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Market doubts grow about China’s ability to turn around growth trend

posted on September 22, 2015 at 11:35 pm
china real estate

One thing I would have been willing to bet on was that stocks trading on China’s mainland markets would climb today, September 22.

With Chinese President Xi Jinping starting a state visit to the United States, can you really imagine officials back in China letting Chinese markets go down? (You may have missed the start of President Xi’s trip in all the excitement over the Pope’s visit, which also started today.)

But it turns out that it was near thing. The Shanghai Composite index moved up just 0.92% on the day and the Shenzhen Composite closed ahead by 0.71%. It’s not that officials didn’t try. At 1:50 p.m. Shanghai time the index was at 3181, slightly above the open at 3161. And then, as has been the case recently, stocks started to move up strongly in the last hours of the session as money from government institutions and government-controlled (or government-commanded) entities from banks to brokerage companies started buying. By 2:20 the index was up to 3209. And then stocks in Shanghai stalled to finish the day at 3186 for gain of less than 1% for the day.

The failure of the Shanghai and Shenzhen indexes to put in a stronger day when President Xi’s prestige (in the opinion of the Chinese government and official media) was on the line didn’t do anything good for global stock markets. In fact, it looks like the lackluster day for Chinese markets served to draw attention to worries about slowing growth in the Chinese economy.

Investors and traders are increasing coming to see difference between the Chinese economy and the China stock markets. The Chinese government isn’t doing a great job of manipulating the Chinese equity markets but it’s doing a even less effective job in reversing the decline in the rate of economic growth.

For the day, sectors influenced by growth—or lack thereof—in the Chinese economy took it in the neck. Mr. Copper, a key indicator of economic growth, fell by 3.58% on Comex. U.S. crude benchmark West Texas Intermediate dropped by 1.8%. (Brent crude edged lower by 16 cents a barrel.)

Emerging market stocks continued their recent downtrend with the iShares MSCI Emerging Markets ETF (EEM) falling 1.87% on the day. Emerging market currencies fell hard too. The Brazilian real dropped to a record low, for example.

The best performing currency on the day was the Japanese yen. The safe haven currency of choice currently climbed on the day. (Which, of course, led to a decline in Japanese stocks with the Nikkei 225 falling 1.96%.)

And if the VIX, the so-called fear index, is to be believed, we’re looking at a return of volatility to the markets. The VIX rose 11.4% for the day to hit 22.44. That sent the volatility index up by 16.88% for the year to date. The high on the VIX for the last 52 weeks is 53.29 with a low of 10.88.

I’m using today’s cash-induced rally in Shanghai to sell Mosaic–I just don’t see higher stock prices turning into stronger economic growth in China

posted on September 8, 2015 at 7:32 pm

Do you believe that today’s big intervention by government purchasers in Shanghai and the resulting rally in Shanghai (up 2.92%) and across global markets really means anything for actual economic growth of China or anywhere else in the world?

If you believe this was largely (or entirely) an effort to prop up stock prices in Shanghai that will have almost no effect on the real economy in China—or on demand for the things (like iron ore) that China buys, then you should sell on the rally.

If you believe there is some mechanism by which rising stock prices will result in increased economic growth in China and elsewhere, you should buy on the rally. Apple’s forecast of strong sales of iPhones in China, or a turn around in demand for BMWs would be more likely.

Personally, I don’t see the magic switch that would turn stock profits—assuming that the rally doesn’t end badly and there are any—into economic growth. Rather than a sign of potential stronger growth, I see the intervention by government cash as a sign that China’s government recognizes that it has a deep growth problem on its hands. And that it can’t afford a bear market in Shanghai at this juncture. (Most capital for Chinese business is still raised from banks so the economic effects of a bear market in Shanghai are smaller than they would be in the U.S. system.) Frankly, I don’t see adding more cash to a financial system that has trouble allocating cash efficiently is going to fix a system that needs big exposure to the consequences of bad investment decisions.

So today I went through my Jubak’s Picks portfolio looking for stocks that I bought on the premise of stronger growth in China but where that premise remains a mostly unfulfilled—or at least delayed—promise.

Tomorrow I will sell shares of fertilizer producer Mosaic (MOS) out of Jubak’s Picks with a loss of 11.25% since I added it to this portfolio on June 3, 2015. I was convinced, then, that demand for potash fertilizers from China and India would pick up enough to let a resurgent phosphate fertilizer business drive profits at Mosaic higher. That dynamic is crucial to rising earnings at Mosaic since the company, the third largest potash producer in the world, has higher production costs than its biggest competitors. At times of rising demand that disadvantage doesn’t matter very much. When demand is sluggish—like now—and prices are under pressure, those higher costs hurt the top and bottom lines and blunt the effect of Mosaic’s dominant phosphate business.

In the first half of 2015, rising margins in the potash business for Mosaic promised a strong second half as rising demand led to increased capacity utilization at Mosaic. Those higher margins on increased capacity utilization now just don’t look likely to materialize. A July forecast from Potash of Saskatchewan that looked at rising demand from Brazil and a second half recovery in economic growth in China to lead prices higher now looks premature.

Mosaic’s shares are up 7.3% from their August 25 low as of the September 8 close. The company will pay its 27.5 cents a share (a 2.73% yield) dividend on September 13 to shareholders of record as of September 3.


Here’s what I’m thinking about on my paid JubakAM.com site today–more volatility in oil prices

posted on September 7, 2015 at 7:30 pm

My post today on my free JubakPicks.com site warned “Watch out!” this week for bad economic news from China. China just revised its estimate for 2014 GDP growth to 7.3% from 7.4%. And I’m looking at this week’s data to see if that revision is but the first of several that will take official growth for 2015 below the government’s target of 7%. It’s hard for me to see a bottom or a recovery in stocks that depend on the Chinese economy–such as commodity stocks in the oil and mining sectors–or to get very optimistic about emerging market equities or currencies without stability in China. I’m also increasingly curious about the implications of the relatively minor role for the country’s big banks in the government’s program to stabilize the Shanghai stock market and the national economy. I suspect it’s related to the increasing bad loan problem at these banks. But that’s the subject for another day’s post.

Today on my paid JubakAM.com site I look at another source of market volatility. If you look at the CBOE Crude Oil Volatility Index you’ll see not just a steady rise in volatility in the crude market but, recently, an acceleration of that increase in volatility. I can certainly understand why crude oil price volatility is rising as we go into the shoulder season for gasoline demand and as refiners shut capacity for seasonal maintenance, and as supply trends take another turn toward oversupply (laid out in the post–the latest surge in supply is coming from the North Sea and Nigeria) but I worry that more volatility increases the risk of even more volatility and a big overshoot, short or long, in the oil market.

That’s what I’m working on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

China “data week” starts off on negative note; look out tomorrow in New York

posted on September 7, 2015 at 3:29 pm

A big week for China news hasn’t started off well. And that says, “Watch out!” when U.S. stocks resume trading on Tuesday, September 8. In recent weeks global markets have followed the lead of China’s markets—generally lower—so even if you don’t own any Chinese or emerging market equities, a week of negative data wouldn’t be a positive development for your portfolio, and especially for any commodity positions.

Today’s news showed that China’s huge foreign exchange reserves got a bit less huge in August. China’s foreign-exchange reserves fell by a record last month as the People’s Bank sold dollars to support the yuan and prevent that currency from falling even further after the central bank’s surprise devaluation. China’s reserves fell by $94 billion to $3.56 trillion at the end of the month. (Economists surveyed by Bloomberg had expected a drop to $3.58 trillion.) Clearly, China still has plenty of cash to use in supporting the yuan, but the big drop in reserves, plus the cost of direct purchases of stocks to support the Shanghai market, does increase the pressure on the People’s Bank to limit its interventions in support of the markets. (Which thought doesn’t make Chinese markets happy.)

On Tuesday, tomorrow, the government will release trade figures for August with the fear among traders being that China’s exports will come in flat again—they’ve been flat for the first seven months of 2015—and that imports, down 15% in that period, will show another decline. On Wednesday, traders will see inflation numbers, which should show prices well under control. The week’s data dump ends on Saturday with news on industrial output, retail sales, and investment—all crucial numbers for anyone trying to figure out how fast China might be growing.

An impending death cross for the Shanghai Composite index hangs over all this and colors the reaction to these numbers. A “death cross,” according to technical analysis, is when the 50-day moving average falls below the 200-day moving average. It’s not a good thing, technicians say, since it indicates continued weakness in the price of a stock or, in this case, an index. Today, September 7, the Shanghai Composite was teetering on the edge of putting in this negative sign.

That wouldn’t do anything good for market sentiment.

Other takes on my paid JubakAM.com site on today’s global stock market pummeling

posted on August 24, 2015 at 7:55 pm

I usually start these brief recaps of stuff I’ve posted on my paid site with the phrase “What I’m thinking about today besides…” But today I’m not really thinking about anything but the rout in global stocks.

So it’s more appropriate to slug this post with a head that begins “Other takes” on today’s market, besides the general market view that I’ve posted here today.

In my regular Saturday Night Quarterback look at the week ahead I noted that normally we’d expect a bounce on a Monday after a two-day rout like that which ended last week. A bounce wouldn’t signal that the coast was clear, but the lack of a bounce would tell us that traders and investors were so fearful that they weren’t the slightest bit interested in bargain hunting and that we had a way to go before we could think about a bottom. I think today’s reaction in global markets and even the U.S. indicates deep, deep fear.

You’ll find evidence for that view in the extraordinary performance of the VIX volatility index, sometimes called the fear index. The index closed Friday at 28.03 and then soared to an intraday high of 53.29–indicating a huge increase in fear since the index tracks the price that traders and investors are willing to pay for options providing protection against a drop in the S&P 500. The VIX closed at 40.74 today for an extraordinary move of 45.34%. On the JubakAM.com site I recommended closing the trade in VIX options that I’d suggested on July 21. VIX options purchased that day for 83 cents closed today at $6.60. I’m no options trader but I’ve been following the VIX closely this year. On July 21 the VIX closed at 12.69, an extremely low level of volatility. I didn’t think the VIX would stay so low with the Federal Reserve set to meet on interest rates on September 17. I certainly didn’t predict that the Chinese stock market would tank global stocks.

And also on JubakAM.com I noted that I thought this correction/bear/whatever had moved into a new stage where instead of just taking profits in momentum stocks that had climbed the most in 2015, traders and investors had started to sell on liquidity. Selling a stock like say Netflix (NFLX) that would be easy to sell because it traded in volume makes sense at this stage because it will also be easy to buy it back when the coast is clear. I suggested three other stocks in the technology sector that on the basis of today’s action seemed to be part of a liquidity trade. In passing I also noted Apple CEO Tim Cook’s extraordinary email to CNBC’s Jim Cramer telling Cramer that iPhone sales in China had picked up in recent weeks. That kind of email to someone who co-manages a portfolio would seem to be at best on the shaky edge of security rules–and testifies to Apple’s worry about iPhone sales in China this quarter..

Just thought I’d let you know what I’m working on at JubakAM.com–I think there’s some value to you in passing on the direction of my thinking about this market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

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