Portable Alpha's Comments

China: Analyzing Trade, CPI Numbers

Sat, 14 Mar 2009 04:59:51 -0400

Two Points -

1]@Tom E.
a negative 8% for China is less likely than a Positive 2.5% for US. Simple math:

4 trillion spent 2+2, in 2009 and 2010. The initial plan was to throw out the RMB 2 trillion per year. then, 6.66% growth is almost ensured (2 trillion package / 30 trillion GDP), okay, nobody is having cash, but China will still be able to sustain a positive net export, since imports will nosedive more than exports. Retail sales, amounted to 10 trillion yuan in 2008, roughly 33% of GDP, assuming a plausible 1% growth in 2009 (should be in line with population growth), that gives you another 0.1 trillion, hence, 0.1 trillion retail / 30 trillion GDP = 0.33%
6.66% + 0.33%, then you already have 7% growth, and I wouldn't rule out that another package that may be incoming.

Although, it seems 2+2 has recently been modified to 1.8+2.0 (to avoid nominal zero growth in 2010, if you spend same amount 2 years in a row), 1.8 trillion is still 60% of 30 trillion GDP.

2] Short-term vs. Long-term
A bloomberg staff writer argues that, China should buy more T-notes to finance US consumers to purchase Chinese -made goods.
www.bloomberg.com/apps...

His standpoint reflects short-term thinking, imo, what gets the US economy into trouble, is excessive spending backed by inflated assets across classes, long story short, credit growth outpaced GDP growth, not sustainable. What slowed Chinese engine down, was its GDP composition and industry structure. It's simple, when you rely your growth on someone else who writes the check, you are semi-handling over your financial lifeline, meaning its export-driven econ-growth. China's 2 trillion equivalent currency + gold reserve, significant M2 (155% of GDP) consisting of 20 trillion consumer deposits, 27 trillion institutional deposits and monetary base will help China weather the storm. More over, two key proportions of the economy, black-market and those they just haven't penciled in, are not part of 30 trillion par value.

So, with the ubiquity of QE and this BL columnist's advice on financing US consumption with Chinese buying Treasuries, 2009-2012 will be 2003-2006, you don't get out of trouble by spending more, you may invest, but it's inconceivable that one can and will pull if off paying all those money that is not his, and thence getting away with it.

Both US and China are in dire need of major restructuring, big time. There is no easy way, I'm assuming a 3.0 version of combination/integratio... of internet, cell phone and whatever else they can come up with, should be 21st century's Amsterdam Stock Exchange in 17th century, industrial revolution in 18th and 19th century, GM in 1H20 century, intel, microsoft and google in 2H20 century (or in fact, any other innovation). Party is over, they should pack it up and start to work harder. More specifically, if its a bad business, then it should be going out of business (tho banks are hot potato, it will be different).

For China, industry upgrade is the key. And desire to win and be the top-notch player in global financial, economic and geopolitical landscape are what currently seem lacking. I don't know what is there to keep Chinese economy pumping like it did in the past 30 years, but I wouldn't say the model of letting-external-deman... represent optimal solution at this point.

Does the U.S. Need China to Pull it Out of Recession?

Tue, 25 Nov 2008 00:31:14 -0500

This conspicuously vicious cycle of spending beyond one's means, represents a double edge sword, same as in Olympics, War in Iraq, Oil boom/decline, and ceteris paribus. I agree that savings and cutting expenses are literally deemed indispensable for both consumers and businesses in such time, nonetheless, the upside could turn into downside, and vice versa.

It's in nature a reluctant yet de facto socio-economic self-sabotage in addition to economic and financial suicide, albeit many consumers neither have the sense of economic security nor the perspectives to have actually been able to realize it, collateral damage. Ok, you stop spending and start saving [which is totally justifiable in such environment]. And the scenario gets problematic, you are buying less, which translates into lower corporate profits, which translates into fire-thine-back en masse, [plus some side effect: cascading stock prices, etc.] which translates back into "you" are less able to buy to the next level, and this goes on and on, at corporate level. At government level, you are buying less, corporate america reaps less, in turn signs you even scanter paycheck, so you are having to buy less, state and federal collect less from your consumption tax, you are buying less, the businesses make less, disbursing less business tax, the government receiving less in revenue, issuing more bonds, devaluing more of the currency, intending to bail more out...

The underlying question here, is that the over-panic consumers have forsaken the key momentum driving the U.S. economy to outperform for half a century - consumerism. Bad or good, it offers the incentives for business to increase capital expenditure [by generating ginormous demand], in terms of hiring more, investing more in R&D, making efforts to keep their desired staff, equipping more and better. And such impetus reverberates throughout the processes, the IB will underwrite that 8 zillionth deal , the CB and credit card companies will issue 12 zillion more loan, the EM will manufacture 100 zillion more goods, yet sustaining 0.000 digit sweatshop salaries for underemployed [who are nevertheless overapperciating such engagement, after all, a meager income is nonetheless more appealing than nada] so that their children could also buy iPOD, enjoy frappuccino, and laptop, which albeit locally-produced and but US assembled, in turn, cementing uncle sam's balance sheet and financing the U.S. consumers.

Perhaps after a quarter or so go with this saving like there is no tomorrow strategy, people should start to spend again.

Can China Take Up Consumption Slack From the U.S.?

Mon, 10 Nov 2008 23:04:24 -0500

CDH, here is a note concerning your concerns as to where "all this talk of the US consumer 'saving' comes from"[as you've mentioned]:

Quote -

"US Private Savings Rate Is Rising Sharply

In a note we issued on November 15, 2007 (To Gisele and Jay-Z: US ‘Twin Deficits’ Are Shrinking), we pointed out that the dominant driver of the US C/A deficits has been the US personal savings rate. Until recently, it had been in a secular decline since the mid-1980s. In trying to determine the key drivers of this variable, we found that three factors – (i) US net housing wealth, as a percentage of disposable income, (ii) US net equity wealth, as a percentage of disposable income and (iii) the long bond interest rate – explain 83% of the movements in the US private savings rate. Of these three variables, the most powerful driver is US net housing wealth, which had been in sharp decline for four quarters.

After remaining close to zero from 2005-07, the US private savings rate surged sharply from 0.1% in 1Q08 to 2.7% in 2Q08 – a level last seen six years ago in 2Q02.

This sharp recovery in the US private savings rate was predicted by our three-variable model. In fact, based on what we know about the determinant variables, the US savings rate could rise to 5.7% by end-2009 – a level last seen more than a decade ago, in 1997. "

www.morganstanley.com/...

Which cements Michael's point.

btw, how are you guys holding up on PE business, CDH? :)

China: Now That's Volatility

Thu, 30 Oct 2008 02:39:18 -0400

Next support at 1'500 by year end. Likely to break 1'400 by Chinese new year.

China: Now That's Volatility

Tue, 28 Oct 2008 23:31:19 -0400

Looks like Beijing might have sussed out what short-selling might mean for the equity market in here.

China, Hong Kong May Review Short Selling to Boost Equities
www.bloomberg.com/apps...

Regardless a rumor or otherwise regarding the reported postponement, okaying margin trading represents another policy initiative that has two edges. If engaged properly, it might boost trading volume, nonetheless, speculative and predatory strategy could lead to significant ramifications for Chinese stock market which have already come under severe pressure.

Haitong's 3Q profits were down as volumes have been declining. Yet I'm skeptical if it would be a good idea to salvage the camp where Haitong and the likes are in, at the expenses of the more, don't think sectorish [or regional] utilitarianism would go with much sustainability and end up with positive outcome in the long run.

China: CITIC and Risk Management Practices

Wed, 22 Oct 2008 14:43:55 -0400

Michael, in addition to your points, i guess lack of discipline [ on governance, management, business operation and investment strategy, etc.], excessive conflict of interests due to complex guanxi and hierarchical structure [well like bad nepotism, and semi-economically pragmatic corporate authoritatianism] plus devoid of hands-on experience for people either in managerial positions and front line might all have to do with CITIC pacific plunge. I'm neither intending to judge nor criticize, just offering some thoughts.

Transparency is definitely an issue.

As to the financial crisis, I personally don't find it diabolical on excessive risk taking business model, it's another case of wrong bet. Investment banking's attainments have already been miraculous. And as you've mentioned, stuffs like cdo, cds and other derivatives, etc. merely represents what's been happening on the surface, deep inside and underneath, it's the loose cannon backed by uber-incentives that have gone off, albeit i'm reluctant to describe it as human greed, desire for more is naturally intrinsic as all creatures seem to have an appetite for growth and expansion.

it's indeed been very dreadful as to what went down on the street, but i guess people still have to look forward at the end of the day. And quasi-elected officials around the world seems to have been making moves, despite procastinatory.

China: Expectations for Fiscal Expansion a Little Hasty

Thu, 09 Oct 2008 13:20:58 -0400

Haha, alright. btw, i've hit your sina blog. Feel sorry how some of the posters have commented...

You could hit up tianya forum when you are in mood. Probably you've heard of it already.
tianya.cn

There seems to be some interesting threads discussing economic matters and CN equity market. I've also come across a poster who appears to have been working with a macro fund in London, I suspect he works with renaissance technologies, tho this guy might have overblown the AUM his firm manages. Anyhow, that particular thread is more anecdotal and entertaining in nature, :), so is tianya forum per se.
cache.tianya.cn/public...

China: Expectations for Fiscal Expansion a Little Hasty

Thu, 09 Oct 2008 01:17:07 -0400

Bloomberg reports that "People's Bank of China sold three- month sterilization bills in open-market operations today", the 15 billion yuan ($2.2 billion) bills are sold at 3.2754%, "8 basis points less than the 3.3570 percent at the previous auction on Sept. 25"
www.bloomberg.com/apps...

I've written in a note on Sep 24, forecasting 2'070 points by Oct 10 for SSE Index. We might witness a short-term correction in the next couple of weeks, since according to "He Xin, chief fixed-income analyst at Shenzhen-based China Jianyin Investment Securities", that "The decline in the yield means 'open-market operations in October will also see a net capital injection into the market,' " in reference to the 3-month bill auction. Nonetheless, medium- to long-term trend bearish movements remain intact and inexorable.

The PMI in September fell to 47.7, a sharp decline from August's 49.2, PMI in Q4 shall continue heading down [likely 45.9 for Oct, etc.]. Exports have been down as well, even the dollar might rally in the coming weeks, it wouldn't subdue much of the negativity for Chinese exports.

I guess benchmark SSE might fall around 1'400 around Mid-Jan to Early Feb, 2009.

Can Europe Handle a Sustained Trade Deficit With China?

Sat, 04 Oct 2008 02:13:26 -0400

I guess China should "de-lever" its reliance on export sectors. And a one-time revaluation probably would be too much for now.

No offense, tho quite some Europeans, organizations and individuals are big on scapegoating external factors [i.e. cheap Chinese products and agressive US expansion] rather than looking at what might have gone wrong on the inside, a less-than-plausible unemployment benefit [de-incentivising the workforce and motivating the unemployed ], an insignificant amount of working hours [just don't see 35 hours a week is heading anywhere whilst people in the states work 10 hours and a half per day on average and folks in Beijing probably work over 12 hours sorta on average on a daily basis], and excessive government burden on pension system, as well as lack of humbleness and pragmatism given their ethnocentricism and perceived privilege [which is just not so realistic].

I think it's time for them to work on the competitiveness and attractiveness of their education system, immigration reform, reevaluate their public policy priorities than elaborating how to best generate revenue via launching punitive measures against US software giant and Chinese made leather goods and apparels.

What the Hedge Funds' Bad September Could Mean for Markets

Sat, 04 Oct 2008 01:42:10 -0400

I think you are slightly overpessimistic. Hedge funds, like most other entities and individuals in various respects, they differ from one another. It's normally a pyramid structure, basically only a few stand on top can beat the market/index/or whatever variable. Which is why, you supposedly elect 100 + 425 + executive branch folks to represent 300 million + people, and which is why there are established ranking system in literally every aspect of our life, i.e. no.1, no.2 and no.x investment houses and commercial banks. [I'm not giving some elitism b.s., just a statistical fact with common sense] Hence, hedge funds are no exception, they are human beings as well, just slightly better informed, more motivated and fairly well compensated, but as you've implied they are not much different than common folks anyhow.

My point tho, it's imperative for investors and money managers to stay put and not panic. Easier said, I know, but that's pretty much the key, well, on top of being able to think outside the box and inside of it, as well as combining composure, flexibility and adaptability to beat the stress and whatever else that shall be beaten.

China: A Run on the Bank of East Asia

Thu, 25 Sep 2008 21:56:57 -0400

It seems State Council has approved short selling. Honestly guys, I almost burst out laughing when I was reading the article.
www.bloomberg.com/apps...#

I'm not sure what's on policymakers' mind, but seems to me a Pandora's box is about to be opened, and those late 20 sth. fund mangers will really have fun big time.

I'm sincerely wondering whose masterpiece advice is this, which nonetheless reminds me of Blackstone position by that HK broker. Maybe I'm a bit pessimistic, and hopefully government officials are indeed thinking outside the box this time around.

Why The Paulson Plan Won’t Work

Wed, 24 Sep 2008 20:31:48 -0400

I'm with J.D. 110, tho it's definitely a good one by Dave.

But perhaps asymmetric information is inexorable and such scenario will be played out like it did and it does, which is just sad.

China: Markets Surge, But Little Has Changed

Mon, 22 Sep 2008 19:33:44 -0400

Russia's low external debts might somehow to do with its 98 default, at least a writedown in its cumulative. I believe tho, UAE serves an example for Russia's policy makers on their economic policy initiatives and directions. Similarly, in addition to diversifying economy, China is in need of industry upgrade as well.

It is, too soon to be blissful on Chinese equity market, both MS and DB indicate that corporate profitability, domestic demand and economic slowdown as well as property market slump would lead further plunge. DB's China Overheating Indicators from Jan 07 to the present have shown warning signs.

1'400 for Shanghai SE isn't really beyond the reach, and nothing's impossible, not many countries can sustain double digit growth for that long. Beijing should be more vigilant and discretionary, they need positivity and confidence, as much as pragmatism and prudence.

Is the PBoC Running Out of Capital?

Sat, 06 Sep 2008 05:54:14 -0400

PBOC <-> MOF would represent a dilemma and RMB revaluation is definitely a catch-22 for China, but may to a certain extent, the U.S. as well.

I remember reading one of Andy Kessler's books mentioning how China and other countries have been overproducing and hence in a sense subsidizing US consumers' overconsumption. What the former has gained were large quantities of Benjamins in green, tho the latter have gained real, actual, tangible and intangible commodities, goods and services, which are more realistic and definitely come in handy in many ways than an accounting unit per se.

Hence, if China eventually or actually gets into real deep "stance", the US wouldn't have a better situation either. I guess just one example, Wal-Mart's success for years and especially in the recent decade in part is correlated with China's overproduction and mass production at relatively lower cost, which helps WMT for years maintain its No.1 rank
amongst GF500 and F500 [interchangeably with XOM tho]. It helps many Americans realize "making US wages and purchasing at Chinese prices", just laying it out from an academic point of view, not judging nor anything.

Second point, because of the very undervalued/cheap RMB per se, it offers key incentive to global investors keep pumping big bucks in FDI for years. Imagine, giants like MSFT, IBM, GOOG, major commercial banks, investment banks, accountancy firms and other key international companies, have been able to recruit talents and semi-talents from top-tier universities and regular colleges at significant lower cost [albeit rising a bit], if not for the undervalued RMB and such. It enables expats purchasing a 20 million USD worth condo at Park Avenue at 6 to 10 million USD in Beijing [even mimicking the name, the one south of chaoyang park, i.e.], it makes daily grocery preposterously affordable for expats and still in the mean time stimulating local economy. Hence, its should be bi-directional, and both peoples and policy-makers across the pacific should work more together on key pertaining issues.

Michael, I guess when you get back, I should really pop in D22 when you will be around, that will be chill :-)

China: What Comes After the Olympics?

Tue, 26 Aug 2008 13:14:20 -0400

canbj88, from my understanding, Michael was just giving the heads-up.

China has indeed been enjoying advantages and her momentum, but problems are out there. Income disparity [albeit universal, but I'm sure you get my drift], social inequality, distrust amongst people and organizations, etc. equity market and housing market are merely exhibiting characteristics of reflexivity, a reflexive relationship, imo. What's going on deep inside is what people, in Zhong-Nan-Hai need to be looking at and figure out what to do next.

NSSF has just invested in [yuan-denominated] two domestic PE funds, SAFE has invested in BP and Total, whilst CIC's current folio has apparently been plunging. All these reflect that at some point, if not properly put, Beijing is panicking and is desperate to do something about the reserves it owns and liability it comes with. 20 Years ago [or even less], there was no properly established social security system, and now what they have is sth. pretty much mimicking 401(k), plus, it is the Chinese generation X, if you will, are footing the bills for the older generation. Maybe I'm exaggerating, but doesn't this look just a bit like ponzi scheme, albeit systematically carried out and probably will work better later on.

I'm not criticizing nor anything, I'm just saying it is crucial to point out existing problems, identifying them and hopefully people sitting on the chair would come up with something more concrete at the end of the day.

China: What Comes After the Olympics?

Tue, 26 Aug 2008 02:26:33 -0400

Educated Investor, here you go:
China Mobile May Report Record Profit on Subscriber Additions
www.bloomberg.com/apps...

China Sees Strong Retail Sales Growth, Weak Growth in Industrial Production

Wed, 20 Aug 2008 02:06:07 -0400

Michael, do you think equity market will bounce back a bit somehow [Lets say late Sep to early Oct]?

You are right, its not the right time and right place to buy stocks momentarily, and probably so for another 6 months.

It appears Beijing is considering a stimilus package, any thought on that?

China May Spend $58 Billion to Aid Growth, Gong Says
www.bloomberg.com/apps...#

I don't remember who has said that, but somebody was on Bloomberg radio talking about impact of tax rebate checks, and his comments were sth. like people were gonna have iPOD money.

Rumor suggests Chinese government had been mulling over a stimulus package earlier, probably in April or May, tho 4 Chuan Quake had probably stalled such initative.

btw, always a fan.