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I am an individual investor passionate the markets with a track record of finding creative opportunities to profit from macroeconomic trends. The Lockstep Investing ( blog is written to speculate on macroeconomic trends in the stock market. The posts will... More
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  • Stimulus Watch: I hope the Aussies are saving their pennies
    Is Australia about to take shot on the chin? Currently the country is navigating the global downturn with exports of raw commodities to China. Is that about to turn?

    Australia, which has benefited greatly from China's increased manufacturing consumption of iron ore. China has gone from consuming less than 20% of Australia's iron ore in 2000 to over 80% in 2008. (1) China has even continued to increase their copper imports during the downturn leading to a scenario where their economy exports less but still increases consumption. For Australia, this situations encourages projections based on artificial demand. For China, this indicates uncorrected inefficiencies in their domestic economies that have been papered over by stimulus plan.

    There is evidence that the Chinese binge buying has abated...

    "In recent months Chinese demand for iron ore -- the primary material in the manufacture of steel -- has dominated freight market activity while also adding to swings on the main index.Port congestion in China as well as off Australia's coast had previously tied up a large number of Capesize vessels, typically hauling 150,000 tonne cargoes such as iron ore and coal. But queues off China have eased.Brokers said reduced iron ore import activity in China in recent weeks was taking its toll." (2)

    Considering the torrid pace of the last six months, this could be a breather or utter exhaustion. We will have to wait and look for more evidence before determining how to address the situation.

    (1) "Australia finds fortunes ever more tied to China" Reuters, Aug 19, 2009, by Wayne Cole

    (2) "Baltic index drifts lower, cargo enquiry light" Reuters, Sept 16, 2009
    Sep 17 11:33 AM | Link | Comment!
  • Stimulus Watch: China went overboard, do the Math
    Now that the world economic situation has turned up many are looking for a sustainable environment to allocate investment. Yet is it really a meaningful recovery or just a meaningful temporary stimulus?

    The total GDP of China $4.3T USD and the amount dispersed through loose credit policies through the first seven months of this year amounted to over $1T USD. This is equivalent to 25% of GDP lent to domestically to increase consumption.

    In comparison the US GDP is close to $14T USD and the stimulus program directly related to the federal budget amounted to $1T USD (Stimulus package + Cars for Clunkers + Chrysler Bailout + GM Bailout + TARP + AIG Bailout). This is a total of only 8% of GDP.

    IMHO it is obvious that China has been too loose with credit in fear of collapse. There are already signs of liquidity causing bubbles in commodities and property values.  Considering the size of the error, it will only be a matter of time before this causes problems in their financial system.

    The author is not yet shorting China, but defintely not long.
    Sep 16 12:10 AM | Link | Comment!
  • Commodity prices will indicate China's recovery prospects

    Recently China has been viewed as a stand out in a horrible global economic situation. It has been peculiar that the world's biggest exporter has been able 7% rate of growth while other major exporting economies, Taiwan, Japan, Hong Kong, and South Korea, all suffered negative growth rates and negative annual growth targets. In response to this environment, Chinese government has mandated lending in the face of a massive drop in exports revenue.

    Unfortunately, in traditional heavy handed approach by the Chinese governmenet, the lending has been indiscrimminately applied. Initial observations suggest that manufacturers have used the additional capital to build up raw material inventories without actual demand to produce for. "The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

    But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. "Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term"  Although I do not have the information resources to support this, I would be curious to know if Chinese companies were actually given incentives to borrow money based on their purchases of commodities, and took advantage of the situation to "arbitrage" the purchase domesticly with other market consumers. If anyone has any insight to how the Chinese stimulous package is being administered, chime in. But back to story...
    "The impact of this rash spending has been evident in the meteoric rise of the Baltic Dry Bulk Index since January even while shipping rates renewed their fall and exports are projected to continue to languish. Chinese firms are importing raw materials, even on decade low export levels. This situation led the CEO of Alcoa to point to China as the demand factor to turnaround abysmal aluminum sales for that company.
    But there is evidence that Chinese firms, and foreign firms operating in China, are not planning to import, but instead are speculating on an increase in domestic demand or a future recovery in export demand.
    "And even though foreigners technically can't trade commodity futures in China, some of the world's biggest trading houses have found indirect ways to trade through local brokers. Non-Chinese firms are emerging as influential players on the country's four exchanges, including in soybean futures. "They are trading large volumes," says one bank analyst who follows the sector."
    If China is speculating with stimulus money expecting renewed global demand, by the second half of 2009, it may not come. Surveys show that shipping rates could actually decline because of reduced purchases by Chinese manufacturers in late 2009. Moreover, just a technical or market mover related adjustment in commodity prices due to lack of real end user demand could cause significant pain or even unloading of commodity futures contracts if balance sheet issues arise at these speculating firms.
    In any case, commodity prices appear to be a solid "tell" over the next six months regarding the effect of the Chinese stimulus and the Chinese economic growth story as scenario to end the global recession.
    The author has no positions related to this post. 
    Jul 15 5:06 PM | Link | Comment!
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