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 Next Urgent Steps

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Over the past 10 years, China has been the fastest growing major economy in the world.

It has also had among the worst stock market returns as capital was misallocated badly to drive growth and employment in areas of the economy that either lacked competitive advantage and/or did not create productive returns on capital. Today, we envision a different outlook for China.

We see a slower growth economy with the potential for a better stock market in the near-term.

Key to our thinking is that China now has a fast growing services economy that is larger than its combined construction and export sectors. We also see an e-commerce initiative that is driving both convenience and efficiency, and lower inflation that 1) makes real estate less interesting; and 2) gives the PBOC more flexibility to ease. The bad news is that China remains a country undergoing a massive transition across many parts of its economy, fixed investment and export activity in particular. Our bottom line: The upside for being in the right as well as the downside for being in the wrong sectors has never been higher in China, particularly given our view that the current rebalancing effort is likely to accelerate even more in the quarters ahead.

China in need to halt the export slowdown and turn it around

  • Excess Import over Export will affect cash flow and reduce national accumulated capital assets
  • Thin margins in factory exports must be converted to higher margins value added products using the existing large factory base transformed into innovation and design orientation instead of contract manufacturing which has no distribution of its own.
  • From Supply Creation to Demand Generation (thru innovation and design)

China needs: (To BOOST DEMAND)

  1. Reform (ways to do things better)
  2. Innovation


China needs to go back to:

  1. Work hard, save and invest
  2. Reform back to basics: Solving money problems with money is like eating your own chicken that makes the eggs – you never get to grow more of it.
  3. Solving problems by innovation is the intelligent way.
  4. And to solve business problems you need financial tools.
    1. China’s present financial tools are not sophisticated enough at the moment to solve China’s large problems.
    2. Labor demographics and raw materials and increasing import dependencies have to be transformed by value added exports of innovative products that are also environmentally sustainable.


China has only known how things are on the way UP.  Managing when trend is down is where the men are separated from the boys and experience and knowledge is important however courage is key.

Leaders In Great Demand

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Leaders main function is to create progress and their main responsibility is to lead and manage other leaders and non-leaders including the average workers.  They are also responsible for the well-being of their groups and followers.

Workers and followers of leaders main function is to help the leader reach their objective.

There would be no leaders without followers and followers without a leaders are neither effective.  They need each other.

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

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

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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 February 2015 Update

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We have been waiting anxiously for the electricity usage data of after the Chinese New Year which would give the low usage month of the year.  The confirmation is clear that Electricity output was 6.26% lower from a year before (post-CNY), seasonally adjusted.  The electricity usage chart is now updated and shown with the prior month.

It is obvious the change in trend created by this new data point.

China Feb 2015 Electricity

All said, the trend of 2009 to 2012 was broken to the BLUE trend (2013-2015) and again broken now in 2015.  This new trend line shows electricity usage dropping at a 6.26% yoy rate.  Also, the new data is 20.5% lower than the expected low on the 2012 BLUE trendline (approx. 385).

The following is the chart prior to CNY-2015.

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Not all is bad as he Chinese government has been emphasizing more efforts in the service sector (which uses less electricity) than the manufacturing and export sector.

However, with the next Baltic Index chart we see that shipment across (exports) is low (591 compared to 1,500 last 2014), implying that export activity across the oceans has further reduced.  (BDI was over 8,000 at the peak of 2007).

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China 2015 New Year Traveling Marvel

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This year 2.8 billion travels are expected to be made in 10 days holidays.  Here is a view of how it goes in the beginning of the holidays.

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Prepare For Opportunistic Impact in 2015

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There is a high expectation that 2015 will result in high volatility and thus major opportunities will become available.  With geopolitical tensions, global economic slowdown with anemic growth in the USA, negative growth in Europe- slowdown in the Asia and China economies, widespread currency policy interactions, added Quantitative Easing for Europe, and finally oil shocks in major oil based countries like Venezuela, Russia and Iran, there are great probability for economic and financial accidents that will trigger a run to safety or erosion of confidence.

This appears to be the global picture:

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The major concern of this global picture is that all Central Banks have been planning for higher inflation and fighting deflation.  The picture shows that after injecting Deca-Trillions of monetary stimulus, the inflation is reducing toward disinflationary and even deflationary levels.  Except for Brazil, inflation is lower than what the Central Banks wish to see which is above 2-3% pa.

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In Europe, only the services sector is able to have inflation contribution.

Is a good place to make a note that central bankers are focused on thinking that inflation is good and deflation is bad.  However, the flip side of the coin are the consumers.  Lower prices of products and services should benefit the general consumer.  Nevertheless, inflation is a good tool to reduce the relative ballooned debt.

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To that extend, ECB sees the lack of inflation going into critical levels thus the recent easing of monetary policy that is injecting over $1 trillion (one further attempt at increasing inflation).

Will the $1 trillion create growth?  That is the key question.

With further complex scenarios unwinding, all taken into consideration, risk of an unexpected and unanticipated crisis is increasing.

The Baltic Index

To start with, the Baltic Index dipped below the low of 2009 – the lowest in 20 years at 650 – went lower to 530.

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A longer term chart shows the Baltic Index at nearly 12,000 at the peak of 2008 dropping meteorically to the under 1000 level in 2009 recovering to the 4,000 level only to drop down further below.

BDI 1985-2014

LONDON, Feb 12 (Reuters) – The Baltic Exchange’s main sea freight index, tracking rates for ships carrying dry bulk commodities, slumped to a new record low on Thursday as slowing activity, especially from China, took its toll.

The overall index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertiliser, fell 13 points, or 2.35 percent, to 540 points, marking an all-time low for which Baltic data is available that dates back to January 1985.

The index, known as the BDI, is also seen by investors as an indicator of global industrial activity.

"Pessimism is still prevailing across the dry bulk sector. Average rates for all sizes are now trading below OPEX (operating cost) levels, rendering owners exposed to substantial losses," said Yannis Olziersky of Greek ship broker Intermodal.

"Apart from the existing tonnage surplus, for which we have talked a lot during the last years, anaemic global growth and demand for dry bulk commodities have also pushed the BDI to its lowest historical point."

Low fuel costs, which make up part of freight calculations, have also contributed to the lower rate environment.

In one of the first casualties of the recent downturn, privately-owned shipping company Copenship said last week it had filed for bankruptcy in Copenhagen after losses in the dry bulk market.

Five dry bulk shipping firms, including shipping tycoon John Fredriksen’s Golden Ocean said this week they will form a new venture to coordinate chartering services, hoping to reduce costs in a fragmented market.

Brokers said the dry bulk market was expected to remain in the doldrums due to weak demand for commodities, particularly from top global importer China.

Weak demand for commodities such as iron ore has put pressure on smaller, higher-cost producers and this has taken its toll on the dry freight market.

"We suggest that the ongoing deceleration of China’s GDP growth, the primary driver behind the dry bulk sector, is taking a significant toll on the rate environment," Natasha Boyden of boutique investment bank MLV & Co said.

China and India Purchases Slowing

With China consuming more that 40% of Global commodity resources in 8 out of 15 major categories, the slowing of China’s purchases is felt primarily in commodity countries like Australia and Canada, then all over Asia and finally globally.

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The Chinese economy, which buys almost half the world’s coal and ore cargoes, will grow in 2015 at the slowest pace in 25 years, economists’ forecasts compiled by Bloomberg show.

While the fall in the index is proving to be beneficial for India’s coal and fertiliser importers such as NTPC, Adani Power, Tata Steel and Steel Authority of India, among others, it is a major drag for shipping companies as lower freight rates hurt their revenue stream. For shipping companies to even break even, the Baltic Dry Index needs to be at least at 3,500 levels.

“In case of fertilisers like di-ammonium phosphates, freight rates have declined 20-25% in the last two months over the West Asia-India route,” said an executive of SIVA Bulk, India’s fourth-largest carrier of coal into India. “Freight rates for coal have also come down to $10 per tonne from $15 in the last two months on the South Africa-India route,” said another company executive.

Coal in India is mainly imported from Richard Bay in South Africa, Australia and Indonesia. Overall coal freights have declined to 25% in the last two months, said the official.

“There is certainly a benefit for the chartering companies, those that are on time charter, but the extent of the benefit depends on the nature of contract they have moved into for the imports,” the executive said.

Chartering companies on spot contracts will benefit the most compared with those that are into long-term contracts which run for a year or more or even the short-term deals which are usually for two-three months.

Chartering companies are those which may export or import cargo either by themselves hiring a vessel from shipping companies or by appointing a shipbroker to find a ship to deliver the cargo.

Exporters of rice and basmati will also benefit from this index fall. In the year ended March, India exported rice and wheat worth $9.6 billion.

Given the current trade activity across globe, especially the slowing coal imports from China and the nearing Lunar New Year, industry officials are of the view that freight rates will continue to remain low even going ahead.

That should be bad news for shipping companies. “2015 does not seem like a good year for the industry in terms of freight rates. Even if China reopens after their New Year, the pick-up in trade is going to remain moderate and nothing rosy,” said Anoop Sharma, CEO – Sea Transportation Business with Essar Shipping.

“This is the lowest level we have seen ever. Apart from falling commodity and crude oil prices, the drop in the index has come because of too many ships on water,” said an executive from J.M. Baxi & Sons, the country’s leading shipping agent.

The current freight rates are not allowing companies to recover even their operating costs, said industry executives. “The situation is getting worse for shipping companies. Forget the debt servicing, companies are unable to recover operating costs. We don’t see any light at the end of the tunnel as of now. If the situation prevails, we may see companies shut down,” said an executive of Link Shipping & Management System.

“Though broadly, a 3,500 index level is seen as break-even point, a lot also depends on the fleet utilisation (whether in spot or long-term contract) by the shipping companies,” said an analyst with a local brokerage. “The more the contract renewals at this juncture, the adverse will be the situation for the shipping company as contracts will get locked at much lower rates,” he said

Industrial Commodities (Copper) Plunges

We have given notion that Copper has been dropping to lowest levels and remains below 2.60 after going below 2.45.

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The Effect of China Slow Economics

China’s growth is a major contributor to global GDP growth.  In order for Global GDP to reach its consensus estimate of 3.8% of growth, China needs to deliver 7% of GDP growth.

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Major provinces and major financial power cities in China have reduced their GDP growth projections dramatically and Shanghai in specific cancelled the announcement of GDP projections after missing it multiple times in the last 6 quarters.

China has clearly been reducing its Infrastructure projects as seen by their fixed asset investments.

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Oil – The Trigger

There is little oil and petroleum does not touches in modern life.  Since the dramatic over 45% drop in oil prices occurred 6 months ago, the entire oil industry has been reacting and others adjusting to lower oil prices.

KKR stated that:

The commodity-dependent countries like India and Japan stand to benefit mightily. Importantly, India is starting to enjoy not only lower inflation but also a smaller current account deficit (compliments of lower prices of imported oil and higher interest rates), which is important for its currency. Japan too should benefit from lower oil prices, given that it is a major oil importer. Already, the country’s central bank has elected to run with a significantly cheaper currency because oil prices become less of a deterrent to consumer spending at $50-$70 a barrel than they do at $95-$105 a barrel.

We Think the Fall In Oil Prices Will Provide a 1.6% Boost to U.S. Consumers, Which Is Only Partially Offset by the Hit to Domestic Oil Producers.

National Debt

We already have written of the debt bubble in China and although it is huge, the China central banks have some power in half of the debt restructuring. The troubling area is going to be the private sector debt.

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Again, in the table below notice the large debt from China and Hong Kong (China related), Thailand and Singapore.

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Many other countries in the concern list have Reserves sufficient to withstand External Debt shocks.  Including Russia, India, Mexico and Brazil.  The other economies are not significantly large enough however when everyone is nervous, any small event could trigger fear and fear is contagious.

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In any potential crisis, the question is always where will the “accident” and surprise come from.  The safest place is the one after the crisis has stricken.

Equity in Select Area Remains Suitable

Companies with superior cash flow and cash on bank are good candidates, and certainly beats low yield bonds in a credit bubble economy.  However, timing would be crucial to take advantage of crisis level opportunities while in the meantime, being short term cautious or remain in cash seems the rule for conservatism under the increasing risk scenario.

The total return on the S&P 500 is now already 204% this cycle versus a historical norm of 115%.   Equity has an overachiever thus far, extending its growth would be potential moderate gain at he expense of higher risk level.

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The duration of this up cycle since the low of March 2009 is 41.3 months.  It is nearly close to the 42 months of the 1949-1952 uptrend and 7.7 months short of the 1942-1946 up cycle.  If there is no downturn in 8 months, there is a likelihood it could extend to the 1982 (60 months uptrend) or more unlikely to the 1990, 112 month upcycle.  The 1990 was an uptrend based on strong economic growth and fundamentals and the 1982 was with high inflation and interest rates.  Both cases are contrary to the current.

On a total return basis, 159% return is above the average in upturns – making the 4th best return and 4th longest in duration in 110 years.

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Gold and Silver

Gold and Silver have not dropped to the extend of industrial metals like Copper.  Although still in a correction mode and prices could come lower, a good price base has been built around the $1,000 to $1,200 for gold.

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Conclusion

Nearly 10 years ago, we said that Secular Bears (measured in a 18-20 year cycle) occurs in 3 major sub-cycles.  Considering that the first major cycle started with the crisis of 1999 (Nasdaq bubble) which initiated the new commodity super cycle, to be followed by the 2nd bear cycle in 2007 (which started the global financial crisis).  We have been anticipating the beginning of the 3rd and last cycle.  The storm cloud are at the horizon but is unclear where it will rain first.

Copper Prices Tumble to 2009 Levels

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Copper prices broke down with a sharp exhaustive move to 2.43 settling down to 2.63 level.  We don’t expect much economic improvement in the near term for 2015.

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Gold on the other hand has cross positively its 200 MA with a strong momentum.  Given geopolitical tensions, it seems logical.  Here is the weekly chart showing also breaking of the middle term average (50MA) and with still a lot of room to grow.  Noticed that starting from Dec 2013 to Dec 2014, Gold showed a negative divergence with MACD as it reached it bottom with January coming with new strength.

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Mathematics for Chinese Calendars

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Looking for powerful and proven tools to forecast the future.  The Traditional Calendar of the Chinese has cycles built in which are useful for forecasting.  It was originally used for weather prediction, most useful in an agrarian society.

Three key concepts make up the calendar and all these come from millennium years of history and experience, starting as far back as the first recorded dynasty in China, the Shang Dynasty.

These 3 concepts are:

  • The 10 Stems (Heavenly Stems): 甲乙丙丁戊己庚辛壬癸 pronounced jiǎ, yǐ, bǐng, dīng, wù, jǐ, gēng, xīn, rén, guì
  • The 12 Branches (Earthy Branches): 子丑寅卯辰巳午未申酉戌亥 pronounced zǐ, chǒu, yín, mǎo, chén, sì, wǔ, wèi, shēn, yǒu, xū, hài, and
  • The 5 Elements (五行 wŭ xíng): 木火土金水 pronounced mù, huǒ, tǔ, jīn, shuǐ. or Wood Fire Earth Metal and Water.
  • Here is the 10-Stems and the 12-Branches:

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    Sample: Of Years and Chinese Calendar designations using Stems and Branches.

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    And next to the Stem-Branches is the 5-Elements.  For example, 1984 was Wood Rat year.  Also shown individually here:

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