Month: August 2013

By Profit Confidential

The Chinese economy, the second-biggest economy in the world, is witnessing a significant decline in manufacturing. The HSBC China Manufacturing Purchasing Managers’ Index (PMI), compiled by financial information company Markit, fell to 47.7 in July from 48.2 in June. (Source: Markit, August 1, 2013.) Remember: any reading below 50 represents contraction in the manufacturing sector.

In July, the manufacturers in China reported a contraction in new orders—the sharpest drop in eleven months.

Manufacturing accounts for a very significant portion of the Chinese economy. According to the World Bank, it accounted for 30% of China’s gross domestic product (GDP) in 2011. (Source: World Bank web site, last accessed August 1, 2013.)

What’s happening with China’s manufacturing leads me to believe that the estimates of growth we have seen for the Chinese economy this year and next are just too optimistic.

The Chinese economy grew at an annual pace of 7.5% in the second quarter of this year. It wouldn’t surprise me if this growth rate declined further. And let’s not forget that this growth rate of 7.5% for the Chinese economy is notably lower than its historical average of 10%.

I keep pounding this on the table: U.S. stock markets will suffer as the Chinese economy contracts.

Here’s what the CEO of The Coca-Cola Company (NYSE/KO), Muhtar Kent, said on the company’s second-quarter earnings conference call: “As is well publicized, China’s economy has been slowing and this is now being felt in consumer spending. [Our] China first half retail sales were the slowest in 10 years… As a result, our volume performance in China remained soft and was even for the quarter, cycling 7% growth from the prior year.”

This is just one example of a large American company seeing softer demand because of the economic slowdown in the Chinese economy. It’s a major risk that shouldn’t go unnoticed.

Article by profitconfidential.com

By Profit Confidential

If there is one constant in capital markets it’s that the oil business continues to be a good business to be in.

West Texas Intermediate (WTI) oil over $100.00 a barrel is nicely profitable. Natural gas and natural gas liquids (NGLs) could be higher, but according to the numbers, big oil is doing great.

Anadarko Petroleum Corporation (APC) is one of the largest independent oil and natural gas companies in the world with 2.56 billion barrels of oil equivalent (BOE) in proven reserves as of the end of 2012.

Last year, the company delivered record sales volume of 268 million BOE, representing eight-percent growth over 2011. The company’s latest earnings were very good.

In the second quarter of 2012, the company increased its U.S. onshore oil volume by almost 20,000 barrels a day over the comparable quarter.

Total second-quarter revenues grew to $3.5 billion, up from $3.2 billion comparatively. Natural gas sales almost doubled to $935 million, while oil and condensate sales fell to $2.0 billion from $2.2 billion. NGL sales came in at $261 million.

Earnings attributable to Anadarko shareholders were a solid $929 million, compared to a loss of $89.0 million in the second quarter of 2012.

The company increased its full-year 2013 sales volume guidance to a range of 281 million to 287 million BOE, up from the previous range of 279 million to 287 million BOE. This should translate to solid bottom-line gains over 2012, with the commodity above $100.00 a barrel. Wall Street estimates have been going up.

Anadarko’s share price performance has been choppy over the last 10 years, but the normalized trend is still upward. The company’s chart is below:

Chart courtesy of www.StockCharts.com

This stock is fully priced with a forward price-to-earnings (P/E) ratio of approximately 17, but it’s typically fully priced because investors want to own it.

Oil and natural gas belong in a well-balanced equity market portfolio (unless environmental concerns are too great an issue). Anadarko has a bright outlook and executes well from the investor’s perspective.

It certainly doesn’t yield like many of the large integrated companies, but Anadarko outperforms Exxon Mobile Corporation (XOM), Chevron Corporation (CVX), and ConocoPhillips (COP) over the long term.

There is a flurry of earnings in this sector right now, and outlooks are going up because of renewed positive action in spot oil.

In terms of portfolio construction, I think an equity market portfolio, especially for income-seeking investors, needs to have holdings in this sector. The yield, whether through integrated producer dividends or through master limited partnerships (MLPs), is attractive and there’s certainty there. (See “Why Supply and Demand Doesn’t Matter for U.S. Oil.”)

Oil is both a consumer cost and barometer in capital markets. If geopolitical events are relatively calm and WTI is more than $100.00 a barrel, it’s a bet by speculators on strength in the U.S. economy.

Even though higher oil prices hurt industries like the railroads, it’s still a vote by financial market participants on the current outlook.

A company like Anadarko is very much a stock that long-term investors can put on their radar. It’s proven to be a solid opportunity on many retrenchments.

Article by profitconfidential.com

By Profit Confidential

I’m longer-term bullish on China, yet at the same time, when I analyze a Chinese company, especially small-cap stocks, I often find myself wondering if the numbers are valid.

We all know what happened with Sino-Forest Corporation or Deer Consumer Products, Inc (OTC/DEER) and how these companies tricked us. Sino-Forest apparently didn’t have much of the forest properties or the revenues it claimed. Hedge fund guru John Paulson lost nearly $500 million from investing in this fabricated company. Deer Consumer Products, on the other hand, really didn’t have much going on at its factories, according to someone who observed the company. (Apparently there were no trucks coming or going, and workers were nowhere to be seen.)

Of course, there were numerous other Chinese stocks, many of which debuted via the hotly contested reverse merger process, that fabricated their numbers. (Read “Chinese Stocks Hindered by Mistrust.”)

The problem is that China is known as the “Wild West” for creative accounting. This is the reason why you see many of the smaller Chinese companies sporting extremely low valuations, as the associated Chinese risk is high and speculative. The trust is simply not there. You are better off with the large Chinese companies, but then the upside potential is low versus small-caps.

Moreover, there’s also the trust we have in the economic numbers coming out of China. There are some who believe key economic data is also creatively managed.

For instance, China reported its Purchasing Managers’ Index (PMI) last Thursday, and it came in at a surprising 50.3 in July, according to the National Bureau of Statistics. Many on the Street had expected contraction, which makes more sense given some of the recent economic data reported on China that pointed to stalling. So ask yourself: how does Beijing suddenly come up with a number that pleased investors and rallied the Chinese market?

While I’m not saying there may be some validity issues here, you have to wonder about the PMI number and all data surfacing from the government-controlled National Bureau of Statistics.

Case in point: the more authoritative HSBC PMI for China came out at 47.7 in July, which indicates contraction: something that seems to make more sense to us. Going back to June, the HSBC PMI also pointed to contraction, while Beijing showed expansion.

So while I remain long-term bullish on China, you really have to wonder about the reliability of numbers coming out of Beijing.

Article by profitconfidential.com

USDCHF is facing 0.9228 support, a breakdown below this level will indicate that the downtrend from 0.9751 has resumed, then further decline to 0.9000 area could be seen. On the upside, as long as 0.9228 support holds, the price action from 0.9228 could be treated as consolidation of the downtrend from 0.9751, one more rise to 0.9450 area to complete the consolidation is still possible.

Provided by ForexCycle.com

By MoneyMorning.com.au

‘If China crashes, so will Australia.’

We’ll admit to singing that tune for much of the past five years.

But we started to change our tune on China about 18 months ago.

That was when even the mainstream media and analysts started to shift from bullish to bearish on China’s economy.

It was also when we started paying less attention to macro-economic events. We felt there was too much manipulation of global economies to make much sense of them.

We’ll leave that analysis to other, smarter folks than your editor. We prefer to focus on micro-economic analysis – stocks.

That has been important. Because despite the negativity on China, the Australian market has held up remarkably well.

So, does that mean Australia has now de-coupled from China?

OK, that’s probably taking things too far.

China is still Australia’s largest trading partner and the biggest consumer of Aussie natural resources. (If our old pal Nick Hubble is right, we’re not just talking about copper and iron ore, the biggest future export to China could be…milk!)

So there’s no doubt that what happens in China will have an impact on the Australian economy.

However, it’s important to separate the Australian economy from the Australian stock market. If you’ve learnt anything from the past five years it should be that what’s good or bad for the economy isn’t always good or bad for stocks…

Have Australian Stocks De-Coupled from China?

To show you what we mean, check out the chart below. Over the past year all the headlines have been about China’s lower growth rate and forecasts of the growth rate going lower.

At the same time, China’s stock market has been volatile, slipping into negative territory for the year – down 3.8% since this time last year. Actually, that’s not bad given the negativity.

But what about the Australian market? It should have taken a beating too right? Yes, resource stocks have fallen. But we can’t say the same for the rest of the market, as the chart shows:

Source: Google Finance

The Australian blue-chip index, the S&P/ASX 200, is 20.9% higher compared to this time last year.

So how’s that possible when the Australian economy relies on China? Even though resources make up a big part of Australian exports, the big blue-chip index has a heavy weighting towards dividend stocks – especially the big banks. China doesn’t impact those stocks directly.

But more than that, the one-year chart of the Australian index is key. Last July and August was the start of the Aussie dividend rally. The Reserve Bank of Australia (RBA) had cut interest rates in May (0.5%) and June (0.25%). But investors didn’t start buying dividend stocks straight away.

The dividend rally only kicked off when investors saw the July 2012 RBA statement as a signal that interest rates would stay low.

Now, as the old saying goes, ‘past performance doesn’t guarantee future performance’. So can we expect more of the same – a continued ‘de-coupling’ between Aussie and Chinese stocks?

Dividend Rally Not Over by a Long Shot

The relative stock action between Australian stocks and the Chinese economy is a great example of how paying too much attention to news headlines can divert your gaze from the important stuff.

If you had thought a slow-growth China would naturally mean bad news for Australian stocks, it would have kept you out of the market. And that would have meant missing out on a 20% gain for your stock portfolio.

But all that is in the past. How will things play out over the next 12 months?

Quite frankly, we still don’t see that things have changed. Interest rates are low, and unless the RBA surprises the market this afternoon, there’s a good chance they’ll go even lower.

And as for the idea that interest rates are about to shoot up and send markets crashing…in the short term, we just don’t see that either (although we could be wrong).

Even in Japan, where the yield on government bonds doubled in just a few days, the Nikkei 225 index has regained almost all of the lost ground:

Source: Google Finance

This shows you that for all the talk of rising interest rates harming the economy, investors still believe interest rates will stay relatively low. And importantly, they see stocks providing a better potential return than other assets.

And that’s the way we look at it. Even if Japanese government bonds are at 1% rather than 0.5%, it’s not a big enough jump to make them more attractive investments compared to stocks.

Look at the Australian market. Bank savings rates are around 4%. That’s not bad. But it’s not as good as a dividend-paying stock that offers growth and the potential for a 6% or 7% fully franked dividend yield (see here for wealth specialist Vern Gowdie’s simple explanation of how a simple share investment can force the government to help pay for your retirement).

This is why we didn’t fall for the claims about the end of the dividend rally. As far as we’re concerned the rally isn’t over by a long shot.

In fact, we’re still looking for opportunities to buy sound dividend paying stocks on any dip, which we could see today if the RBA doesn’t cut rates.

Cheers,
Kris+

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From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Daily Reckoning: The Global Trend Towards Wealth Protection

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Pursuit of Happiness: Learning to Avoid the Governments ‘Noble Wealth Trap’

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

By www.CentralBankNews.info     The Central Bank of the Republic of Uzbekistan held its benchmark refinancing rate steady at 12.0 percent, saying in a brief statement that the board’s decision “is based on the main directions of the monetary policy for 2013, as well as actual and expected inflation.”
    The central bank has maintained its rate since January 2011, when it was cut by 200 basis points.
    On its website, the central bank said it would be holding a press conference on Aug. 7 but gave no further details about its policy decision.
    Uzbekistan’s inflation rate eased to 3.3 percent in the third quarter of 2012 from 3.4 percent the previous quarter while its Gross Domestic Product expanded by 7.5 percent in the first quarter of 2013 from the same quarter in 2012, down from an annual rate of 8.2 percent in the fourth quarter.
    The central Asian republic of Uzbekistan was previously part of the Soviet Union but gained its independence in 1991. The country’s economy is mainly based on commodities, such as cotton, gold, uranium and natural gas.

    www.CentralBankNews.info

By MoneyMorning.com.au

Surely, it’s a good thing China is slowly opening up its financial markets to free market forces?

The Chinese money printers have endorsed the idea of cheaper money. At least, the People’s Bank of China (PBOC) has ‘liberalised’ interest rates. Specifically, China’s central bank will now allow lenders to make loans below the benchmark lending rate of 6%.

Well, it would be a good thing if it were true. But we’ll believe it when we see it. Mind you, there are no free markets in money any more. China is not alone in creating an unbalanced banking system backed by unsound money. But it’s done as good a job as anyone.

The latest example is the construction of a ‘mini-Manhattan’ on the outskirts of China’s northern city of Tianjin. Over 43 high-rise projects are planned in the Binhai New Area Central Business District, according to Angus Grigg in this weekend’s Australian Financial Review. Three 100 storey towers are planned, including a Binhai version of New York’s Rockefeller Centre. The grand plan is for 10 million square metres of office space, or double the amount in Sydney’s CBD.

Before we go rubbishing the project as another example of local government loans financing unproductive real estate development – and showing how this blows bubbles in commodity markets which eventually put Australian investors at risk – we should point out that China is not Australia. That might seem obvious. But allow us to explain why it might matter.

China’s great leap forward from poverty to middle class wealth has been engineered by the Communist Party of China. It’s no small feat. Urbanisation and industrialisation, along with globalisation, have transformed China in the last 30 years. The creation of so much apparently excess office space capacity is the extension of China’s development plan. And it’s worked so far, hasn’t it?

Well, to a point. But we’re now at that point. From here, real economic gains in China will not come from starting from a low base (in terms of urbanisation, GDP, and industrial capacity). You can build office towers no one is going to use. But there IS an economic cost. That cost is in the misallocated savings of the banking system. And as our colleague Greg Canavan pointed out to us recently, an emerging middle class whose savings are tied up in non-performing property developments is not a middle class that can consume more and lead China’s much-vaunted-but-not-at-all-visible rebalancing.

Still, we know from past experience that these special economic zones are a way for China to direct foreign investment into new projects that create jobs and more capacity. What’s more, the major cities compete with each other for this foreign direct investment. If you’re an international company, investing in China is a political as it is financial, when it comes to balancing the competing cities.

What’s really at stake here is whether Australian investors can take the investment bubble in China at face value, or whether it will be the catalyst for a major fall in the stock market. If that happens, it will be related to a serious crisis in China’s financial system.

And that raises an even more interesting question of whether you can have a real banking crisis in a command economy where the State owns the banks.

Dan Denning+
Editor, The Denning Report

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From the Archives…

Is This the Spark to Send Australian Property Crashing?
26-07-2013 – Kris Sayce

Why it’s Deflation…Not Inflation, that’s Heading Our Way
25-07-2013 – Vern Gowdie

Why You Must Avoid This Big Investing Mistake…
24-07-2013 – Kris Sayce

The Dark Side of Technology: Part 2
23-07-2013 – Sam Volkering

The Dark Side of Technology: Part 1
22-07-2013 – Sam Volkering