It’s clearly going to take more than a credit rating downgrade from Fitch Ratings to get the attention of China’s stock markets. Yesterday Fitch cut China’s long-term local currency credit rating from AA- to A+. Because of the uncontrolled growth of China’s shadow banking sector, Fitch said, total credit may have reached 198% of GDP by the end of 2012, up from 125% in 2008.
Despite the downgrade, the iShares FTSE China 25 ETF (FXI) were up 0.5% today.
“Ultimately, we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet,” Fitch told the Financial Times.
In other words China’s financial system is going to need a government bailout like those in Ireland, Greece, and Cyprus. Read more
Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.
Well, never mind.
Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.
Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.
Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.
China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%
Investors can expect a torrent of economic data from China over the next week. Read more
MGM Resorts International (MGM) has passed another milestone on its path to building a new casino on Macau’s fast-developing Cotai strip. On January 9 MGM China Holdings, MGM Resorts International’s joint venture with the daughter of casino giant Stanley Ho, received formal government approval to build what will be its second resort/casino in Macau.
The joint venture will pay a land premium of $162 million to build a 1,600-room hotel, and a casino with 500 tables and 2,500 slot machines in Macau. The resort/casino is scheduled to open in 2017 at a projected construction cost of $2.5 billion.
How much is formal permission to build a casino that won’t open until 2017 worth? Working backward from a projected EBITDA (earnings before interest payments, taxes, depreciation and amortization) of $400 million in 2017, Deutsche Bank calculates that the development adds about $665 million to the equity value of MGM Resorts. (MGM Resorts International is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
But in my analysis the value of the 2017 casino still takes a back seat to improvements in MGM Resorts International’s balance sheet and any recovery in the Las Vegas market that the company dominates. Read more
One day doesn’t a rally make but…
I find myself writing that a lot recently. Yesterday it looked like a move up in gold could mark a turn in the gold market. This morning, so far, gold has given back about half of yesterday’s gains.
And this morning it’s the theme of this post on the bounce (not yet a rally) in Asian markets last night.
After sagging for two days, shares in Japan and China are up today. The Shanghai Composite Index was down 0.03%, essentially unchanged.
Today’s action re-enforces my belief that the decline in the first two days of the week was the normal pause that follows on a big advance like that recorded by the Tokyo market since the election of the pro-stimulus Liberal Democratic government of Prime Minister Shinzo Abe.
The higher close in Tokyo today wasn’t a surprise after the Abe government leaked news of a stimulus shock large enough to revive a diner suffering from fugu poisoning. Read more
Yum! Brands (YUM) dropped the other drumstick yesterday.
An 8-K report filed with the Securities & Exchange Commission (SEC) on December 21 said that a December 17 Chinese TV story about high levels of antibiotics found in KFC chicken in China from on two Chinese suppliers would have a moderate impact on sales in China. Moderate, the company told Wall Street analysts in guidance ahead of the company’s February 4 earnings report, would amount to a 4% drop in same store sales in China in the fourth quarter.
Yesterday, the company filed another 8-K report that lowered guidance to a 6% drop in same store sales in the quarter. That’s a huge decrease in sales during the last two weeks of the quarter. Credit Suisse estimates that same store sales must have showed a 15% to 20% decline in the last two weeks of the period to produce this large a shift for the quarter as a whole.
It’s not clear to me that Wall Street earnings estimates have yet caught up to the shift. 60 days ago the consensus for 2012 earnings at Yum! Brands was $3.27. Today it’s $3.25. Estimates for the fourth quarter have dropped to 83 cents from 85 cents 60 days ago.
The shares did drop 4.2% today to close at $65.04 but that is still substantially above the $63.88 low on December 21 and only partially reverses the climb to $68.32 on January 4 from that post-guidance low.
I think we’re likely to see more—if modest—downward pressure on the stock through earnings as investors fret about the very real possibility of an earnings miss or negative guidance for the first quarter of 2013. Or both.
I’d wait on these shares.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Yum! Brands as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/