Tag Archives: China

bird flu: investment implications from the SARS experience

May 9, 2013 By in Current Market Thoughts, Portfolio management, Stock ideas Tags: , , , , , , , , , Leave a comment

coronaviruses

Three times in the past decade we’ve had global flu pandemic scares from coronaviruses:

–SARS in 2002-03

–H5N1 in 2008, and

–H7N9 currently.

I don’t know enough to say any more than that in each case the disease is carried by birds or animals and transmitted to humans through contact,  Contact can come either from physical proximity to live animals or from eating undercooked meat.

The truly dangerous development would be a virus mutation that allowed the disease to be transmitted from an infected human to other humans.  In the case of H7N9, this possibility hasn’t been ruled out, but the evidence for or against appears to be unclear.

SARS

The S&P 500 dropped by about 10% once the threat of SARS became apparent;  the Hang Send fell by closer to 20%.  The emergence of the following two viruses have been greeted mostly with yawns.  Still, I think it’s worth looking back at the SARS episode to remember what happened then–just in case H7N9 takes a negative turn.

Beijing

One key difference between SARS and the others is that the government in China, where all these flu strains have originated, initially tried to cover up the SARS outbreak.  That allowed the disease to spread for months before any systematic action was taken to combat it.  And even then China didn’t want to release details to the international medical community about how bad SARS had become.  And it rebuffed foreign offers of medical cooperation and assistance.

As a result, before the spread of the disease was controlled through quarantine, 8,273 cases of SARS were reported, the vast majority in China and Hong Kong.  About 10% of those infected died.

Beijing’s attitude is now completely different.  China has already supplied virus samples to world medical agencies so they can begin work on possible vaccines.

what a repeat would mean for stocks

Economically, what would a repeat of the SARS experience look like?  Here’s what I think:

1.  World GDP growth would slow down.  Factories in the affected areas would cease production, with employees possibly quarantined.  As in the case of the recent floods in Thailand, we would doubtless find that shuttered manufacturers made some low value-added, but nevertheless key, industrial components that would force work to be curtailed all through the supply chain.

2.  International trade would decrease markedly.  Export destinations would be reluctant to accept shipments of goods for fear of contamination.  transport hubs wouldn’t want to handle cargoes.

3.  Global travel would come to a screeching halt.  Travelers would fear being infected while on aircraft.  For the same reason, no one would want to receive business visitors, especially from affected areas.  Less obvious, though most important, travelers would fear being quarantined–possibly for months–at a foreign destination and not allowed to return home.  That could reduce their work effectiveness, as well as potentially forcing them to remain in an area where medical care might be sub-par.

stock market effects

In the SARS case, stocks stayed depressed for around three months.  They began to rebound once signs emerged that quarantine was effective and the virus was coming under control.

Back then, stocks in Hong Kong were hurt across the board (in today’s world, the biggest losers would likely be the casinos in Macau). Industries badly hit around the world included, as you might expect, hotels, ports, airlines and all businesses in international tourist/business destinations.

Pharmaceutical companies, especially those with related expertise, did well.

Were H5N9 to mutate into a form that’s more dangerous than it is now, I’d expect the same general pattern to recur.

Let’s hope it doesn’t.

commodities cycles

April 18, 2013 By in Capital-intensive firms, Current Market Thoughts, Gold, Industry Analysis, Mining, Trading Tags: , , , , , , , , , 2 Comments

commodity rhythms

agricultural

The co-owner of one of the smaller investment companies I’ve worked for was a farmer.  He made me realize that there are no long cycles for most agricultural commodities.  If prices for a particular crop are high, farmers will plant more–usually a lot more–the following season.  That virtually guarantees that prices will either level out, or more likely fall.  The opposite happens–supply falls, and prices subsequently go up–if prices are currently low.

Considering that many crops have two or three growing seasons in a year, price adjustment comes swiftly.

metals

Metals mining, especially base metals mining, is just the opposite.  Mines tend to be gigantic projects, costing billions of dollars and designed to last 20 years or more.  Most of that money is spent up front:  for the mine itself, for all the drilling machines and other earth moving equipment, for the ore processing plants, for the roads or rails to tap into a country’s established transport infrastructure, and maybe even for new sources of electric power.

Because the optimal project size is “humongous,” mines tend to spew out very large amounts of output when they open.

Because–unless you’re very unlucky–the running costs are low relative to the initial investment, projects seldom shut down once they’re up and running.  They normally don’t even consider doing so unless the output price falls below out-of-pocket extraction costs.  And even then a mine may not shut down.  Miners always identify pockets of especially rich ore that they set aside for a rainy day.  So the first response to weak pricing it to turn to these high-grade areas in order to keep going–and spewing even more price-depressing output on the market.

In addition, some emerging countries run their mines to create employment and get foreign exchange.  Because whether they make money or not is a secondary concern, such mines almost never shut down.

The result of all this is a supply/demand dynamic somewhat like the farm one I sketched out above.  When times are good and metals prices are high, miners generally spend their cash developing new mines.  This creates periodic overcapacity when supply outstrips global industrial demand as all the new mines open at once.  But, unlike the case with soybeans or corn, excess capacity doesn’t disappear come winter.  Instead, it can stay for a decade.  What cures the oversupply is the eventual expansion of the world economy to the point where it can use all the raw materials being produced.

an example

I was a starting-out analyst when a supply-demand imbalance sent base metals prices skyrocketing in 1980.  I remember copper briefly hitting around $1.40 a pound and bringing previously loss-making capacity back onstream.  The price almost immediately fell back.  It took nine years for demand to expand to the point where it absorbed all available supply–and for the price to regain that 1980 high ground.

Another wave of new capacity pushed the price back down in the mid-1990s, where it stayed again until sharply climbing demand from China absorbed all the new output.  The price began to rise again in 2003.

For most metals, this pattern of feast and famine is common.  It’s not alone.  Chemicals and shipbuilding are the same way.  The common threads are:  commodity industry; long-lived assets with most of the capital in up front; capacity additions coming in large chunks.

Try to find a copper chart that goes back to the 1980s.  It isn’t that easy–suggesting to me that commodities traders aren’t as up on their history as they should be.

investment significance

I think that for base metals, and maybe for gold as well, we’re deep in the end-game transition from fat years to lean.  It has less to do with the state of demand in China than the state of supply among mining companies.  If I’m correct, time–and the accompanying gradual world economic expansion–is the only cure.

a falling gold price–what does it mean?

April 15, 2013 By in emerging markets, Gold, Industry Analysis, Recent Market Action Tags: , , , , , , , , 3 Comments

Back in the day, I was, among other things, a gold mining analyst.  That period left me with an enduring fascination, not about the yellow metal itself, but about gold “bugs”–the people who are obsessed with gold and who buy it as an “investment.”  I have the same complex mixture of feelings about gold bugs that I have about survivalists, Civil War reenactors, model railroad buffs and people from Brooklyn.  It’s not exactly “There but for the grace of God…”, but that’s the general direction.

I really don’t get gold as an investment.  Yes, it’s shiny and there may actually be gnomes in Zurich.  Until the mid-1970s, gold did serve as a kind of money worldwide.  But no longer.  One exception:  developing economies where either there are no banks for businesses to use, or where people don’t want/trust banks to know about their finances.

Contrary to what I think is popular belief in the US, virtually all the demand for gold comes from the developing world.  The US accounts for 5% of purchases, the EU 10%.  Japan is a non-factor.  Last year, as usual, India was the #1 buyer of gold, at 28% of the total.  Greater China took 25%.

Before the Great Recession, the large bulk, maybe 3/4th, of the world’s demand for gold was for jewelry (although much of this did double duty as chuk kam 99.9% gold trinkets). 10% was for technology or dentistry.  The rest was gold bars and coins bought as an “investment.”  The bulk of that demand was supplied by mine production, with the rest coming from recycling and steady selling by central banks in developed countries.

The GR changed that pattern, in two ways.  Demand for gold bars and coins more than tripled.  Central banks in the developed world stopped selling, while their counterparts in emerging economies began to buy gold like there was no tomorrow.  Between 2009 and 2011–which appears to have been the peak of this activity–the gold price doubled in US$.

Gold ETFs?  They peaked in 2009 at about 17% of world gold demand.  By 2011 they had shrunk to 4%.

What’s happening now?

The gold price has been slowly declining for two years, without attracting much attention, as panicky buying by gold bugs has waned.

What’s new is India.  The biggest drain on India’s growing trade imbalance is its citizens’ continuing demand for gold–both for jewelry and because the country’s banks don’t work.  New Delhi has decided to deal with the steady flow of cash out of the country by taxing gold imports.  At least to some degree, this will put the metal’s chief buyer on the sidelines.  That won’t stop mines from churning out the stuff, however, until/unless the gold price drops below their cash cost of production.  That’s a looong way down.

Elsewhere, “investment” demand appears to be waning.  Less significant in the short term, Chinese tastes seem to be slowly shifting away from chuk kam to fashion or statement jewelry with lower gold content.  And, of course, more dentists are using ceramic teeth and PC demand is slowing.

In other words, the supply/demand picture for gold is looking less favorable for prices.  The price decline has nothing to do with inflation fears in the US or EU subsiding, or renewed faith that either area is suddenly on a sounder economic footing.

Macau gambling and the Chinese economy

April 3, 2013 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Industry Analysis, Recent Market Action Tags: , , , , , , , , 1 Comment

March 2013 Macau gaming results

The Macau Gaming Inspection and Coordination Bureau has just released its report on the gambling take of casinos in the SAR during March 2013.  The figure is eye-popping.  Last month gamblers exited Macau;s gambling palaces with their wallets lighter by 31.3 billion patacas (US$3.9 billion).

how good is that?

–P31.3 billion is an all-time monthly record for casino win in Macau.

–It represents a 25.4% improvement over the comparable period of 2012.

–The year-on-year gain is the highest for the SAR since January 2012, after which the Chinese economy–and the Macau casinos–began to falter.

–March is also up 15%+ vs. February, which runs contrary to Macau’s (admittedly short) pattern of flattish month-on-month comparisons in the first quarter.

winners?

This is great for the Macau casino industry, and especially for the firms that have recently added capacity, mostly in Cotai, to accommodate extra gamblers.

At the same time, the Macau gambling results give us a good idea about how well-to-do Chinese citizens feel about their economy, their personal earning prospects and their degree of comfort with the newly-installed government.  It’s a solid thumbs-up on all counts.

The figures also suggest that in its newly-launched anti-corruption, anti-ostentation campaign, Beijing is aiming at much bigger fish than high-roller casino patrons.

Tiffany (TIF) reports so-so 4Q12 earnings

March 22, 2013 By in earnings conference calls, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

the results

Before the opening bell this morning on Wall Street, TIF reported 4Q12 (the company’s fiscal year ends in January) results.  Sales were up 4% year on year during the quarter, at $1.2 billion.  Net earnings were up 1% yoy, at $180 million.  That works out to eps of $1.40, vs. the $1.39 reported for 4Q11.  But it was $.04 above the brokerage house consensus of $1.36.

For the full year, sales were up 4% at $3.8 billion.  Net income was $416 million, down from $465 million in fiscal 2011.

In its earnings release, TIF also gave its first guidance for fiscal 2013.  It expects sales to be up by 6%-8% and eps to move roughly in line–but possibly with a touch of positive operating leverage evident later in the year.  1Q13 will be relatively weak (TIF fingers marketing costs and high raw material prices as the culprits), but earnings comparisons will likely improve from then on.

As I’m writing this, shortly after the open, TIF shares are up almost 3% in a market that’s up by about half a percent.

I don’t see why.

my take

TIF is an exceptionally well-managed company with a powerful brand name in the Americas and the Pacific, and in a business, luxury goods, that has strong long-term growth prospects.

This is the first time in five quarters that TIF results have exceeded the Wall Street consensus.  That’s a plus, although the “beat” is at least partly due to analysts’ low-balling their estimates after having whiffed four quarters in a row.

Management guidance of 6%-9% eps growth for fiscal 2013 is also a low-ball number, in my view.  I think +10% is easily attainable but believing in +15% would be a stretch.

my issue is valuation

I’ve owned the stock in the past but don’t now. Based on management guidance, the stock is trading at 20x year-ahead earnings, which is about as high as the PE has gotten over the past decade.

–Yes, there have been short periods when the multiple has spiked higher, but who wants to count on this happening again.

–Yes, there may be another, say, 5% to count on in the stock as earnings come in better than guidance.  But a professional investor should be looking for the potential +30%s and the +50%.  There’s just not enough upside here.

–Yes, there’s recurring speculation that some EU luxury conglomerate may buy TIF.  But, again, is this enough of an investment thesis?  In my view, no.  If the stock were trading at 15x earnings, however, it would be a different story.

what catches my eye in the release

TIF still doesn’t have its balance sheet completely back under control.  A while ago, when world economic prospects looked brighter, TIF decided to boost its inventories significantly.  That was so as not to lose sales for lack of stuff to sell, as well as to support a quickened store expansion plan.    …an aggressive, but very sensible strategy.

As global growth started to fade, TIF put on the manufacturing brakes.  But at 1/31/13, inventories were still $161 million higher than a year earlier.  And debt, net of cash, was up by $176 million.  That’s the reason, I think, why TIF bought back no stock during 4Q12, despite the fact the shares spent much of December in the mid-high $50s–vs. TIF’s full-year average buyback price of $66.54.

Comparable store sales in the Pacific, ex Japan and ex currency effects, were +6% for 4Q12.  I interpret this figure as saying sales there, which I view as the key factor that could make fiscal 2013 surprisingly good for TIF, have passed their low point.  TIF is penciling in a “mid-teens” total sales increase for the region–implying, I think, +10% for comparable store sales.  In a better Chinese economy and with clarification of the new government’s view on luxury goods consumption, that figure may be way too low.   If there’s one thing TIF bulls should monitor, this is it.  If there’s one thing that could change my mind about the stock, this is it.