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Private Beige Book points to continued slowing in China’s economy

posted on December 18, 2015 at 10:55 am


As China’s leaders began the country’s annual Central Economic Work Conference today, December 18, a private survey modeled on the U.S. Federal Reserve’s regional Beige Book survey of economic activity showed that China’s economy continues to weaken.

The annual economic conference will set a goal for economic growth that will be announced at the spring meeting of China’s congress and determines policy steps to achieve that goal. China President Xi Jinping has said that China must grow GDP by an average of at least 6.5% a year over the next five years.

The Chinese Beige Book, published by CBB International, New York, reports data showing that reaching that goal is going to be very, very tough. In contrast to recent official Chinese government data indicating that the Chinese economy showed signs of stabilizing in November, the private Beige Book reports that national sales revenue, output, prices, hiring, borrowing and expenditure were all weaker in the third quarter than in the second quarter. Government data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November.

Maybe it’s just a difference in reporting period—third quarter ending in September vs. November–but reading the Beige Book it’s hard to imagine a big turnaround happening so quickly in such big chunks of such a huge economy. For example, the Beige Book showed that corporate profits continued in slide in the third quarter. The percentage of companies reporting profit increases slipped to the lowest level recorded. In the manufacturing and services sectors revenue, employment and profits all fell. (Retail and real estate held up reasonably well, CBB concluded.)

There are always leaks from this annual economic meeting and it will be interesting to hear what China’s policy makers are advocating to end the slowdown in economic growth. After all policy makers haven’t done nothing to fix the problem; it’s just that what they’ve done—such as six interest rate cuts since 2014—hasn’t worked. Particularly worrying is evidence in the Beige Book numbers that show evidence that deflation is taking hold in China’s economy—in spite of the interest rate cuts. Deflation hurts corporate profits since even companies that are selling more wind up selling at lower prices. And central banks intensely fear deflation since monetary tools have a tough time reversing embedded deflationary expectations. Just ask the Bank of Japan.

Those interest rate cuts haven’t succeeded in getting more companies to borrow in order to expand production or to buy more efficient machinery either. The percentage of companies borrowing fell to a record low in the third quarter.

The CBB Beige Book is based on surveys of more than 2,100 companies across China and interviews with bankers, managers, and company executives.

5 effects of lower than expected inflation in China for October

posted on November 11, 2015 at 5:23 pm

Inflation in China at the consumer level rose in October at just a 1.3% rate year over year. That, the National Bureau of Statistics said on Monday, was the lowest rate since May and well below the 1.6% rate in September. Economists had expected an increase of 1.5

A truckload of implications (or at least five) follows from this number.

First, combined with the disappointing showing on exports and imports in data released over the weekend, it reinforces forecasts of slow growth in the global economy. The fear of slow global growth has led to another day of declines in emerging markets. The iShares MSCI Emerging Markets Index ETF (EEM) was down another 0.38% on Monday.

Second, with inflation in China so low, the People’s Bank of China is relatively free to cut interest rates, reduce bank reserve requirements, and otherwise stimulate growth in the Chinese economy. I think the Chinese markets will start to anticipate some or all of those measures in fairly short order. (Think possible short-term rally.)

Third, with low or no inflation in the global economy, there isn’t anything that I can see that stands in the way of a stronger U.S. dollar. (The U.S. dollar, in fact, hit a six-month high against the euro on November 9).

Fourth, with a stronger dollar and lower global growth expect weaker commodity prices. Oil was up slightly today as of 3 p.m. in New York time after days of decline but copper was down 0.47%.

Fifth, a stronger dollar means more cash flowing into dollar assets, which is likely to damp increases in U.S. interest rates when/if the Federal Reserve moves. The yield on the 10-year U.S. Treasury held steady on Monday at 2.31%.

Update Alibaba post-earnings

posted on October 27, 2015 at 7:24 pm

Update October 27, 2015. Despite China’s economy showing signs of slowing, revenue growth at Alibaba (BABA) blew through estimates for the second quarter of the company’s fiscal year. Wall Street analysts were looking for revenue to grow by 27% and instead Alibaba recorded 32% revenue growth.

Gross merchandise volume—the value of goods sold on all of the company’s platforms–rose by 28% year over year. Remember how some U.S. Internet companies have had trouble with the transition from a PC-centric Internet to one dominated by mobile platforms? No signs of that at Alibaba. Mobile platforms accounted for 62% of gross merchandise volume. Mobile revenue grew by 183% year over year. Annual active buyers increased by 386 million, a gain of 26% year over year.

Revenue in China grew so strongly that international sales as a percentage of revenue actually fell from 9% of total revenue to 8% in the quarter. Alibaba’s co-founder Jack Ma has said he wants to see international markets account for 50% of sales.

Newer businesses almost grew fast enough to make an impression on the top line. Cloud computing revenue, for example, was up 128%, but that still amounted to revenue of just $102 million off a very small base.

Yesterday when I recommended buying Alibaba’s ADRs at the end of the New York trading day, I said pay just enough attention to fundamentals to see that they aren’t going to stand in the way of the Alibaba momentum story. Fundamentals did much better than that today and that should leave momentum to run until at least the $95 level that the ADRs hit in June. After that it’s an issue of timing—do the ADRs hit $95 before or after the big Lunar New Year’s holiday, which could supply another momentum boost. (Lunar New Year falls on February 8 in 2016, the Year of the Monkey. People born in the Year of the Monkey are witty and intelligent with a magnetic personality.) I’d hold on for $95 or until the Lunar New Year, depending on Alibaba’s momentum after the big Single’s Day shopping holiday and the Western-style December shopping festivities.

The ADRs finished the day up 4.1% at $79.48 after trading as high as $82.79. That still leaves good overhead room to my $95 checkpoint. I’d watch momentum more than price (and certainly more than valuation) at this point.

Buy Alibaba

posted on October 26, 2015 at 3:42 pm

I’m adding the ADRs of Alibaba (BABA) to my Jubak’s Picks portfolio today ahead of the company’s report of fiscal second quarter 2016 earnings tomorrow before the New York market opens.

The units are up 30% from September 29, but September 29 marks the low for the U.S. traded ADRs, a good 16% below Alibaba’s IPO price. With this week’s plenum of leaders of the Chinese Communist Part set to add to the stimulus momentum of the surprise interest rate cut by the People’s Bank last week, I think Alibaba, despite that 30% jump, is the best way to play speculation on better growth for the Chinese domestic economy. (For a bonus add in excitement about next months Single’s Day, China’s biggest shopping event.)

Remember, when you’re trying to figure out if you want to buy this stock after a 30% move that this is China, the home of momentum and the enthusiasm of crowds. Tomorrow Alibaba will disclosure more about new cloud-based services for the business to consumer e-commerce market and expansion of the company’s offerings in video and streaming entertainment.  (Alibaba recently bought (for $4.6 billion) the rest of Youku Tudou, a YouTube-like site to enable it to stream content.) Plus founder Jack Ma will undoubtedly speak excitedly about Alibaba’s international expansion with a bigger London office serving as a European hub and expansion into France and Germany.

Alibaba isn’t just for China or the developing world anymore.

Besides at $76.58 today the ADRs trade way below the 52-week high of $120 and even after the recent rally are down 26% for 2015. I’d look for an initial move up to the local high of $95 back in June. (The holiday shopping seasons are coming!)

You’ll notice that I really haven’t mentioned any fundamentals in this post. (For the record, Wall Street is expecting 27% revenue growth in the September quarter. Given Alibaba’s spending on expansion and acquisitions and the company’s byzantine structure and accounting, I wouldn’t put any emphasis on earnings per share.)

To me the Alibaba story has always been about momentum. The stock had it, lost it, and now looks like it has it back—at least for a while. A buy right now is a bet on the Chinese market believing in stimulus for the domestic economy, in enthusiasm for the move to expand into streaming video, and in Alibaba’s expansion into developed markets.

I wouldn’t put this one in my buy and forget box—the Chinese market just doesn’t work like that.

But for an investor looking to buy into enthusiasm about the domestic Chinese economy, Alibaba looks like the pony to ride for a while. As I said above, I’d give this one a target price of $95.

This week is full to overflowing with market moving macro news

posted on October 26, 2015 at 12:47 pm

What a week for potentially market-moving news!

Let me give you a quick run down, ok?

Monday: Beginning today and running through Thursday, the Central Committee of the Chinese Communist Party meets to formulate a new 5-year plan that would go into effect in 2016. Certainly on the agenda are a new target for economic growth, reforms for the country’s huge state-owned enterprises, and goals for continued urbanization, environmental regulation, and registration for China’s migrant workers. The goals aren’t actually released until ratified by the national legislature, which meets in March, and typically they don’t go into official effect until the fall. But while remaining officially unimplemented, many parts of China’s government start to react as soon as the meeting is over. That’s especially true of monetary authorities such as the People’s Bank. China’s central bank cut lending rates at the end of last week in anticipation of this meeting, but there’s still room for more moves on mortgage rates and restrictions, and bond issuance by local governments, just to name two issues. The Shanghai and Shenzhen markets were up modestly overnight (0.5% and 0.68%, respectively) in anticipation of the meeting.

Tuesday: Call it a preview of Thursday’s report on third quarter U.S. GDP growth. Wall Street is expecting a 1.3% drop in orders for durable goods for September. That would be an improvement from an even bigger decline in August. Look to see what the figures ex-aircraft show since a shift in the timing of one or 10 of these big-ticket orders can skew the entire top line of the report. Anything worse than Wall Street’s expectations will color opinion ahead of the GDP report.

Tuesday: It’s Apple (AAPL) day. The company reports revenue and earnings for its fiscal fourth quarter. Key issues will be sales of the new iPhone, where analysts will be looking for any signs of weakness in the launch, and sales in China, where they will be looking for signs that slowing growth in the Chinese economy has cut into sales. Apple CEO Tim Cook has repeatedly said that Apple isn’t seeing problems in its China results—that may have created expectations that could bite the company this quarter. I think Apple’s results this quarter are likely to have more effect on the market as a whole—where investors will look for clues to growth in the Chinese and global economies—than for technology stocks. Still watch for reaction from shares of Apple’s suppliers such as Analog Devices (ADI), Qualcomm (QCOM), and Synaptics (SYNA.)

Tuesday: More on strength or weakness in the U.S. economy when Ford Motor (F) reports third quarter earnings. (General Motors (GM) reported last week and showed a larger-than-expected gain in operating profits in North America.) Of particular interest at Ford will be sales for the company’s new mostly aluminum F-150 pickup truck.

Wednesday: The Federal Reserve’s Open Market Committee will probably do nothing on interest rates, but investors will be intently parsing any Fed comments for clues on what the U.S. central bank might do in December. Look for any change in the post-meeting statement on the Fed’s degree of worry about China now that it looks like that market has stabilized–for the moment, anyway.

Thursday: The U.S. Department of Commerce releases its preliminary estimate of third quarter GDP growth. Economists are looking for a year over year growth rate of just 1.9%, down from a 3.9% rate in the second quarter. The report will certainly move the odds on a December interest rate increase from the Federal Reserve. The odds for a December increase have moved up slightly recently on a decline in volatility in emerging markets.

Friday: The Bank of Japan meets: Will it stand pat on asset purchases and just reiterate recent comments from Governor Haruhiko Kuroda that the current program of quantitative easing is working (despite a lack of economic growth or inflation), or will the bank decide to increase its asset buying? Without some progress toward those two goals, the credibility of Abenomics will continue to erode. A promise last month from Prime Minister Shinzo Abe that the Japanese economy would be 20% larger by 2020 has resulted mostly in derisive laughter.

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