Seeking Alpha

China’s manufacturing contracted for a second month in December, with HSBC's PMI coming in...

China’s manufacturing contracted for a second month in December, with HSBC's PMI coming in at 48.7 from 47.7 the month before. The weak manufacturing data adds pressure to officials to consider loosening monetary policy.
Comments (6)
  • Lost in the wailing...HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13 percent in industrial output.
    30 Dec 2011, 04:58 AM Reply Like
  • I believe HSBC data rahter an Chinas Bureau of Statistics
    30 Dec 2011, 10:45 AM Reply Like
  • Hey damnit, some of that loss was mine.
    1 Jan 2012, 07:27 PM Reply Like
  • There was never 6.3T of value there.
    2 Jan 2012, 07:59 AM Reply Like
  • The theory is that the intrinsic value of a firm is the sum of all the future of all the cash flows to shareholders discounted at the required rate of return for equity. The cash flows include cash dividends, stock repurchase programs, payouts from acquisitions for cash, obviously companies shares are not valued based on these events but rather the expectation of this cash. The other factor is the discount rate, which if this rate increases, the value of the cash stream will go down.

     

    These concepts are the eventual, intrinsic values, but in truth, because it is a free market and a stock at any point will trade for what a buyer is willing to pay stocks and markets trade above and below the intrinsic value. Lots of the shareholders, in fact the vast majority, keep their shares presumably because they believe the price being offered should be higher and there is not a better alternative investment.

     

    So the question I have is this: What changed? Did the expected cash flows decline? Did the required market rate of return increase? Or did the current market price that buyers and sellers are willing to transact trades at simply decline?

     

    1) Companies are more profitable now than they were a year ago. In fact, the earnings margin on the S&P500 is the highest it has been in 60 years.
    2) The discount rate has increased, this despite the risk free rate (which is a short term rate) is historically low. The implication being that the equity required rate of return has increased. In fact the forward 12 month PE for the US market is 10.7x vs the historical norm of 15.1x. The same is true in all the world's markets.

     

    Is this a buying opportunity? It is relative to the past, but obviously if I buy something now I'll have to sell it in the future.

     

    This is an interesting article http://bit.ly/rPDS15
    2 Jan 2012, 09:37 AM Reply Like
  • Companies have figured out that salary can replace salvery. Salary used to mean a 40 hour work week, but now its legal to work someone 60 hours for that 40 hour pay rate, and thus you don't have to hire a second person for the same job. They are doing more with less, less labor, healthcare costs = more profit. I will be amazed if we see 4% unemployment within the next decade.
    2 Jan 2012, 09:58 AM Reply Like
DJIA (DIA) S&P 500 (SPY)