Slower growth in China is necessary to avoid a bust–but it will reshape the investing landscape

Okay, I know that news that China’s economy grew at a slower than expected 7.7% rate in the first quarter—coupled with worries about a deepening recession in much of the EuroZone and that the U.S. economy might itself be slowing—knocked the stuffing out stocks on Monday, April 15. And that the China news looks like it has broken the momentum of the recent rally, at least for a while. Believe me, I’m not fond of drops of this magnitude.

But…

In slightly longer-term I think this slowing in China’s growth rate is good news.

You see I think it’s intentional. (Which means that a return of fears about an unintentional hard landing aren’t justified.) China’s government is trying to slow its growth rate because its afraid of setting off another bout of real estate speculation, of increasing the flow of hot money into China’s economy, and of the rising tide of borrowing and debt in China especially at the local level.

Investors around the world who had decided that they could count on China revving up its economy again to 9% or 10% growth were indeed disappointed. They’d placed their bets, especially in the commodities sector, based on those expectations. And when those expectations weren’t met they sold and sold.

But the only way China could meet those expectations would be to go back to the old days of stimulus, stimulus, stimulus based on massive spending on infrastructure and other hard assets financed by loans that stood almost no chance of being repaid.

China faces a choice—a slowdown today or a crash tomorrow. And I think that China’s new leaders have picked “slowdown.”

Now like most medicine this one isn’t the tastiest thing to swallow. Read more

Retracement,correction or panicky plunge: Initial thoughts on today’s falling markets

As if April 15 wasn’t already painful enough…

Today we’ve got either a standard retracement of the April rally, a sell off in growth-related stocks on a disappointing report on first quarter GDP out of China, or a panicky plunge in oil, industrial materials, silver and gold.

It’s certainly a down market today but the nature of the “down-ness” depends on how your portfolio is positioned.

It’s hard to judge a downturn while it’s in progress—either for severity or duration—but here’s how I understand what we’re seeing today.

Doubts about growth prospects have been rising for months as analysts cut their earnings forecasts for U.S. stocks even as stock priced rose. Last week, earnings reports from Alcoa (AA), Wells Fargo (WFC), and JPMorgan Chase (JPM) that showed year over year declines in revenue. That added to a general sense of worry over economic growth resulting from projections for lower growth in the EuroZone and disappointing retails sales growth in the United States. The clincher for investors worried about growth came overnight when China announced first quarter GDP growth of “just” 7.7%. That was below economist projections of 8% and below the 7.9% growth posted in the fourth quarter of 2012.

If global growth is going to be lower than expected, you’d expect commodity prices to fall. That decline today, however, has been amplified by a previous retreat in commodity prices. So commodities aren’t just retreating today—they’re reacting to today’s move lower as if it is a continuation of a longer bearish pattern. Today benchmark Brent crude is down 2.2% and London Metal Exchange 3-month contracts on copper are down 2.7%.

The biggest damage, though, comes in gold and silver where today has just accelerated a move that turned from correction to plunge last week when Goldman Sachs recommended going short gold. Read more

Why markets aren’t worried about inflation even as central banks flood the world with cash

It puzzles a lot of you I know from your emails and your posts on my sites. Frankly, it puzzles me. And I’d say that anyone who says this doesn’t puzzle them has more ego than sense.

The world’s central banks have flooded the global financial markets with cash—and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.

And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.

Does this make any sense?

Maybe.

You can find a potential key to unlocking this puzzle in The Vapors 1980 hit “I’m turning Japanese I really think so.”

Let’s start by trying to understand the logic of the Japanese market at the moment. Read more

Alcoa’s earnings surprise is better news for carbon-fiber maker Toray Industries

Alcoa (AA) kicked off the first quarter earnings season Monday after the close in New York by reporting earnings of 11 cents a share (excluding ne-time items), up from 9 cents a share in the first quarter of 2012, and above the 8 cents a share projected by analysts.

I don’t see anything in Alcoa’s numbers to make me want to buy the stock. But the aluminum maker’s results do say Buy Toray Industries (3402.JP in Tokyo or a very lightly traded TRYIY in New York.)

Here’s why.

Alcoa reported strong growth in its engineered products business, which sells to the aerospace and automotive industries. The auto industry is on track to consumer 4% more aluminum this year as the average car produced in North America adds 14 pounds of aluminum from last year’s level to reduce weight and improve gas mileage. In aerospace both Boeing (BA) and Airbus are working on huge backlogs. Boeing completed its final certification test for the batteries in the 787 on April 5. Analysts are expecting the U.S. Federal Aviation Administration to give the go ahead on deliveries of the 787 within weeks. Order backlogs have reached 4,948 planes at Airbus (up from 4,400 a year ago) and 4,450 at Boeing (up from 4,000.)

So with that potential why am I not running out to buy these shares? (The market isn’t falling all over itself either with the shares up just 0.47% today as of 2:45 p.m. New York time.)

Because while Alcoa beat analyst estimates on earnings, the company fell significantly short on revenue. Sales actually fell to $5.83 billion for the quarter from $6.01 billion in the first quarter of 2012. Wall Street had been expected revenue of $5.88 billion. (The company reduced costs by $247 million from the first quarter of 2012—if you’re wondering where the earnings surprise came from.)

The problem, as it is for so many commodities right now, is that supply exceeds demand. Alcoa projects that the global aluminum market will be in surplus by 155,000 metric tons in 2013. That’s an improvement from the company’s forecast back in January of a 535,000-ton surplus. But the reduction comes from Chinese companies that have taken capacity out of production in response to low aluminum prices and that have the ability to put that capacity back into production as soon as prices improve. So it’s not just the forecast surplus that hangs over the aluminum market but the extra capacity that can come back into production on any increase in price. (Alcoa continues to forecast a 7% increase in aluminum demand in 2013.)

I’d rather go with shares of a company that will profit from the positive trends in the aerospace and automotive industries that Alcoa has identified but that isn’t facing the same market surplus problem.

Which brings me to Japan’s Toray Industries. Read more

It’s a central bank world–we just live (and invest) in it

Friday’s market action on the very weak U.S. jobs number—just 88,000 jobs created in March—put worries about U.S. economic growth on center stage.

At least in the short term.

What with earnings season highlighting companies’ growth for the first quarter and projected growth for the second quarter, and what with the Commerce Department set to release retail sales figures for March on April 12, I think it will be easy for the market to get caught up in growth worries and for the bulk of investors to start behaving as if growth were the most important issue facing the market.

Don’t go with the crowd. Recent numbers casting doubt on U.S. growth rates shouldn’t be ignored, but they haven’t changed the basic forces driving global financial markets.

This is still the central banks’ game. And currencies—the relative price of the dollar, the euro, and the yen—are still the most important mechanism for transmitting messages from the central bank to the markets.

If I’m right and this remains the central banks’ game, I’m looking for a strengthening dollar (and a weakening yen and euro) to continue to put downward pressure on the price of oil, copper and other commodities—and to continue the rout in gold.

U.S. economic growth does figure into this equation since weaker than expected U.S. growth will temper the boost that the dollar might otherwise deliver to Japanese and U.S. equities. Decent growth in the U.S. economy is likely to give the current rally more room to run.

But growth is really a sidebar to the main story.

Which isn’t to say that the story hasn’t changed at all. Read more