Archive for category Business

China Stock Market Dynamics–Only Happens In China

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

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

skitch

 

skitch

 

skitch

China Installed Electricity Capacity reaches 1,390 Gigawatts (2014)

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

image

Compared to the USA where in 2014, electricity generated was over 4,000 Gigawatts.

image

China Stock Market & Economic Update

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

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).

Riots Intensifying in 2014 –Turning into Racial Divides

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

Riots in the USA and across the globe escalate to racial riots.  Constant riots resulting from accusations of excessive police brutality from police and citizen activities that resulted in fatal shootings have escalated.  This is in Missouri.

Violent protests break out in suburban St. Louis

China Holdings of US Treasury Declines Further

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

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

image

China M&A Getting Traction in 2014

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

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.

Warren Buffet Rules for Running a Business

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

1. Keep calm in the face of volatility. Buffett writes that earnings gyrations "don’t bother us in the least." After all, "Charlie and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent."

2. Keep good company. Berkshire has never split its Class A shares. As a result, one share currently costs almost $214,000. That discouraged people from rapidly moving into and out of the stock, and that’s exactly the way Buffett likes it. He wants shareholders who share his long-term view. All the way back in 1979, he wrote, "In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences, they will, in large part, attract shareholders who focus on the same factors."

3. Keep your focus. In that same letter, Buffett warns that even a great company can see its "value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander." The result: a "sidetracked" leadership that "neglects its wonderful base business while purchasing other businesses that are so-so or worse." In this area, Buffett argues that "inactivity strikes us as intelligent behavior." In 1982, a year that saw a number of corporate deals, Buffett thought that in many of them, "managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch."

4. Keep costs low. In his 1996 letter, Buffett wrote that being a "low-cost operator" is directly responsible for the success of Berkshire’s GEICO auto insurance subsidiary. "Low costs permit low prices, and low prices attract and retain good policyholders." And when those customers recommend GEICO to their friends, the company gets an "enormous savings in acquisition expenses, and that makes our costs still lower."

5. Keep employee incentives simple. Buffett doesn’t like what he calls "lottery ticket" arrangements, such as stock options, in which the ultimate value could range from "zero to huge" and is "totally out of the control of the person whose behavior we would like to affect." Instead, goals should be "tailored to the economics" of the business, simple and measurable, and "directly related to the daily activities of plan participants."

6. Keep out of trouble. Buffett tries to "reverse engineer" the future at Berkshire. "If we can’t tolerate a possible consequence, remote though it may be, we steer clear of planting its seeds." (Buffett notes that his partner Charlie Munger often says, "All I want to know is where I’m going to die so I’ll never go there.")

7. Keep your undervalued stock to yourself. Buffett is especially critical of a company using its stock to make a purchase when that stock isn’t being fully valued by the market. "Under such circumstances, a marvelous business purchased at a fair sales price becomes a terrible buy. For gold valued as gold cannot be purchased intelligently through the utilitization of gold—or even silver—valued as lead."

8. Keep it small. In 2006, Buffett wrote that he’s skeptical "about the ability of big entities of any type to function well." In his opinion, "size seems to make many organizations slow-thinking, resistant to change and smug." That’s one reason Berkshire’s corporate headquarters still has only a handful of employees, with almost all the managing work left to its unit’s managers. "It is a real pleasure to work with managers who enjoy coming to work each morning and, once there, instinctively and unerringly think like owners."

9. Keep your reputation. In Buffett’s mind, perhaps the most important piece of advice for businesses, and for everyone else, is to maintain a sterling reputation for honesty by never doing something you wouldn’t want to see reported on the front page of your local newspaper. After taking control of Salomon in the wake of a major 1991 scandal at the financial firm, he famously told a Congressional panel that he had a simple message for employees: "Lose money for the firm and I will be understanding; lose a shred of reputation for the firm and I will be ruthless."

China Market Upmove–Shanghai Stocks October 2014 Update

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

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).

image

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.

image

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.

News: China is the #1 Largest Economy per International Monetary Fund

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

The International Monetary Fund has indicated today that China, and not the US, is now the biggest economy in the world.

The IMF uses the PPP estimates which many economists consider a fairest measure because it takes into account the cost of living in different countries.

Based on these estimates, the US economy considering its population purchasing power is measured to be $17.4 trillion while China is $17.6 trillion.

However what is more important to consider is that while the US growth has reduced considerably to 2% in 2014 with an continuous declining growth rate for the last 10 years, China has maintained over 7% growth rate which although reduced after the global financial slowdown remains much higher plus the fact that China population is many times bigger that of the US.

China Climb to #1

The growth in China started 30 years ago and steadily overtook the US economy while at the same time the US economic growth slowed.

The latest IMF figures show the Chinese economy is worth $17.61 trillion, compared with $17.4 trillion for the US

 

China has 1.3 billion people which is about 5 times than the US.  In the 19th century, the US with an increase immigration of 30 million europeans also increased its economy surpassing the UK which at the time was the #1 economy.  China with its population density

China has a population of around 1.3 billion – four times that of the US – but its economy has only just become the biggest

 

The new IMF rating is based on an analysis using a statistic called ‘purchasing power parity’ (PPP), which makes adjustments for the fact that goods are cheaper in China and other countries relative to the US.

Without these cost adjustments factored in, the Chinese economy is still smaller than that of the U.S., at $10.3 trillion.

But experts have described the toppling of America after nearly 150 years by China, even on the PPP measure, as a ‘symbolic’ moment for the global economy.

China enjoyed three decades of double-digit growth before the global downturn of 2009, as industrialization and sweeping economic reforms in China created a new powerhouse in the East. Growth has now slowed (since 2012) but remains strong by Western standards with the IMF forecasting expansion of 7.4 per cent this year and 7.1 per cent in 2015.

And while for the US, the IMF is predicting growth of just 2.2 per cent this year and 3.1 per cent next year.

US overtook the UK 142 years ago

Britain led the world in the industrial revolution of the mid-18th century, but America was hot on its heels.

The US underwent huge industrial expansion after its civil war ended in 1865, fueled by rapid urbanization and huge population growth – including the immigration of nearly 30 million Europeans.

Britain had out-produced the U.S. and its European rivals for much of the 19th century, at the height of the industrial revolution and with trade links across the Empire. But the US caught up as a growing population, the expansion of the railways and a focus on industry as well as agriculture boosted its economy.

In 1872, the US overtook Britain to become the world’s largest, a position it held for the next 142 years.

Productivity, leading brands and innovation, coupled with the success of the US dollar and the fact that 62 per cent of the world’s financial reserves are held in the currency, kept America on top.

Meanwhile, the economies of Britain and other European powers were ravaged by two world wars. Britain borrowed heavily from America during the Second World War and received a further $4.3 billion in 1945.

History Repeats

China was the world’s leading trading nation up to the 18th century, until control of its ports and trade were taken over by imperial nations in Europe. Under Communism it remained inward-looking, until 1980 when the government started to allow foreign investment.

In this graph depicting the top contributors to the global economy, it shows China and India combined to be more than 50% of the world’s economy up until the 1800’s, a situation that did not change until the 1980’s.  Now China and India together add up to over 40% of the world economy based on IMF estimates.

 

Based on the IMF estimates, India is ranked as the #3 economy in the world and Japan is #4 and Germany #5.

Russia, Brazil, France, Indonesia and the UK make up the rest of the top 10 in that order.

Many economists believe the PPP measure of an economy is a fairest measure because it takes into account the cost of living in different countries.

As an example, although wages are typically far lower in less developed countries than in mature economies, goods and services are often also cheaper, which affects individual consumers’ comparative purchasing power.

Blue Print for Capital Raising

VN:F [1.9.16_1159]
Rating: 0.0/5 (0 votes cast)

The Bigger Picture

1. Dream Team – Top performers that have a track record, done hundreds of deals and will lend their name to you.  Will work for a piece of the action and aren’t looking only for money.  They want to be a part of something bigger and will only do it if they can contribute to it.  Looks great on paper and gets financing in a snap.  Daniel Pena used to do his deals like this blind pool in the late 80’s through the 90’s.

2. Sources of Financing – Banks with whom you want to "build a long term relationship" with.  There is always more money out there than there are good deals.  You’re in demand, they’re not…even in a time like this.

3. Top Accounting Firm (The Big 4) – PriceWaterhouseCoopers (PWC) – (415) 598-5000, Deloitte (Deloitte Touche Tohmatsu) – (415) 783-4000, KPMG (kpmg.com) – (415) 951-0100, Ernst & Young (ey.com) – (415)894-8000 (415)263-1691

4. Top Law Firm – Baker & McKenzie, White & Case, Kirkland & Ellis, Wilson Sonsini Goodrich & Rosati, Cooley Godward, Morrison & Foerster,

Sources of Financing (Banks)

1. Identify Banks

2. Identify the

        a. Managers of those bank

        b. Loan Officers of that bank.

3. Choose the least likely candidates to start pitching to (for practice).  Work your way up to the targets.

4. Arrange appointment through a secretary or via a top accounting firm you’ve engaged to make the introduction.

5. Meet with them for lunch (which they usually pay for)

        Interview Questions:

        1. "What is your personal lending limit?"

        2. "Who do I have to go to for an approval on the next level of financing?"

        3. "Are you a centralized loan institution that pools loan requests, or a branch-based lender?"

        4. "Is your bank presently in a lending mode, or in a downsizing mode?" (downsizing = death spiral)

        5. "What type of ventures do you like to make loans on?"

        6. "What was the last deal your bank turned down.  Why?"

        7. "What was the last $5 million deal you did?" (Avoid if reputable bank)

        8. "Can your institution take me to the next level of my Quantum Growth?"

        9. "What is your banks policy on "asset lending" versus "cash-flow lending?"

        10. "Are you an interstate bank, or do you operate within this state?"

        11. "Could you give me some recent examples of companies for which your bank has approved business loans?"

        12. "Do you anticipate any conflict with your present banking clientele in handling my banking business?"

        Rough list of local banks:

  •            New Resource Bank 4159958100 <–New BANK! More likely to give funding.
  •            US Bank 4154316700
  •            Comerica Bank
  •            First Republic Bank 4153921400
  •            Bank of America 4156222378
  •            Wells Fargo Bank 4153964000

Hiring People:

1. Hire somebody better than you.  Most people are threatened by a person better than them.  But why hire somebody who does a worse job?

2. More creative than you.

3. Has EXPERIENCE.  How many deals have they done?

4. Wants my job.

5. Hungry.

6. Good attitude.

7. Surprises me with unexpected results.

8. Commitment.  Chooses getting a deal done than going to his daughters 16th birthday.

How to Treat Your Staff:

1. Pay them well.  Keep them happy with money.

2. Never reprimand them.  You’re their coach.  You’re their leader.

3. Train somebody else for your job.  Focus on the macro, not micro.

4. Let them act on their own.  Trust them.  Let them make minor mistakes and learn on their own.

In finding a Top Accounting Firm

    *Key terms to remember: "value-added fees", "success-oriented fees"    <–important

    Remember to respect their "independence" and you cannot directly compensate them.  However, the "long term relationship" will be built on how strong your team is and how big the company will grow, keeping them as your firm.  Sell them on the future fees, not the short term fees.

FIRST MEETING (Duration: 20-25 minute meeting)

        1. The Pitch (Who are we…)

           a. We’re looking to dominate the industry.

            b. We’re plan to grow geometrically through acquisition. 

The whole is greater than the sum of the parts.

            c. We’re in a highly fragmented industry.

            d. There’s an uptrend in the market, long term growth.

        2. Interview Them (So, who are you?)

            a. We’re interviewing other firms.  (We’re not desperate.  We have options.)

            b. We’re looking for the firm who’s offering the most value. (You’re going to have to fight for me.)

        3. Ask for value.

            a. Asking for "success-oriented fees" and "value-added fees" to be delayed as late as possible.

            

        ie. Deferring until 6 months after first acquisition.

SECOND MEETING

        1. Draft Engagement Letter.

        2. Settle on terms.

Improve the web with Nofollow Reciprocity.
Uses wordpress plugins developed by www.wpdevelop.com