Tag Archives: China

thinking about 2016

October 19, 2015 By in Current Market Thoughts, Long-term themes, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

At present, world stock markets appear to me to be obsessively focused on the smallest details of the here and now.  This may be fine for short-term traders, but getting caught up in this mindset is the surest recipe for trouble for us as long-term investors.  Our biggest advantage against professional traders is taking a longer view.

So it makes sense that we should be shifting our focus toward the new year, even though (actually, because) I think the markets have yet to do so.

My thoughts (which will be presented in more detail in my yearly strategy posts in a few weeks):

interest rates

Rates will be somewhat higher a year from now than today.  The Fed, however, has made it clear that the journey back from emergency-low rates to normal–that is to say, from zero to perhaps 2% for overnight money–will take years.  In theory, higher rates make fixed income relatively more attractive to investors than stocks, mimplying that the stock market suffers price-earning multiple contraction.  I’ve written a number of times, and I still believe, that virtually all of this contraction has long since been factored into today’s stock prices.  Even if this is incorrect, next year’s rise is going to be quite small.  Absent a crazy panic, the potential headwind from PE contraction is likely to be extremely small.  

world economies

–the US will continue to be strong

–the EU has bottomed and will gradually strengthen, so next year will be better than this

–China ‘s transition from export-oriented growth to expansion led by domestic consumer spending is happening at a satisfactory pace.  While traditional economic indicators, which are generally speaking all focused on exports (the wrong place to look), continue to be ugly, overall economic growth next year will be at least as good as in 2015

–natural resource-producing emerging countries will continue to have troubles.  The main issue will not be lower commodity prices.  It will be dealing with excessive debt taken on when companies/governments believed in a perpetual commodities boom, and adjusting private/government spending downward to deal with lower levels of commodity income.

 

More tomorrow.

Janet Yellen, this week and last

September 25, 2015 By in China, Current Market Thoughts, Portfolio management Tags: , , , , Leave a comment

Fridays are strange days on Wall Street.  That’s because, unless they’re super-confident, short-term traders don’t like to hold a large inventory of securities over a weekend.  Too much time for bad stuff to happen.  So they sell enthusiastically on Friday afternoons.

There’s certain sense to this behavior.  For them two days+ may be a long holding period.  Also, companies and people, particularly sneaky ones, like to save bad news up for late Friday afternoon or the weekend, when they think no one is paying attention.  This lessens the pain, they think.  Often, it has the opposite effect, however, since anyone who’s been around for a while knows what a late-Friday press release invariably contains.

 

So in one sense it’s not a great surprise that the huge effort–enough to send her staggering off the stage–Janet Yellen put out yesterday to explain that, yes, the US economy is in great shape and, yes, the Fed is going to take the first baby steps to get the country out of interest rate intensive care (IRIC (?)–although it may be too late for this acronym) before New Year’s eve had no lasting positive effect on stock prices today.

The reason is that, aside from robots designed to react to newsfeeds, everyone knew that already.  In fact, her announcement on Thursday the 15th that the Fed Funds rate would stay at zero for now wasn’t a shock, either.  Futures markets had been putting the odds of a rate hike in September at less than one in three.

Yet the stock market took something Ms. Yellen said last week the wrong way.  If it wasn’t the interest rate announcement, what was it?

Actually, I think there are two things, one said and one not.

The first, and more important, in my view, is the unspoken but strongly held belief by the nation’s finest economists that if we have to depend on the White House and Congress for economic support, we’re doomed.  That’s because monetary possibilities to plug up a hole in the bottom of the boat are all used up.  The federal arsenal now contains only fiscal policy—changes in government regulation of business, or in spending priorities or in taxes.  The Fed knows it isn’t going to get bailed out by Washington if it raises rates too soon–something that has gotten many nations into trouble in the past.  Therefore, it has to err on the side of caution, even if that’s unhealthy to do.

We all sot of know this, but it’s not a plus to be reminded that as a nation we’re stuck in at best second gear as long as Washington dysfunctions its way through life.

The second, the one said, is that developments in China have the potential to hurt US growth enough to tip us over the edge.  I don’t think the effect on the stock market is so much about the details.  It’s the headline that matters–that the US is no longer so large that we’re impervious to what may happen in any other single country.  It conjures up thoughts of the post-WWI, when the UK passed the mantle of world economic leadership to the US, except that we’re now in the role of the UK.

Again, everyone sort of knew this was happening.  But having it confirmed by our foremost economists is another thing.

To put this in stock market terms, I don’t think Ms. Yellen is calling into question the market’s ideas about current earnings as about the multiple those earnings are worth.

 

 

 

thinking about China: deflating a stock market bubble

August 27, 2015 By in Asian economic development, characteristics of their financial markets, China, Current Market Thoughts, economics, emerging markets Tags: , , , , , Leave a comment

For most of the 30 years I’ve been watching China-related securities, the mainland stock markets have been an afterthought for virtually all foreign investors.  The same for the authorities in Beijing, as far as I can see.  They seem to have regarded the equity markets as a vehicle for funding moribund state-owned enterprises that no bureaucrat in his right mind would give money to.

The mainland markets have gradually morphed over the past decade into something more interesting, as smaller, more innovative firms elbowed their way in.  But the market remains very hard for foreigners to gain access to, and is arguably still not worth the trouble.  The real action remains in Hong Kong.

 

Last year, faced with a bubble in the domestic property market created by a flood of investment money with no place else to go, Beijing decided to redirect this flow of funds to the Shanghai and Shenzhen stock markets.

In solving one problem, however, Beijing created another.

The issue was partly that the mainland exchanges were going through the roof in US-internet-bubble fashion.  In addition, however, the rise was fueled in large part by borrowed money.  Worse, this consisted not only of official margin lending but also by huge amounts of sub rosa margin disguised as either uncollateralized borrowing or debt secured by businesses or property.  No one knew how large this total debt was–only that it was gigantic, and that inexperienced retail equity investors had leveraged themselves to the sky because they had taken government encouragement as a guarantee against losses.

 

As/when the market peaks and begins to decline, margin loans come due.  When speculators can’t add more money to margin accounts (as is inevitably the case), this triggers forced margin selling that feeds on itself and turns into an avalanche of downward pressure.  Once selling starts, it can be almost impossible to stop.  Of course, as soon as potential buyers realize what’s going on, they withdraw and wait for the market to hit bottom.

This precarious development in Shanghai/Shenzhen is not a unique phenomenon.  The same thing happened in 1985 in Singapore/Malaysia, in 1987 in Hong Kong, and in 1997-98 in many smaller Asian markets.  In hindsight, Beijing could possibly have averted the crisis by raising margin requirements and by cracking down on unofficial margin loans by financial institutions.  But it didn’t.

Beijing seems to me, however, to have followed the standard protocol for dealing with a mammoth overhang of margin selling and restoring order to the market, namely:

  1.  identifying and cutting off borrowing sources

2.  prohibiting short sellers from exacerbating the problem by speculative selling

3.  buying enough stock, either directly or indirectly, to reduce forced selling to a level that the market can handle unaided

4.  allowing the market, once functioning again, to clear by itself.

The way I look at it, we’re in #4 now.

One other comment:

in the US, the rise and fall of the stock market is regarded as the most powerful leading indicator of future economic performance.  I don’t think that what’s going on in Shanghai/Shenzhen stock trading has much macroeconomic significance.  Rather, the China stock market fall is an obstacle that every emerging market encounters on the way to stock market maturity.

 

 

 

 

 

 

 

 

 

 

thinking about China: economic growth and metals

August 26, 2015 By in Asian economic development, China, economics, Hong Kong, Japanese development, Mining Tags: , , , 1 Comment

In the late 1970s, Beijing decided that its central planning model of economic development wasn’t working because the domestic economy had become too complex.  It reluctantly shifted to the model Japan had used to recover from WWII–concentrating on export-oriented manufacturing, offering cheap labor in exchange for technology and industrial craft skill transfer.  China became an increasingly large user of natural resources (oil and metals) as it created industrial infrastructure, industrial plants and provided housing and other public services for its large population.

Maybe ten years ago China realized that it was soon going to run out of low-wage farm workers willing/able to switch to manufacturing in order to sustain the export-oriented model.  Associated pollution and other environmental problems were also becoming more acute.  So the natural resource intensive, export path to growth was nearing an end.

Five years or so ago, China, now out of cheap labor, began the shift to a consumer-oriented, domestic demand approach to GDP growth.  Government stimulus to offset the negative effects of the recent recession gave exporters one final surge of vitality.  Still, for years manual labor-intensive businesses have been leaving China for, say, Vietnam or Bangladesh.  Beijing has also been cracking down on relatively primitive steel and aluminum processing operations.

Politically and socially, as well as economically, this is a difficult transition to make, because rich and powerful forces of the status quo don’t want things to change.  Japan, Singapore and Hong Kong (multiple times) have made the shift; Malaysia, Thailand and much of South America have not.

One of the main characteristics of this period of change is a slowdown in demand for base metals and other industrial inputs.  For China, which had been the dominant customer for almost any base metal, the transition comes just as global mining companies have made (inexplicably, to my mind) huge additions to productive capacity.

The result of increasing supply at a time of flagging demand is easily predictable–lower prices.

Why write about this?

Many financial markets commentators have been pointing to low base metals prices as evidence of cyclical economic weakness in China.  That may ultimately turn out to be the case.  But it’s equally a sign of:  1) structural change in the Chinese economy, which would be a good thing, and 2) witless mining companies.  So it’s by no means a sure thing that bears on China are correct.

By the way, the last global collapse in base metals prices came in the early 1980s.  That followed a decade-long period of mine expansion that was based on the idea that the United States couldn’t grow economically without using copper, lead, zinc and iron in amounts that would increase in a straight line with GDP expansion.  In hindsight, what a mistake!  Although Peter Drucker had been writing about knowledge workers from the 1950s, no one put two and two together.  It took almost two decades for world growth to absorb the excess capacity that miners added back then.

 

what’s going on in stock markets?

August 25, 2015 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, stock market Tags: , , , , , , , Leave a comment

technicals

From the intraday high of 2132 on July 20th, the S&P 500 has fallen by almost 12.5% to its intraday low of 1867 yesterday.

For fans of support and resistance, 1867 is within hailing distance of the 1820 intraday low for the index in mid-October 2014.  The closing lows at that October bottom were 1867 on both October 15th and 16th.

That all adds up to a severe correction by the experience of the past few years, but still one that might be called “garden variety.”

opposing signals

What’s unusual about this decline is that virtually the entire fall happened in a panic-filled two-day period–last Friday and yesterday.

So this all gives us two opposing market signals.  On the one hand, in the normal two-steps-forward-one-step-backward rhythm of stock markets, we’ve finally made a significant backward step over a suitably long period of time.  One might conclude that we’re done with that phase and are ready for the next up move.

On the other hand, the past two trading days have been fear-filled.  On Friday, the S&P was down by 3%+ and closed on its lows.  Yes, it was a Friday, so brokerage houses flattened their books going into the weekend (translation:  dumped inventory into the market near the close).  Even so, closing on the lows sends shivers down traders’ spines.  Then the market opened on Monday down by about 6%, another stomach acid inducer.  Pundits rushed in to “explain” the goings on to retail investors as a sign that the Chinese economy (the largest, or second-largest, depending on how you count, economy in the world) was imploding–with dire consequences for the rest of the globe.  That increased the fear quotient.

My point here is that emotions are much more powerful that we usually recognize–and they linger.  Maybe the market had been fearful for close to a month and purged that fear over the past two trading days.  But I don’t have the sense that anyone was afraid before fireworks erupted on Friday.  That’s my main hesitation about saying Monday represents a selling climax that clears the way for upward progress.

China not the cause

I think that China is the trigger for what’s happening in markets now, not the cause.

I’m torn between two viewpoints on China as an economy.  I think the hedge funds proclaiming that the selloff in oil and metals is due to economic weakness in China that Beijing is covering up–and that we are due for a protracted bout of global economic weakness–are completely wrong.  On the other hand, either they or their brethren spouted similar nonsense about hyperinflation being induced by Fed action five years or so ago.  Everyone now knows that was totally wrong–yet this craziness struck a responsive chord and influenced stock trading for an extended period of time.

My conclusion:  this isn’t a time to bet heavily on whether the market is going up or down (it almost never is).

trading up

During periods like this, most investors, even professionals, tend to go on vacation.  They just don’t look at the daily ups and downs of prices.  For anyone who can stand the rocking of the boat, however, there’s useful portfolio work that can be done to upgrade holdings.

–clunkers that have never gone up usually don’t go down a lot in general market declines.   Strong stocks that have gone up a lot typically get pummeled.  So this is a great time to ditch the former and use the money to buy the latter.

–we’re in a time of significant structural economic change.  I think the prophets of doom are mistaking that for cyclical economic weakness.  Losers in a time like this are typically large and well-known; potential winners are typically smaller and more obscure.  For most of us, the appropriate switch is from old-line, status-quo stocks into ETFs that are focused on Millennials.