Archive for category Investing

China Stock Market Dynamics–Only Happens In China

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China Stock Market Dynamics.  Massive bubble reaction with government intervention.

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China Stock Market & Economic Update

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To understand how the Chinese economy is doing now, it is important to look at it from a longer term perspective.  China growth for the past 30 years has been spectacular and especially since 1990’s and 2000’s has been stellar.

There is a obvious slow down at the moment since 2012.  The slowdown is partially due to government reforms however there are also in major part due to slowness in the export sector.  The export sector is being affected by slowing of foreign demand and also growing competition from countries with lower cost center than China like Indonesia and Vietnam that have attracted many corporate buyers away from China, Nike and Adidas to name a few.

From a longer term perspective, China overall economy has growth exponentially over the last 30 years propelled by the exporting of its low cost labor that would produce products for the develop markets, USA and Europe.  In addition, large foreign investment partly to participate in the industrial but more toward infrastructure development in China including early stages of large real estate development.

Propelled by a major movement of population from the small towns and village to the major cities and from inland provinces to more prosperous provinces, the migration has provided the initial large base of labor to provide for the last 30 years of the outsourced production and manufacturing demand.

China has 126 large state-owned-entities consisting of 117 large State-Owned-Enterprises (SOE’s) and 9 large State-owned banks and insurance companies.

Some doomsayers believe Chinese capital is leaving China because of a lack of confidence.  However, it is best seen as a major policy change and encouragement of Central government to promote outbound investment, a move that started as early as 2013 with further public announcements made by China’s Premier Li Keqiang.  The very large majority of Chinese capital adds to over $3.9 trillion just in foreign reserves of the Central government and large SOE’s and personal investable assets remains at over $10 trillion.  And while countries outside China are still in recession or slow growth including the USA, this asset base could be seen as productive for both regular and strategic growth outside China.

China is also not totally homogeneous now, there are provinces that slowing and there are others that are growing.  And in the international terrain, China is developing in all commercial and financial areas including the bold creation of the Asian Infrastructure Investment Bank (AIIB).

China Holdings of US Treasury Declines Further

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China holding of US Treasury falls to the lowest level since 2013.  Reportedly, China held $1.25 trillion in U.S. debt as of October, a $13.6 billion drop from September.  China remains the largest foreign holder, ahead of Japan, who holds $1.22 trillion.  Now China and Japan have a very narrow difference in holdings of US Treasury debt.

China’s overall foreign-exchange reserves, the world’s largest, stood at $3.89 trillion at the end of the third quarter 2014, down from a record $3.99 trillion at the end of June.  Thus, US Treasury represents China’s 32% of the total Forex reserves compared to 34.9% a year ago in October 2013.

Chinese export and factory activities has declined in 2014 being one contributing factor. 

While the Chinese Yuan has weakened 1.3 percent since October, it’s remains the only one among 31 major global currencies (as reported by Bloomberg) to strengthen against the dollar.

As of November 2014, the most traded currencies globally are:

  1. US Dollar
  2. Euro Dollar
  3. Japanese Yen
  4. British Pound
  5. Australian Dollar
  6. Canadian Dollar
  7. Chinese Renminbi
  8. Swiss Franc
  9. Hong Kong Dollar
  10. Thai Baht

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China M&A Getting Traction in 2014

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As predicted in my book, China’s outbound M&A would be the focus post China’s 40 Year Export Driven economy.  China is now beginning to take full control of the M&A rather than just being a minority stake holder.  Lesson learned on large minority deals like the $5 Billion ill-time investment into Morgan Stanley hit but stock market volatility during the Global Financial Crisis.  No pain no gain, and in the long term these learning experiences are focusing China into a strong path toward M&A.

Here is an excerpt in China Daily.

The summary is:

  • Deals are for controlling interest.
  • For bank related deals objective is to serve the eventual Outbound Chinese Corporation.
  • The Debt markets abroad can also serve to bring back cheaper capital to home.
  • Beginning with smaller first (versus before).
  • Obtaining management, training and education in the process.
  • All faster than in an organic process.

China financial firms seek control deals in outbound M&A

Updated: 2014-12-15 13:47

Chinese financial firms are targeting purchases of distressed banking assets coming on the market in Europe to expand their reach beyond emerging markets.

The first Chinese purchase of a European investment bank was announced last week, with Haitong Securities agreeing to pay 379 million euros ($470 million) for an investment bank in austerity hit Portugal.

Banco Espirito Santo de Investimento SA (BESI) is being sold by Novo Banco, the bank carved out of Banco Espirito Santo after it was rescued in August.

For China’s second largest brokerage it’s a modest-sized deal, equivalent to just 1.5 percent of Haitong’s market value. But it demonstrates the changing character of acquisitions by Chinese financial firms.

These days they mostly seek controlling stakes, and now they are scouting Europe for opportunities, avoiding anything too big.

"Increasingly, Chinese financial firms are seeking control deals as a way to expand their global footprint," Mayooran Elalingam, head of Deutsche Bank’s Asia-Pacific M&A said.

"Several distressed opportunities are available in euro zone economies and we expect the Chinese financial services sector to be active in these situations," he added.

Encouraged by Beijing

Such deals can help Chinese banks gain treasured European banking licenses as well as expertise, notably in debt markets, that can be transferred back home, whereas growth through opening overseas bank branches can be a slow process.

This year, the government began encouraging Chinese stock brokers and financial firms to acquire greater international reach, according to investment bankers.

"The government is encouraging the outbound M&A push," a Hong Kong based M&A banker said.

The drive for geographic spread reflects China’s efforts to build up overseas bank outlets as the yuan currency gains a greater share of global trade.

Haitong’s purchase of BESI, Portugal’s biggest debt underwriting firm, will give it control of a business that earned 247 million euros in revenues in 2013, according to analysts at Daiwa Capital Markets, and a ready-made investment banking network in Europe.

"As regulators liberalize the financial industry in China, banks, insurers and securities firms would be on the lookout for asset managers, private banks and wealth managers," said Bernard Teo, head of financial institutions group investment banking in China with Goldman Sachs.

Some M&A bankers do not rule out the possible acquisition of a European commercial bank.

Struggling Italian lender Monte dei Paschi di Siena, the worst-performing European bank in a recent asset quality review by the European Central Bank, could attract Chinese bids, according to Hong Kong-based M&A bankers.

Chinese buyers could also be interested in Novo Banco, which Portugal’s authorities hope to sell in the first half of next year, they added.

Lesson learnt

Until now Chinese financial firms’ strategy has been based on organic growth and sporadic purchases of minority stakes in foreign firms, mostly in the emerging market sphere.

So far this year, they have announced $3.2 billion worth of overseas deals, three-quarters of which were majority stake purchases, according to Thomson Reuters data.

The total spend on overseas deals is way below the record $17.9 billion posted in 2007, but back then only 4.3 percent of the deals were for majority stakes.

In 2007, just before the global financial crisis erupted, Chinese financial firms and sovereign wealth fund bought stakes in publicly listed global financial companies, including a $5 billion investment in Morgan Stanley.

The stock market losses from the ill-timed deals created a headache for executives back home.

"Chinese financial institutions are likely to shy away from large transformational deals as they have learnt valuable lessons from the investments made during the financial crisis," Goldman Sachs’ Teo said. Their main goal now, Teo said, is to serve Chinese corporations expanding globally.

Trading Update Oct 21 201

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Since October 6th, we had a reversal with a LONG bias.  Technically speaking, Longterm (LT) and ShortTerm (ST) are Long biased.  Prices (of S&P 500) following an upchannel as shown below.  Prices are now getting overbought in the 60 and 720 timeframes (97% overbought in 720).  Prices reached the significant target of 1940 (resistance).  There is still room for 1 or 2 more up moves in the next 24 hours.  Time to tighten trailing stops and some profit taking.

ES Oct 21 2014 Up

1940 (resistance and target) also coincides with the 200 MA of the 720 timeframe.

Following the next move, we would expect if there is a new long term trend developing, that it will begin to show it’s face soon.

Gold Status

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This is an update to the status of Gold.

There is around 35,000 Tons of gold available for investment in the form of coins or bars (nearly 20%).  The majority is in the form of jewelry (49%).  With a total gold on unearthed to be 171,000 Tons with another 52,000 Tons not yet mined giving a total hypothetical figure of 223,000 Tons of available gold on earth.

World gold holdings (2011)
(Source: United States Geological Survey)
Location Gold holdings Share of total
(in tonnes) world gold holdings
Total 171,300 100%
Jewelry 84,300 49.20%
Investment (bars, coins) 33,000 19.26%
Central banks 29,500 17.20%
Industrial 20,800 12.14%
Unaccounted 3,700 2.20%

 

World Gold Holding

As at June 2014 (Top 40 based on World Gold Council data)

Rank Country/Organization Gold holdings
(in tonnes)
1 clip_image002
United States

8,133.50
2 clip_image004
Germany

3,384.20
3
     
 

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International Monetary Fund

2,814.00
4 Italy 2,451.80
5 clip_image010
France

2,435.40
6 clip_image012
Russia

1,094.70
7 clip_image014
China

1,054.10
8 clip_image016
  Switzerland

1,040.00
9 clip_image018
Japan

765.2
10 clip_image020
Netherlands

612.5
11 clip_image022
India

557.7
12 clip_image024
Turkey

512.9
13

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European Central Bank

503.2
14 clip_image028
Taiwan

423.6
15 clip_image030
Portugal

382.5
16 clip_image032
Venezuela

367.6
17 clip_image034
Saudi Arabia

322.9
18 clip_image036
United Kingdom

310.3
19 clip_image038
Lebanon

286.8
20 clip_image040
Spain

281.6
21 clip_image042
Austria

280
22 clip_image044
Belgium

227.4
23 clip_image046
Philippines

194.3

 

From 1960 until 2000, South Africa was the largest producer of Gold to be surpassed now by China which is producing approximately 400 tons per year.

The world total available gold is estimated to be around 170,000 Tons.  Gold is considered a rare precious mineral given that is finite in nature.  Having been unearthed and produced for thousands of years, by 1500, the available gold unearth was around 13,000 Ton.

Top 40 Mines in the World

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Top 40 Undeveloped Mines in the World

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Top 40 Mines in the World by Quality

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Top 25 Largest Mines & Deposits in Asia/Oceania

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Top 12 Countries with Most Gold Mining

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Top Countries by Quality of Gold

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Recent Weakness of Gold

Gold prices have dropped significantly from its high in 2011 and reaching a low of 1,200 per ounce as of this writing in Oct 19, 2014.

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One of the Major Reasons

As long as the US Dollar is in uptrend, the Gold prices will tend to be on a downtrend.

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Trading October 14, 2014

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Prices are now significantly exhausted from this down move that started September 19 at 2013 to 1863 (150 points down in 26 days).  We are looking for a breather and reverse to LONG at the first opportunity unless prices go significantly below 1860.  Clearly this cycle that started UP on August 14 to the peak on September 19 to today, has shown different characteristics than any other cycle during the entire last 2 years.  For one, the momentum of the upmove has changed the future price action outlook, meaning a new theme is evolving.

(while it took 36 days going up and 26 days to come down breaking below the starting point).

ES Oct 14 2014 60 min Exhausted

The 760 min chart shows how prices hit further down the normal channel  (45 degrees) to a deeper channel (60 degrees) while breaking the prior low of the start of the cycle in August 14.

ES Oct 14 2014 360 min Oversold

Looking at it from longer term perspective  (Daily), the UpTrend started late in 2013 reached a terminal point with a move than widened the Bollinger Band (BB) while touching the 200 MA.  All timeframes are now oversold.  We expect prices to move UP toward 1940-1950 range first.

ES Oct 14 2014 Daily OversoldES Oct 14 2014 Daily Oversold Closeup

China Market Upmove–Shanghai Stocks October 2014 Update

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China market is giving early signs of temporary stabilizing of economic activity.  We would expect the market be 6-9 month ahead of the economy.  Notice that SSEC (stocks) hit a “capitulative” sort of low mid June 2013 while Copper prices (fundamental economy) hits a similar low in March 2014 (almost 9 months later).

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Copper prices have retested the 3.00 prices with increased negative divergence signifying a base is being build.  With the global economy in slow down mode including China.  Activity here is key for revealing fundamentals in the Chinese economy.

If SSEC prices go pass the next resistance of 2450, we would expect a confirmation with Copper prices moving up.  Copper resistance is at 3.30.  However if prices go below 3.00 and break below 2.85 significantly, we would have a serious fundamental problem.

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With all this said, SSEC next resistance of 2450 and then 2500 will determine the next move.  However, this strong move (nearly 130% up) is reaching now overbought conditions with wide resistance at 2450 and 2500.  We can expect prices to come to 2300 or 2250 to rest which will allow us to see the next move ahead.

At this moment, we are watching the minuteness of a macro trend reversal which obviously has many twist and turns.  If we can be 80% it would already exceptional.

October 13 2014 Trading

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Prices have continued down and is now oversold at the 720 minutes level.  Prices last tested the 1900 (1903) and sold off to 1863.  There is a negative divergence created in the last move signifying the down energy is exhausting, at least only until recovery to the 1920 to 1900 is retested.  We will be watching volume capitulation as final exhaustion.  Volume has been increasing. If capitulative volume does not occur, the downtrend will have more severe moves down now instead of later.

ES Oct 13 2014 720 min Profittaking

The quality of the negative divergence as shown in the 60 minutes is of mild nature

ES Oct 13 2014 60 min Profittaking

October 10, 2014

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We are resuming recording of important trading events.

On September 18, the system gave a signal with a potential for a long term effect.  A SHORT signal was received at 2010.00 with conditions significantly overbought in the S&P 500 equity index.

This is shown in the following chart:

2014 calling top Sep 18

Noticed that the negative divergence around September 1 from the last Uptrend leg that started in Aug. 7.  A classical Wave 4 (value of divergence was 0) and a final exhaustion move with large price increase but little energy (divergence – in blue – did not reach the strength from before even though prices went up – ie an empty move – all signs of exhaustion confirmed by overbought conditions).

That makes this move more interesting is the prices of Copper (in our opinion) which have now returned to test the low 3.00 mark and fundamental events regarding global economic slowness in the last remaining economic pedestal – China. The correction of China economic contraction is gaining attention especially with Hong Kong social unrest from the “Occupy Movement”.  (Hong Kong is key for bonds for the Asian region including China). 

With the US zigzag GDP estimated at 2% now and Europe remaining at an anemic 1% and now China reducing its growth estimates from 8% (a year ago) down to 7.6% and with other experts further lowering estimates to as low as 7.2% present areas of concerns for most macro economist. Given that the US central bank has been reducing its Quantitative Easing (QE) program with an estimate to end shortly, this would reduce a significant amount of capital influx into the capital markets.  Add also increased global geopolitical activity.  All of this added together and if the theory is correct, there is a stage of maturity requiring taking note.

Furthering the events of September 18 until today, we have broken for the first time in 24 months, the 200 MA of the 720 chart as shown below:

ES Oct 10 2014 Channel Down

Notice the channel that has developed since Sep 18 SHORT and also the increasing volume in the down channel with prices down that has exceeded the bottom of the channel with speed.

Volatility is increasing making options trading an attractive vehicle.

Prices stand now at the 1890 support level (1893) in the daily charts while down move is just beginning to reach oversold conditions, meaning there is further room for selling.

Note – The information in this article is both private and for informational purposes only.  No advice or recommendation is given even if the language may suggest so.

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