China’s banks on the hook for $260 billion in local-government bad loans

That’s one huge bad loan problem.

23% of the $1.1 trillion that Chinese banks have lent to infrastructure projects backed by local governments are likely to go bad, an unnamed source with access to government data has told Bloomberg.

The works out to about $260 billion in potential bad loans or about five times the $50 billion that China’s five biggest banks plan to raise this year in new capital.

About half of the projects can’t generate sufficient revenue to cover their debt service. The interest on these loans will have to be paid by other sources including the local governments that guaranteed the loans.

The problem isn’t likely to show up all at once. Many of the loans to the investment vehicles set up by local governments (since China’s local governments aren’t allowed to borrow themselves) are long-term debt. Borrowers will probably manage to scrape up interest payments for the next year or two in the hope that something will happen to bail them out before running out of cash. That means that loan problems will start to show up in large numbers in two or three years.

But show up they will. This same insider said that government data show that only 27% of the loans to local government-affiliated investment vehicles will generate enough cash to repay their loans.

The central government is ultimately on the hook for this bad debt—well at least as much on the hook as Beijing can be given its history of simply burying bad debt in special purpose vehicles.

The pause that tells us where this rally is headed

Now we test this rally.

The upward move in the market stalled yesterday, July 28, at technical resistance for the NASDAQ Composite index, which had led the advance.

Nothing unexpected there. The NASDAQ Composite is up 10% in just 18 days. That’s enough to convince some investors to take profits. A technical analyst would call the market “overbought.”

It’s what happens from here that counts, that determines whether we’ve had a great bounce, a very quick but decent summer rally, or are on the verge of something more.

What makes deciding how this market will break now so hard is that stocks have been so volatile recently.  Arthur Hill of Stockcharts.com counts six moves in the NASDAQ Composite and NYSE Index of 8% or more since the April high. (That’s three moves of 8% or more up and three down.) That’s an average of one 8% move every 2.66 weeks.

Semiconductor stocks, which have helped lead the most recent upward move, show the same volatility (and then some) with six 10% moves since late April.

On that pattern investors can expect that any pullback here would be quick and substantial. (Like 8% or more, perhaps.)

Update Teva Pharmaceutical Industries (TEVA)

It’s great earnings for the second quarter (announced on July 27) versus long-term worries for Teva Pharmaceutical Industries (TEVA) right now. With an assist from sell on the good news, long-term worries are winning at the moment.

For the second quarter earnings climbed to $1.08 a share. That was an increase of 30% from the 83 cents a share in the second quarter of 2009. The Wall Street consensus had projected earnings of $1.04. 

In its conference call the company raised its guidance for the year to $4.50 to $4.60 a share, up from the prior forecast of $4.40 to $4.60.

Oddly enough for the world’s largest maker of generic drugs, the long-term worries focus on a proprietary Teva drug, Copaxone.

Finally–the launch of my new subscription newsletter

It took a little longer than I expected (what with the simultaneous launch of the Jubak Global Equity Fund) but it’s finally here…

Ta da!! The Jubak Asset Management newsletter and website.

As promised, as my thanks for a year of your loyalty to JubakPicks.com (Yep, I started this site just a little more than a year ago) all readers of JubakPicks.com can subscribe for half price. Yep, for just $150 a year—a 50% discount off the retail price of $299—you can get my new JAM Letter.

Everyone who signed up this month for special offers and all registered users of Jubakpicks.com will be getting an email this week that includes a discount code for 50% off the JAM subscription. So be sure that you’re either registered at JubakPicks.com or that you’ve signed up for our special offers email. To register, just hit the ‘register or login’ button in the upper right-hand corner of JubakPicks.com. (Being a registered member allows you to access my stock portfolios and comment on my blog posts, and it’s free.)  To sign up for the special offers email, click here. (Just by the way, if you invest in my new mutual fund, Jubak Global Equity, you get a free subscription to JAM.)

Okay, so even after a 50% discount, $150 is real money. What do you get for your cash?

Every day, not once a month or once a quarter, the Jubak Asset Management (affectionately known as JAM) newsletter and blog delivers:

• First access to my thoughts on the day’s most important market events
• Breaking videos, shot from my desk at Jubak Asset Management, with up-to-the-minute commentary on what the news means
•  The weekly “Saturday Evening Quarterback” email to get you ready for the week ahead
• My takes on stock market conditions in the U.S. and global stock markets in the short-, medium-, and long-runs
• My in-depth reports on hot (and cold) sectors, industries, and global markets
• A daily summary of events and trends sent via email after the markets close, at around 5:00 PM EST.

And all this goes to readers of JAM first and often exclusively.

For example: right now on JAM you’ll find posts on why Spain’s banks are the big winners from the euro stress test; the reorganization at Grupo Mexico that makes this copper producer a buy; the Mexican deal that puts more fizz in Brazil’s Ambev; my first video from JAM world headquarters on the fatal flaw in the euro stress test; and more.

So all you registered users and folks who signed up for special offers: look for my email later this week with your discount code. Or, go straight to the JAM site at Jubakam.com to subscribe now.

More cheery numbers from the mortgage front

And now its credit-worthy home owners with prime mortgages that are jumping ship.

Foreclosure rates for loans that conform to the guidelines of now government owned Fannie Mae and Freddie Mac have jumped 425% since January 2008. And the monthly rate of foreclosures has accelerated in the last two months, according to Lender Processing Services.

Unlike the subprime mortgages that set off the global financial crisis, conforming agency prime mortgages are held by borrowers regarded as the best credit risks.

There’s bad news and good news in these numbers.

The bad news should be pretty obvious: The last thing that Freddie Mac and Fannie Mae need is more bad mortgages.