China Archives - Page 9 of 15 - the patient investor

May 21, 2014

Is the market overpriced? Episode V

In my last post I concluded that the same factors driving rising inequality — new technologies and access to cheap labor through increased globalization — may also be driving a sustainable increase in corporate profits. While we may be understandably wary of “this time is different”, consider the following:

The rise of China as a trading partner over the last two decades.

US Imports from China

Corporate profits at 11% of GNP suggest a new paradigm when compared to the historic (normal) range of 5% to 7%.

Corporate Profits/GNP

The decline in employee compensation as a percentage of corporate value added mirrors the rise in corporate profits.

Employee Compensation/Value Added

And Robert Shiller’s CAPE, normally used to argue that the market is currently overpriced. If we stood in 1994 and looked at the range of CAPE values for the past century, we would no doubt have concluded that a CAPE value greater than 20 indicates the market is overpriced. In the last two decades, the CAPE only briefly dipped below 20 at the height of the global financial crisis. Now pundits argue that a CAPE value greater than 25 indicates the market is overpriced. Something has definitely changed.

Shiller CAPE

Whether the change is sustainable, only time will tell. But one thing is clear. Of the 466 corporations who have so far reported earnings for the first quarter 2014, 77% have either beaten (68%) or met (9%) their estimates. Corporate profits are not in imminent danger of collapse.

May 21, 2014

Is the market over-priced?

The rise of China as a trading partner over the last two decades.

US Imports from China

Corporate profits at 11% of GNP suggest a new paradigm when compared to the historic (normal) range of 5% to 7%.

Corporate Profits/GNP

The decline in employee compensation as a percentage of corporate value added mirrors the rise in corporate profits.

Employee Compensation/Value Added

Shiller CAPE

March 18, 2014

Dr Copper: China weakening

Falling copper prices reflect a weakening Chinese economy. Follow-through below $6600/tonne, after breaching primary support at $6800, signals a primary down-trend.

Copper

March 8, 2014

China will never support Putin on Crimea

Offering the people of Crimea a referendum — on whether to secede from Ukraine and join the Russian Federation — may appeal to Vladimir Putin but he should not expect support from China. For two very simple reasons: Hong Kong and Taiwan. China claims these two territories as part of China, but there are no prizes for guessing the outcome if a similar referendum (to secede) were held in either territory.

March 5, 2014

Putin’s ploy

The Wall Street Journal quotes Vladimir Putin’s justification for occupying the Crimea:

Russian President Vladimir Putin said Tuesday that Russia reserves the right to use force in Ukraine to protect Russian-speaking residents there…….”

This was a ploy used by Hitler to assert control of the Sudetenland in 1938. Sudetenland is the name given to the border districts of Bohemia, Moravia, and parts of Silesia, within Czechoslovakia, that had large German-speaking populations. Hitler encouraged Konrad Henlein, leader of the Sudeten Nazis, to rebel, demanding a union with Germany. When the Czech government declared martial law, Hitler threatened war. This led to the September 1938 betrayal of Czechoslovakia by France and Britain. Adopting a policy of appeasement, the two countries agreed to give Hitler the Sudetenland, with Chamberlain describing the crisis as “a quarrel in a faraway country, between people of whom we know nothing”. On his return to London, Chamberlain asserted that the accord with Germany signaled “peace for our time”.

Hitler enters the Sudetenland, October 1938

Hitler enters the Sudetenland, Bundesarchiv, Bild | October 1938

In March 1939, German troops occupied the rest of Czechoslovakia. In September 1939, Hitler invaded Poland on a similar pretext of protecting the German minority from persecution. War followed, leaving more than 60 million dead. Almost two-thirds were civilians.

Hopefully Western leaders have learned from history. Appeasement is not an option.

Read more at BBC History and Wikipedia: The Sudeten Crisis.

An appeaser is one who feeds a crocodile, hoping it will eat him last. ~ Winston Churchill

March 4, 2014

China Sides With Russia on Ukraine | The Diplomat

Shannon Tiezzi writes:

China’s ambiguous position reveals its dilemma. Beijing’s instinct is to back Moscow, both to uphold the fruitful cooperation between these two nations and to stand firm against pressure from the West. However, vocally supporting Russia would violate China’s principle of non-interference. More importantly, it could arguably set a precedent of Chinese support for military intervention to protect separatists unhappy with their government—which goes against all China’s instincts, given its own issues with Tibet and Xinjiang provinces. Yet as the Global Times put it, at the end of the day power calculations mean more than principles. China’s geopolitical strategy requires Beijing to at least tacitly support Russia, and at the end of the day that argument outweighs more abstract philosophical concerns.

March 4, 2014

As China looks on, Putin poses risky dilemma for the West | Reuters

David Rohde at Reuters quotes James Jeffrey, a retired career U.S. diplomat:

Jeffrey said the days and months ahead will be vital. If Putin faces few long-term consequences for seizing Crimea, it will set a precedent for China and other regional powers who may be considering establishing 19th century-style spheres of influence of their own.

“The Chinese,” Jeffrey said, “are in the same position.”

January 19, 2014

Shanghai selling pressure

A sharp fall below zero on 13-week Twiggs Money Flow warns of selling pressure on China’s Shanghai Composite Index. Breach of support at 1950 is likely and would offer a target of 1800*.

Shanghai Composite Index

* Target calculation: 1950 – ( 2100 – 1950 ) = 1800

Michael Pettis summarizes the four challenges facing China:

China is over-reliant on credit to generate growth;
Attempts to boost consumption will reverse the long-standing subsidy of new investment;
Attempts to resolve excess capacity also slow growth; and
Unrecognized bad debt on bank balance sheets mean that growth is overstated.

January 15, 2014

China weakens

China’s Shanghai Composite is headed for 1950 after breaking support at 2080 to confirm a primary down-trend. Twiggs Money Flow below zero indicates selling pressure.

Shanghai Composite Index

* Target calculation: 2100 – ( 2250 – 2100 ) = 1950

December 23, 2013

Russia 1998 crisis haunts Deutsche Bank analyst seeing China bust | Livemint

When the Deutsche Bank AG equity strategist [John-Paul Smith] looks at the country [China], he says he detects some of the same signs of a financial meltdown that led him to predict Russia’s 1998 stock market crash months in advance. China’s expansion is being fueled by soaring corporate borrowing, a high-risk model that needs to be replaced by the kind of free-market measures and budget cuts that fed Russia’s growth in the aftermath of the country’s default and subsequent 44% monthly tumble in the Micex Index, Smith said.

There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year, Smith said in an interview from London on 12 December, a day after he issued a report predicting China’s slowdown will lead to a 10% decline in emerging-market stocks next year. “If I am wrong on China, I am wrong on everything.”