of basic industrials. It will not take much if a few tech companies explode out worldwide with innovations. (We will still be debating vouchers for school systems). That will change peoples mind from hanging around the docks to gauge sentiment.
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Tom B
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1765 Comments
Nov 17 09:59 AMOn Nov 17 09:38 AM finmah@yahoo wrote:
> If one were to follow your logic - the collapse of China and global
depression.
> The conclusion is quite meager - buy stocks around China's
economy.
> But didn't you just say that the collapse would finish off
nations
> already weakened by recession. I would say you should recommend
shorting
> if a global depression is coming.
>
> China is very large and more basic ala America in the 40's. This
will
> be the test if they are another export based economy like Japan or
something
> else. I am betting on the latter if one goes by history. They
aim
> to be the crossroads of markets. Watch their chip and biotech
industries
> they are getting tired of basic industrials. It will not
take
> much if a few tech companies explode out worldwide with
innovations.
> (We will still be debating vouchers for school systems).
That
> will change peoples mind from hanging around the docks to gauge
sentiment.
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Dr Pandey
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5 Comments
My Website
Nov 17 11:16 AM-
James Wilson
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133 Comments
Nov 17 12:53 PMSo many insiders sold a lot of stock between may and sept in every stock I have looked at so far.
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fran
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234 Comments
Nov 17 01:10 PMand after this past year with usa financials,etc and recent ppi/cpi/employment gov't data, and recent gov't TARP demonstration/explanat... feel comfortable with WHOSE data?
what is your case that any gov't data is acceptable??? from any country??
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jepittman
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268 Comments
Nov 17 02:57 PM-
skipper
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13 Comments
Nov 17 03:08 PMWith regard to the Chinese, we should have learnt by now not to underestimate them. Brazil, where I live, has a very active steel industry (and of course is fortunate enough to sit on billions of ton of high FE content Iron ore). The annual production of steel in Brazil is equivalent to one month's production in China.
Another important consideration is that China is not a democratic country which makes the business of implementing economic policies an absolute doddle compared to the West. Just look at the dilemma facing Obama with Detroit - one of his core electoral bases. He can't afford not to bail out the automobile industry there. The Chinese would have no such qualms. I'm not saying that is good but it is the reality.
Brazil's big mining company Vale tried to strongarm the Chinese into increasing the price of iron ore as recently as 3 weeks ago. Now the Chinese have Vale eating out their hand and delivering the stuff to China free of freight.
The Chinese alone could probably kickstart world trade back into action but I believe they are sitting back taking advantage of the drastic 'realignment' of prices in order to make their move.
On Nov 17 09:36 AM Josh Stern wrote:
>
>
> In earnings reported over the last two months, results from domestic
> focused Chinese companies are holding up a lot better than the overall
> market while the stocks are doing a lot worse than the overall market
> - a good percentage are posting huge year on year gains while the
> stocks are down 50-90% and trading at outrageouly low valuation levels
> relative to trailing earnings/sales/cash flow/liquid assets. At the
> same time, many domestic facing Chinese companies reported blowout
> earnings, though many also cautioned about a sudden demand drop in
> October that clouded near term forecasts. From everything I've read,
> the lack of bank lines of credit for importers continues to be a
> huge problem for international trade and hurts Chinese exporters
> and manufacturers. At the same time, this factor is presumably temporary
> and causes indices like the Baltic Dry to severely underestimate
> even current low cyclical end demand for dry bulk shipping.
>
> Taking all of the above together, I see the category of being a domestic
> facing Chinese company as currently a big investment plus when looked
> at purely from a macro POV. Bears counter that they think fraud is
> much more widespread. I don't see fraud as being plausibly common
> enough to come anywhere close to making up the huge discount in valuations
> these companies are getting now. I'd suggest instead that they deserve
> some discount because the immature investment culture tends to result
> in mgmt. that sees investors as more of a source of potential/past
> funding and less like actual owners of the company. As a result,
> I don't see valuations getting to par until dividend paying, share
> buybacks, and corporate buyouts become much more common than they
> are at present. But valuations are so compressed that Chinese companies
> still represent excellent opportunity for investors with longer time
> horizons.
>
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Stone Fox Capital
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94 Comments
My Website
Nov 17 03:49 PM-
Pipo
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266 Comments
My Website
Nov 17 05:50 PMjimrogers-investments....
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fawnpass
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8 Comments
Nov 17 10:17 PM-
jegan ;-)
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760 Comments
Nov 17 10:31 PMThe author has some very valid concerns. Just because his opinions aren't backed up by fancy charts, or quotes from 'Bogle' or 'Templeton' doesn't mean that he is incorrect.
I'm invariably impressed at how many posters spew out the flavor of the day. Just because everyone is hanging their hopes on China doesn't mean that China is going to oblige. They have stated quite clearly that they are not interested in bailing out the rest of the world. They intend to focus on their own problems. And they do have problems. Consider the one child per family program. Where is the next generation of workforce coming from, Who is going to pay the Social Security, or support their greying population? Does anyone really think they have a handle on their polution problems? Their lack of anything like an FDA? Are you aware of their internal banking problems, and what we would consider fraudulent practices? What about their collapsing real-estate values? Who do you think they are going to sell their products to? How are you supposed to value their businesses if they don;t report in an understandable fashion? What about their untried quasi Communist-Commercial politics?
I think that if we enter a world-wide recession, China is going to suffer as much as anyone else. Further, I expect (based on many reported incidents) that they will have some very intense outrage on the part of their citizenry.
jegan
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Chinese Zodiac Marriage Combina...
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32 Comments
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Nov 18 12:26 AM-
Chinese Zodiac Marriage Combina...
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32 Comments
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Nov 18 12:28 AM-
Chris B
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527 Comments
Nov 18 12:02 PMUS
-losing the Iraq war at a cost of trillions of dollars and thousands of dead.
-bailing out GM/Hummer, et. al. and their failed products.
-bailing out the owners of subprime debt investments to try to prop up housing prices/costs.
China
-infrastructure: ports, roads, railroads, mass transit
-education, world-class universities, high literacy
-technology
-energy security
Based on these trends alone, we can see that the US will have a negative long term ROI and China will have a positive ROI. They are pursuing the same path the US pursued in the early 20th century, and as a result will be the dominant empire of the 21st.
Note that this does not mean that naive US investors will earn anything there.
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Asbytec
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230 Comments
Nov 23 10:41 AM