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Pompano Frog  

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  • Chinese Stocks Are Cheap, Hong Kong Stocks Are Even Cheaper [View article]

    I think the author and many commentators may be confused.

    EWH is an ETF which represents Hong Kong Companies. The Hang Seng Index (^HSI) follows these companies.

    The H shares are Chinese companies that trade on the Hong Kong stock exchange. There are over 600 of these companies that trade on the Hong Kong exchange. The index that follows them is called the Hang Seng Enterprises Index (^HSCE). The First Trust AlphaDex ETF (FCA) is a 50 stock portfolio chosen from this index.

    It's the difference in valuation of the H Shares to the Shanghai Composite Index (^SSEC) which is what you are hearing about.

    I am not connected to FCA, but you can download a white paper on their techniques and a spreadsheet of the individual companies. Just check a few out and read the annual reports. Alibaba failed to meet the listing requirements on the Hong Kong exchange.
    May 23, 2015. 08:06 PM | 1 Like Like |Link to Comment
  • Chinese Stocks Are Cheap, Hong Kong Stocks Are Even Cheaper [View article]

    The author was not clear that he was recommending H shares. These are Chinese companies that trade on the Hong Kong Exchange. The Hang Seng Index follows Hong Kong companies.

    My recommendation in this space is the First Trust AlphaDex China ETF (FCA). This is roughly an equal weight portfolio of 50 Chinese companies out of the roughly 600 that trade in Hong Kong. They use an alogrithm which you can read the white paper on their website.

    There is no discussion here of monetary policy. While valuation is the most important factor in investing it has always been the case that investors who fight a negative monetary environment will suffer even if the valuations are low. China will continue to rise because the monetary backdrop is bullish and the H shares are cheap on a relative basis to the other major markets
    May 23, 2015. 07:38 PM | 2 Likes Like |Link to Comment
  • Greece Has Won This Round [View article]

    When Greece leaves the Euro and adopts the new Drachma that currency will immediately devalue by roughly 40% to 50%. This will set off enormous inflation in imported goods and services. Long term lending will come to a halt.

    Just look at Russia. Wages are down 10% and prices are up 14%. That lowers the living standard by 24% and, you as a government, never raised taxes or lowered pensions.

    On the other hand Greece is a great travel destination. Being part of the Euro has made a trip to Greece for foreigners artificially high relative to other choices.

    The drop in the Drachma will immediately set off a boom in tourism. Tourism is a high employment economic sector and requires low skills. This is why China subsidizes foreign and domestic tourism.

    As a side, if you want to know what good economic policy looks like you just have to ask yourself what China is doing.

    China uses tourism to employ the older generation that lacks STEM skills.

    These minority parties in the PIGS can sell their follower's their fantasy view of the world because there are no simplistic real life examples of the economic consequences.

    I would think Greece leaving the Euro would reduce the political power of these fringe movements.

    Keeping Greece in would increase their power.

    On your second point most Greek debt is held by central banks and international financial institutions. It will have little economic effect. I think bank regulations would not allow banks to hold Greek debt without a full reserve.
    May 23, 2015. 07:19 PM | 1 Like Like |Link to Comment
  • Greece Has Won This Round [View article]
    How does a Greek default negate Euro quantitative easing?

    Here in the U.S. we had the same scenario play out. The Federal Reserve loosened credit enormously running M1 expansion in the double digits.

    The politicians in both parties were trying to play to the public's misunderstanding of the causes of the recession and refused to increase fiscal policy.

    You can see that monetary policy was able to overcome a dragging fiscal policy. It took some time.

    The Greek Tsipras party, I think, did not win a majority in the election. I don't know what the recent polls show. But, politicians the world over are the same. They are not interested in the best interests of their population. They just want to hang onto power.

    If Tsipras gives in they will loose power. If the Troika gives in the existing political power will see increased resistance to reform in Spain, Portugal and Italy.

    Greece will leave the Euro. The leaders of Greece don't know if that is the best economic policy, but they have the best chance of retaining power with that choice. It will have little effect on the Euro zone.

    We can talk about it on a beach in the Greek Islands at a 40% discount to current prices.
    May 22, 2015. 05:19 PM | 6 Likes Like |Link to Comment
  • What Is 'Smart Money' Shorting In This Psychotically Bullish Market [View article]
    Dear Reader..

    Since these author's repeat the same anti-fed mantra over and over, and play on their reader's tenuous knowledge in this area I would like to repeat some points I have made in the past.

    My comments on SA go back to 2009. I was enormously bullish on the U.S. market in 2009 and on China in 2014. All of these comments were based on my understanding of central bank behavior and it's ramifications.

    I don't understand how you can think there is a credit bubble when it is extremely difficult to get a real estate loan. My examination of my spreadsheets indicates credit bubbles are real estate related. It is the drop in real estate construction that creates a recession.

    Rising interest rates are not negatives for financial markets. It is the availability of credit and not the cost of credit that shuts off new construction.

    I would ask the reader to consider if it might be possible that central banker's and their enormous support staffs have a better understanding of economic and monetary policy than the politicians who control the media dialogue?

    I can tell you one thing. In the last 50 years it was difficult to make money in the financial markets if you didn't follow central bank behavior. The economy is booming at the top. Does this feel like a boom to you?

    The author's first article was similar to this and critical of Japan. I guess he missed that move too. If your financial philosophy has not worked in 5 years it may be time to reconsider. I forgot human beings are not rational and markets are inefficiently priced.
    May 22, 2015. 11:12 AM | 8 Likes Like |Link to Comment
  • James Montier Rightly Dismisses The Natural Rate Of Interest [View article]
    Dear Reader..

    We are expected to believe that the four major central banks, Bank of Japan, the Federal Reserve, European Central Bank and the People's Bank of China, who employ thousands of the brightest economists have no understanding of monetary policy.

    Does that make sense to you?

    Who are attacking the policies of the Central Banks? The answer in the U.S. are the two political party's. In my opinion these two political party's have economic manifestos no different than they did in the 1930's. I do not exaggerate.

    Meanwhile, the Central Banks are practicing monetary policy based on the latest research. A recent example was the action by the Swiss Central Bank. You can go to their website and you will find, in English, a paper reviewing prior research on how a central bank should respond to massive capital inflows.

    Point two, has it been profitable, as an investor to follow central bank behavior or insist they are in error. In my opinion, a critic of the central banks would have missed every single major market movement on a global basis in the last 50 years. Good luck with that strategy. This time might be different. That is my attempt at sarcasm.
    May 21, 2015. 12:37 PM | 3 Likes Like |Link to Comment
  • Why AK Steel Won't Be Able To Sustain Its Recent Rally [View article]
    Dear Reader..

    Everyone of the facts presented in this article are true.

    Everyone of the conclusions cannot be supported by those facts.

    The first set of facts concerns the level of economic activity in China implying a slowdown will set off a large export of steel to the U.S. We are presented with the evidence of the HSBC (HongKong Shanghai Banking Corp) PMI index (China Purchasing Managers Survey).

    There is no correlation with changes in this survey and future economic activity in China. Believe it or not, Chinese purchasing managers are just like American purchasing managers they do not use a dynamic forward looking forecasting model. They just look at the orders on the books. They herd. Herding is why markets are inefficiently priced.

    Meanwhile, HSBC does not care, in the slightest, that their survey is of zero help to anyone. This is a classic example of the principle/agent problem. This is why markets are inefficiently priced. HSBC is just looking to get their name out into the media and in front of the client. What is in the client's best interests is the last thing on their mind.

    Now, getting to economic activity in China. The Shanghai Composite stock index is up 117% from a year ago. I guess the readers of Seeking Alpha missed that move since SA is filled with the academic analysis that China was and is going down the tubes.

    You may remember that in March, 2009 our economist's had a bleak outlook for the future of the U.S. economy, but it seems the 30% rally off the bottom created a magical increase in retail and auto sales by the fall. Auto sales in March were 9.3 million annualized and by August were running at 13.0 million. It must be magic.

    Now, think of the effect in China of the equity market moving a 100%. China will easily achieve their 7% target. I think the actual target is 8% which will also be achieved in 2016. We will see.

    All metals are becoming high tech. The reason companies use AK Steel is not because they are making steel as they did 20 years ago. This has become a specialized business where most large customers need a form of customization.

    The author is assuming that the political situation towards steel imports will stay the same. Steel is a national defense issue. It is an employment issue. During wartime you need to ramp up vehicle production at an enormous rate. Allowing your steel industry to die is not helpful. We will see.

    This gets to the most fundamental issue of all. Financial market success is not about describing the attributes of a company or industry. It is about relating those attributes to the price of the financial asset. This particular company has a very dynamic financial profile. I own this stock.

    If you think that the U.S. is facing a financial liquidity crisis you do not want to own a company with high levels of debt. Rising interest rates due to economic growth is not a liquidity crisis. I need to get to work.
    May 20, 2015. 10:46 AM | 6 Likes Like |Link to Comment
  • Who Is Lewis And What Does His Turning Point Have To Do With China? [View article]
    I don't understand why they don't quote medical papers from the 1950's?

    Yes, they taught this in 1965 at the University. Demographics is destiny and no underdeveloped country can possibly catch up.

    I guess Singapore must have missed that class.

    Ben Gee is totally right. Not only is China just emulating the policies of S. Korea, Japan and Singapore, but they have learned from their mistakes and are moving at even a faster pace at similar levels of development.

    The slowdown in GDP growth from 10% to 7% was solely due to the move in the stockmarket from 40x p/e to 8.5x p/e last year.

    Just as drops in our stock market lead the real economy. You might notice that the increase in the Shanghai market will have the same effect on their economy as the increase in our market from the 2009 lows had on real economic activity in the U.S.

    Just remember, in China you are dealing with a country with a much higher investment rate and therefore the effect is going to be magnified. I suspect GDP growth in China in 2016 will hit 8%. And I could be low.

    Americans should be copying what Korea, China and Singapore are doing from an economic viewpoint. And most importantly, that means "upskilling" our population. We need to be turning out more STEM graduates.

    Even if they never practice in their field the education they get creates an enormous economic machine that creates national wealth.
    May 7, 2015. 11:40 AM | 2 Likes Like |Link to Comment
  • IMF To Ukraine: Pain, And More Pain, And Maybe Some Gain [View article]
    Thanks to the author for the economic coverage of the Ukraine.

    As an American, I am deeply ashamed that the Ukraine gave up its nuclear arsenal and its military spending in exchange for our security guarantees which we have failed to honor.

    I would advise any other nation's leaders to ignore America. American promises are worthless. The Saudis are certainly moving in that direction.

    Allowing the brutal dictatorships of Russia and Iran to flourish at the expense of their neighbors is a shame to the sacrifices of previous American generations.
    May 3, 2015. 10:44 AM | 2 Likes Like |Link to Comment
  • How Much More Upside In This Chinese Equity Rally? [View article]
    First, let me apologize, I shot this off without consulting my spreadsheets.

    The Shanghai composite had a closing high of 49x p/e in 2007.10.

    Went down to 12.8x in 2008.10.

    Rallied to 23.5x in 2009.07

    Hit bottom 2014.04-.06 at 8.6x p/e..

    We are currently at 17.4x..

    The reason I went FCA is because Hong Kong regulations on financial disclosure reduces my risk of fraud. The 50 companies in this index are almost all audited by the Chinese subs of the U.S. major accounting firms.

    Secondly, there is a valuation discrepancy between Hong Kong prices and Shanghai prices.

    Thirdly, this is an equal weight index which is reworked every 6 months. This is far preferable over time to a market cap weighted index.

    Fourthly, First Trust AlphaDex country ETF's use a valuation algorithm to create their portfolios which over time should generate an extra 2 or 3% per year.

    If you really want to learn about China investing go back 6 months before the move and look at the articles and comments on Seeking Alpha. Its educational.
    Apr 27, 2015. 12:21 PM | 1 Like Like |Link to Comment
  • Why AK Steel Remains A Risky Bet Ahead Of First-Quarter Earnings [View article]
    Dear Reader..

    I presume that the move in the steel stocks has little to do with current earnings and a lot to do with what the industry associations and companies are doing regarding state sponsored dumping of subsidized steel onto the U.S. market.

    If steel imports are forced back to last years levels AKS could earn $1.50 per share. At 10x earnings and the market trading at 18x p/e in 2016 you are looking at $15.

    Believe it or not the World Steel Association "experts" are just extrapolating the current global overcapacity in steel production. They have not the slightest clue of how to project change.

    If you think the U.S. is going into recession in 2016 this is not the stock for you.

    If you think China is going to have low economic growth when the Shanghai stock index has almost doubled in the last 6 months you don't want to buy steel stocks.

    AKS is a leverage bet that these "experts" don't know what they are doing. When you take a job at the World Steel...Ok I will stop.
    Apr 27, 2015. 10:12 AM | 4 Likes Like |Link to Comment
  • How Much More Upside In This Chinese Equity Rally? [View article]
    Dear Reader..

    The MSCI historical p/e ratio chart is extremely misleading. This index is capitalization weighted. It means a few large companies dominate the index today and even more so 5 years ago. These large companies are SOE's (State owned Enterprises). The Shanghai composite is a better measure of the China equity market and is a different index today than it was in 2010.

    When you are growing 8% a year your economy is changing at an enormous rate. Think of North Dakota during the shale boom and now think of a country with 1.3 billion people.

    The Shanghai composite was trading at near 40x earnings in 2010 and last year at the low it was at 8x p/e.

    The huge increase in the Shanghai market over the last six months is going to generate higher GDP growth with a lag of 6 to 12 months. Think of what happened in the U.S. based on a much smaller market movement off the recession bottom in March, 2009.

    Stock markets create economic activity in the "real" economy. Stock markets create next years corporate expansion budget goals.

    The constant barrage of anti - China media coverage is the product of the political class in the U.S. and Europe trying to find excuses for their abysmal economic performance. U.S. and European political scientists and historians hate China. China is a dictatorship.

    The problem is that every one of the Asian growth economies had dictatorships or overwhelmingly dominant political parties during their high growth phases. Germany and Japan post war and through the 1950's certainly fall into that last category. After the military leader of South Korea was killed their was a significant lowering of the long term growth rate.

    The problem is that investors are missing enormous investment opportunities.

    The institutional investors are still publishing the same misleading analysis to justify missing the biggest bull market of recent years.

    While there will always be meaningless corrections in financial markets this is a long run bull market that will feed on itself.

    From an economic standpoint China is the best run large economy in the world. Whether they will be kind to others, as the U.S. has been, when they are totally dominant is another issue.

    If you review my prior comments on China prior to the move you can fill yourself in on some important details.

    I am still buying FCA (First Trust AlphaDex China, $30) at current prices.
    Apr 27, 2015. 09:58 AM | 3 Likes Like |Link to Comment
  • Greece Contagion Risk [View article]

    You can read my previous comments on Seeking Alpha concerning investing in China. My postings go back to 2009.

    I don't write as much on SA for a number of reasons.

    You can take the 4 largest trade partners and the 4 largest financial lenders and their countries and know where the connections are.

    Thailand and Indonesia had common lenders. Most of the Greek debt is held by official institutions.

    Academics date the Thai crisis from the currency panic in July, 1997.

    I am of the school of economic reality that identifies the starting point as the top in the Thai stock market in Jan, 1996 with the Thai Set Index at 1410. By May 1997, two months prior to the currency crisis, the index was at 566.

    Think about this. A massive stock market collapse. I know Keynesian's tend to think the financial markets are a side show. They are not.

    The Thai's could not loosen credit without causing a currency collapse. Would you sell European equities today with the ECB loosening credit? That would be like selling the S&P in 2009.

    If you were advising the current Greek government how would you tell them to stay in power if they give in to the EU?

    It will be interesting to watch no matter what happens.
    Apr 17, 2015. 02:33 PM | 4 Likes Like |Link to Comment
  • Greece Contagion Risk [View article]
    Greek exit will be a trivial event.

    Markets will have a strong rally in reaction.

    The political party in power in Greece can stay in power only through an exit. In general, the major harm is done to Greek savers.

    Financial institutions are not following the same models that they did in July, 1997 when the Thai currency crisis began.

    What evidence exists that there is financial connection between Greece and some other country equal to Thailand and Indonesia in 1997?

    A Greek exit would be an enormous..enormous plus for the Euro. It would allow those other countries such as Italy, Spain, Portugal and Ireland that are reforming to continue to meet their obligations to become competitive.

    Property values in Greece will plunge in $U.S. terms under the new Drachma. If we can make money buying China we can end up with a home on a hillside on some Greek island.
    Apr 17, 2015. 12:38 PM | 2 Likes Like |Link to Comment
  • The Small Cap Premium: Where Is The Beef? [View article]
    Dear Reader..

    This was a cutting edge article on the current academic take on the financial markets. The problem is most of it is wrong.

    Let's take the most obvious which is his academic model of future stock market prices based on analyst estimates of future earnings.

    Do you really believe that corporate revenues for the S&P 600 are going to grow at the rate projected if the Central Bank inverts the yield curve? Or takes M1 to negative growth?

    Earnings are a function of revenue. Companies budget based on expected revenues. If revenues fall short or increase beyond expectations earnings are subject to substantial volatility.

    A stock model to work must be based on monetary reality and expectations. That of course, is an oversimplification, but it catches the main point.

    At major tops in the market the economy is booming and the analysts have rosy projections for the following 12 months.

    What were the analysts projections in Feb/March 2009? Think about it. What was the Central Bank doing?
    Apr 12, 2015. 01:48 PM | 2 Likes Like |Link to Comment