Import numbers were up high, exports fell, and inflation moderated. Surely, it seems like the rest of the world will be slightly happier with China going forwards, right?
Nope, we went from overheating to hard landing in the punditry’s view in about minus one quarter. It was probably already landing hard while it was still overheating if you read the news flow. I don’t really care if they cooked the books; Chinese inflation isn’t really like inflation elsewhere and savers have few options but to really get squeezed unless they put money into real assets like housing, which by the way is the exact thing that looks set to blow any second according to said punditry. Municipal and provincial government debt is apparently another flashing red light. Look around a little bit, and you will see people saying that the CCP chiefs have no clue what they are doing. (Search Jim Chanos.)
I agree! My spin on this is that I consider that the exact reason why one should stay invested – and heavily so – in China. I hope I shocked you a little there, but let the following quiz bring you back to reality. Four scenarios:
- Politicians of Country A have no idea what they are doing.
- Politicians of Country B have no idea why they aren’t doing anything in the face of long term dangers, freak out and blame Country A, and occasionally C and D.
- Politicians of Country C have no idea why they can’t get anything done.
- Politicians of Country D have perfect knowledge of why they’re not doing anything, but no idea as to why this doesn’t convince the markets that they are the gods of wealth creation and fiscal responsibility.
The question: In the face of global economic and financial turmoil, where would you rather have your money invested? (If you haven’t figured, A: China, B: USA, C: Japan, D: Europe/Germany.) I live where I do because I prefer exposure to politicians that actually do something in times of crisis. How about you?
Another reason that I prefer Chinese politicians is that they actually revive a long-lost concept in the west: Counter-cyclical policy.
How long ago was it that they stopped tightening in the face of 9.6% growth and 5% inflation (and growing)? When the world crawled back out of the 2008 bummer year, how long did it take them to start tightening again? When the crisis actually hit, which country provided the greatest stimulus as a percentage of GDP? Compare this to all other countries, and ask yourself, doesn’t this seem like they are at least willing and able to do something? Sure, there are some track-backs following the 2008-9 stimulus, but when the pundits stop screaming “overheating!” China is already there with the punchbowl wondering whether a refill is due, and when they’re tired of screaming “catastrophic crash!” China has already removed the liquor and is just waiting for the party to get back up to speed.
Europe? “Your olives landed in my pizza, and now we’re all heading for meltdown to be snacked on by speculators/Chinese/Americans!” Meanwhile the oven engineer is bickering with the wine farmer next door about whether to up the temperature just because it is a very good oven he built, and the wine farmer concluding that that would indeed add a very sour taste of vinegar to his bottles.
US? “We feel worried that we might not be the best ever, and if you’re outside our borders it’s your fault. That we can’t have functional politics where routine decisions can be made without massive divisive party splits, name calling and public chicken races has nothing to do with it all. We’re only doing all of those things because China, Japan and Germany either undervalue their currencies or drive their economies in the ground, or both.”
Japan? Fingers crossed for Noda, and most importantly that he stays on for long enough that he will actually see his own name tag arrive on his work desk at the premier’s office.
To break a bit from all the doom and gloom, lets look back into what selective easing in China is already doing.
In the steel sector, this can be pretty visibly seen over the last month. Nickel price is stagnant, and inventory has continued its plunge! But still, Angang Steel and Maanshan Iron are visibly outperforming these fundamentals! Why? Well, regulatory sentiment drew them down faster than the nickel price, and this change of at least not more tightening could be a godsend for these companies. They have faced strong price pressures, notably because of currency appreciations, tax exemption removals and higher penalties for energy intensive industries, so if this regulatory grindstone is taken off, prices can outperform substantially even in these uncertain markets.
With some confirmation that relative and selective easing has been accounted for in China for some time, and assuming that lending will continue to ease, this will be a huge turn on sentiment. Outperforming for that reason? My bet is with consumer goods, Macau casinos and gold plays. Small allocations to finance as well, but the waters are muddy right now, with Europe threatening to force liquidity withdrawal and Goldman selling their ICBC stakes again.
Casino stocks have already been discussed at length, and I believe last week’s sell off was an over-reaction, mainly sparked by a single quote from James Lee at Tanrich Securities. Valuations and fundamentals are still good, and I see no reason whatsoever why revenue in Macau would grow slower than the Chinese metropolitan area growth rates of 15-20% (base national + migration + human capital increasing returns), which has already been accounted for in my analysis of the market. A 40% call for growth is ridiculous, and so is 20%… anywhere else. I retain my calls for Sands in the short run, but then again that 25 barrier is now even stronger, and then once the market as a whole picks up (holiday season, with Christmas, New Years, Spring festival… you know the drill) plus a Santa Claus easing in the US and the current policy path of China, moving in harder on Galaxy.
On gold, well, we have these charts to play with:
Currently the SMA 60D is removing price at around 1822, and I suspect a full rally to 1850 would be needed to pull up the MA slope over the long run. (63 however removes price at 1750, so the adjustment could be rather important for the start of next week). Price action around here is thick, but so was the support at 1750. Can it climb to 1850 next week? Partially, there were very encouraging signals out of new york last night: gold did well no matter what. Risk on? Up. Risk off? Up. It’s catching back up with risk aversion and speculative inflow, and also, it shows this pattern on the hourly charts:
The circles show the triple cross, which last led to 70 dollar up, and now we have another one and we’ve already cleared 20! Word of caution: the price action is thicker here. As heroic as the 60D MA cross, trashing previous highs at 1750 plus the big figure fib I mentioned there earlier, in a wide SMA/EMA bearish gap, we now have the 1815 fib 0% to contend with, 1790-96-1800 resistance, and the 1825 level as well which was a line in the sand previously. Then there is a triangle at 1840 which almost looks like a hook now.
The forecast is for hitting 1825 on 20 EMA crossing 60 SMA, after which price takes a break since I believe this reflects similar price action to the 70 move. I’ll be waiting for the SMA/EMA gap to close on the daily (a matter of weeks?) to see further sustained up runs, however. This could be broken by a new touch at 1880 or above, at which the SMA comes back up and pulls the Bollinger with it, SMA at that point being led by 20 and 60 EMA’s.
Though, that doesn’t constrain me from doing some betting in Chinese gold plays again. Zijin Mining is performing rather well, and is under its 252 Day SMA. The august/september peaks failed to register in this stock, and then it still rallied afterwards, partially reflecting better outlooks from all the banks, and potentially hinting at less strict treatment from Chinese regulators and even some preparatory holiday bidding. News of further easing and Friday bullish pinbar, monthly SMA over quarterly? Calling HK$ 4+ by year end, no problem. (14+% rally.)
More interesting is Zhaojin. Same pinbar, same metal, different performance, and I blame the banks on that one. However, it did register the gold peaks, and it looks increasingly as if the triangle it is trading in has to be broken soon. The range since the breakdown in late September is effectively 11.6 to 16, meaning a 4.4 dollar break wouldn’t be impossible, especially on the upside. The fact that the stock has not enjoyed the same breakout as the metal did on the 25th of October and beyond indicates a potentially extreme catch-up scenario, and higher probability to the upside run. Breaking the triangle to close at 16+ (15 is the triangle upper area right now) and hurdling the close before the sell-off at 16.3 could see the stock technically shoot towards 18+ in a few weeks’ time.