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  • China Mobile's Sagging Profit: Time To Buy? [View article]
    The short-term risks for CHL are micro-economic factors such as 1) CAPEX spending on 4G LTE base stations, 2) increased marketing expenses to promote 4G LTE and 3) slower revenue growth in voice calls and text messaging as more people use WeChat over WiFi on their mobile phones as the preferred mode of communication. The long-term case for CHL are macro-economic factors such as 1) increased urbanization expanding the middle class, 2) urban lifestyles centered around the Mobile Internet and 3) higher disposable incomes leading to more data consumption.

    After the turbulence of the financial markets subside due to short-term macro-economic factors such as 1). Fed tapering, 2) EM selloff and 3). soft landing of China's economy, CHL could become an interesting dividend growth stock if it succeeds in reclaiming its market dominance lost to its competitors namely CHA and CHU who are hampered by their inability to match the 4G network coverage of CHL. With its future 4G network, CHL will now have the first-mover advantage in capitalizing on the explosive growth of the Mobile Internet in China, something that it lacked during the 3G period.

    Compared to Internet names like Alibaba which is expected to IPO sometime this year and Tencent which is listed in HK, CHL is an inexpensive way for the conservative investor to get exposure to the explosive growth of the Mobile Internet in China.
    Mar 28 08:46 AM | Likes Like |Link to Comment
  • The Nuclear Option: Russia's Threat To Dump Treasuries [View article]

    Thanks for this insightful article. Just one comment on your statement:

    "the reserve currency status of the USD is not something that occurs due to the generosity of other nations towards the US. It is a brute fact that flows from a combination of the US's economic position in the world the unplanned evolution of market processes over many decades. As such the dollar's role as the world's medium of exchange for international trade and finance is extremely entrenched. And for this reason, so is it's role as the world's preeminent reserve currency. You don't just change that with the the machinations of politicians."

    Remember Bretton Woods?

    The USD became the gold-standard reserve currency of the international monetary system by virtue of the agreement signed during the Bretton Woods Conference in July 1944. During Nixon's term, the gold-standard was dropped, turning the USD into a fiat reserve currency.

    So I think you're wrong to assume that the USD became the world's reserve currency by virture of "the unplanned evolution of market processes over many decades." Quite the contrary, it was the "machinations of politicians" during the Bretton Woods Conference after WWII that set the stage for the USD to become the world's reserve currency.

    A similar process could happen for the CNY to become an alternative reserve currency for the international monetary system. China could for example diversify its reserves to include more EURO or precious metals such as gold in addition to promoting its currency as another reserve currency.

    Anyway, I've always enjoyed your well-thought out articles. Good luck!
    Mar 15 02:12 AM | Likes Like |Link to Comment
  • How Resilient Is China? [View article]
    Hello Mike:
    I've always enjoyed your comments as you seem to be well-informed regarding the economic issues facing China's long-winded development.
    Your observation on the similarity between the economic disparity between the coastal cities and the inland provinces under today's PRC and during the ROC era is quite insightful. But you miss one very important differentiating factor: Opium.
    From the time of the Opium Wars in the 1850s to the founding of the PRC in 1949, the early development of mercantile capitalism in China was concentrated in the same coastal cities which have benefited from the market opening made possible by Deng's reforms. After the British took control of Hong Kong and later Shanghai, mercantile capitalism grew out of the Opium trade which was the British effectively monopolized. The spread of Opium throughout China was made by possible by Chinese traders who acted as agents for the British trading houses such as Jardine Matheson and was financed by British banks such as HSBC which ranks as one of the world's largest banks today. Not surprisingly, the "H" and "S" in HSBC stands for Hong Kong and Shanghai, respectively.
    Because the Opium trade lasted so long - 100 years -- tens of millions of Chinese men became Opium addicts. Meanwhile, the money from the Opium trade became the source of Capital for the incipient industrialization of Shanghai. Although there were other foreign Capitalists involved in the industrialization of the Northeast such as the Germans in Shandong and the Japanese in Manchuria, Shanghai was the center of commercial, financial and industrial life during the Republican era. And also, not surprisingly, it was in Shanghai that the Chinese Communist Party was founded in 1925.
    The rich Chinese people in Shanghai supporting Chiang were "tainted" Capitalists with investments in trading, manufacturing, banking, property because they all made their initial fortunes through the Opium trade in consort with the British. As you've correctly pointed out, Mao's strategy was to build his base in the countryside and win the loyalty of the peasants to surround and finally capture the City symbolized by Shanghai which represented all that was evil under the ROC: dirty money, rich gangsters, British Imperialists, opium-addicts, etc.
    When "Capital" mostly means drug money, the urban society that came into being in Shanghai was corrupt to the core. If the British didn't force the Opium trade upon the Chinese, the ROC would have fared better as industrial capitalism would have been seen as "legitimate" which is exactly what happened after Deng's reforms. In the 30 years since Deng's reforms, China's economy increased by 170 TIMES going from USD 46B to USD 8T. This was made possible by integrating China into the global economy following the export-oriented, labor-intensive, low-cost manufacturing industrial model of the earlier East Asian countries. But this will no longer work with the "demand implosion" happening in the developed world due to credit contraction and declining consumption of aging baby boomers retiring en masse.
    So the question now is what happens next?
    The 2008 financial crisis served as a wakeup call that China could no longer follow the earlier East Asian industrial model which enabled Japan, South Korea, Taiwan, Singapore and Malaysia to develop, modernize and industrialize their economies. China's answer is to rely on its own vast domestic market which the early Tigers do not have. For this strategy to succeed, China wants the private sector to develop the service industries for this domestic market. Remember, each consumer product has to be stored, shipped, sold, supported and serviced. Rather than just making the product and shipping it overseas, China wants to capture the entire value chain of the production and consumption process: from manufacturing, warehousing, logistics, transportation, retailing, support, etc.
    For purposes of comparison, it would be useful to look at the U.S.A 100 years when it too was a developing country. Outside of the coastal cities facing the Atlantic, America had a vast hinterland ready to be developed. To link the East Coast to the West Coast, the Transcontinental railroad had to be built in order for the Western hinterland to be settled. This is similar to China's "Go West" strategy today.
    Whereas the Tier-1 coastal cities (Beijing, Shanghai, Shenzhen and Guangzhou) followed the old urban development model based on the "Megalopolis" concept (think New York), the "Go West" strategy wants to emphasize the "Cluster" concept (think San Francisco). This is designed to improve the carbon efficiency of high-density urban living inter-linked by mass-transit and high-speed rail lines. For industrialists who have made their fortunes on the coastal cities, they have no choice but to invest in the inland areas to serve the domestic market. However, that would imply massive fixed-asset spending to build the urban infrastructure. But this is already happening with 70% of the fixed-asset spending occurring in the Tier-2, Tier-3 and Tier-4 cities in the inland provinces.
    In summary, because the Central government decides public policy, local politicians and bureaucrats are only involved in public administration. An example is the housing restrictions forbidding non-residents without work-related reasons from investing in residential properties in a locality or municipality even though local governments stand to gain from increased revenues from land sales and real-estate development. Another example is the new laws disallowing local governments from tapping credit from the "shadow banking system" by creating for the first time a municipal bond market. The "shadow banking system" itself will be more regulated by allowing the high-interest, guaranteed principal WMPs to be repackaged as "junk bonds" to be managed by AMCs with the appropriate credit rating and risk management systems in place.
    Feb 2 11:06 AM | 3 Likes Like |Link to Comment
  • China's Rebalancing Economy [View article]
    That's correct. To circumvent strict controls on the capital account, Chinese investors participate in USD/CNY interest rate arbitrage by using foreign trade current accounts which is not reflected in the capital accounts. However, the Chinese government has tightened supervision of this carry trade as well by strictly monitoring abnormal transactions. China's Forex controls has limited the carry trades from the excess liquidity in the global financial markets. Additionally, the Chinese government policy to limit foreign investment in financial assets effectively insulates the Chinese financial system from hot money flows. This is the main reason why QE tapering has not impacted China as severely as the other EMs. Ironically, China decided not to inflate its stock markets preferring instead to undertake massive infrastructure spending. Since 2010, the credit tightening has lessened the risks of a hard landing.
    Feb 2 08:53 AM | Likes Like |Link to Comment
  • And The Taper Continues [View article]
    The Fed's QE is a temporary solution to a permanent problem: credit contraction during the 2008 financial crisis followed by demand implosion. The money printing allowed the banks to repair their balance sheets by offloading toxic assets to the Fed while purchases of government debt lowered long-term rates. Instead of inducing domestic capital investment, the exact opposite has occurred as corporations strive to increase shareholder returns by optimizing capital investments which usually means outsourcing to lower cost destinations overseas. This is exacerbated by demand implosion due to the need of baby boomers to save more and thus spend less. As proven by Japan's earlier QE policies, monetary policies alone won't solve the structural problems besetting the mature economies of the developed world. The temporary fix allowed banks to appear healthy by inflating their financial assets but this effect has only masked the structural problems of the underlying economy.
    Feb 1 01:52 AM | Likes Like |Link to Comment
  • China's Rebalancing Economy [View article]
    "China's reported GDP is lower because the nation's domestic investment spending has declined while Chinese consumption of imported goods has increased. Both factors would be negative contributors to China's reported GDP, which are being offset by increased consumption spending."

    GDP ("Y") = Consumption ("C") + Investment ("I") + Government Spending ("G") + Exports ("X") – Imports ("M")

    Based on the formula above, a decrease in Investment ("I") plus an increase in Imports ("I") would decrease the GDP figure but an increase in domestic Consumption ("C") would offset both decreases. There has been a marked improvement in China's Exports ("X") owing to the modest recovery in the Western economies while President Xi Jinping's austerity measures aimed at curbing government waste would tend to decrease Government Spending ("G"). That leaves the only wildcard left which is Consumption ("C"). Of all of the above components of GDP, there is a good reason to believe that China's domestic Consumption ("C") is massively understated because almost all Chinese SMEs evade taxes by not under-reporting their revenues. The growth of domestic Consumption ("C") can be proven by the explosive growth of e-commerce in China which is accounted for by the official GDP figures. Retail sales of both consumer products and consumer services, on the other hand, are massively under-reported. As retail sales move to online channels, the revenues become visible as reported under domestic Consumption ("C") in the official GDP figures.
    Jan 31 07:11 AM | 2 Likes Like |Link to Comment
  • How Resilient Is China? [View article]
    The reason for China's "Go West" campaign is to encourage factories to relocate from the coastal cities to inland provinces. Even though the stated purpose was to reduce income inequality between the coastal and inland areas of China, there's also the economic incentive of getting closer to the domestic markets located in the inland provinces. Because only the coastal cities have seaports, the export-oriented factories settled there first as their products were exported to the world. In this old export-oriented model, the service industry value-chains were all located in the destination markets with the factories only adding the value of making the product. But with the new domestic market model, the idea is to increase the economic output of the service sector as every consumer product that is sold to the domestic market adds value in the form of transportation, warehousing, logistics, retail and support services.
    In America, 75 million baby boomers have been retiring at an average rate of 10,000 new retirees per day since 2010. As consumers with high disposable incomes, these baby boomers would have to spend less in order to save more. Declining consumption which accounts for 70% of the U.S. economy will mean that China's economic growth will have to come from somewhere else. And that somewhere else is China's domestic market.
    Jan 29 01:58 PM | 2 Likes Like |Link to Comment
  • How Resilient Is China? [View article]
    "In sum, their need to rebalance their economy is synonymous with reducing the income disparity between the 400 million people occupying the coastal areas and the 900 million people occupying inland areas."
    Chinese Premier Li Keqiang wrote an article on this issue:
    Agree that the 2008 financial crisis was a wake up call for China that it can no longer depend on Western consumption to drive the industrialization of its economy. In my view, the 2008 financial crisis is not a cyclical downturn but a structural decline of the credit-driven consumption economy of the West. Unless the West open its floodgates to immigrants from the Third World, its working population will decline as the baby boomers retire. Aging baby boomers retiring in the next 10 to 20 years requires them to save more and spend less. In addition, the skyrocketing costs of health care and elderly care will consume most of their retirement income.
    Jan 28 06:27 AM | Likes Like |Link to Comment
  • How Resilient Is China? [View article]
    Great article! Very balanced with key points about how China does things differently from the West. Since 2010, China has tightened credit starting with the state-owned banks. But that move induced the growth of its "shadow banking system" as borrowers sought financing outside the official banking system. The problem is non-trivial but the financial reforms announced since the Third Plenum means China is moving to clean up its "shadow banking system". In the meantime, China is letting off some steam to prevent the system from blowing up.
    Jan 27 03:34 PM | 4 Likes Like |Link to Comment
  • Time Is On The Side Of The NQ Longs [View article]

    "On that front, I believe there is significant reason to question NQ’s self-proclaimed “platform strategy”. When the author describes this strategy as “simply creating opportunities for economies of scale and scope,” I chuckled aloud, since it sounds like he has read too many economics textbooks. Under his theory, once NQ has developed a large enough user base for its security application, the company should logically “develop and acquire new applications that open up opportunities for cross-selling”, “generously pay for acquisitions”, “rinse and repeat”. What could be simpler? Ummm. Where does one start? In practice, this could either be a recipe for success, disaster, or everything in-between. On paper, it might sound ok, but in practice…in highly competitive, technologically-driven markets, I don’t think going from security software, to games, to homescreens, to a Shazam app, to Segways makes a lot of sense. Is there another company in the universe with such a varied (muddled?) product offering?"

    Yes; it's called Xiaomi and their Android ROM is called MIUI:

    NQ Mobile's shift from mobile security software to mobile platform strategy is a timely one as Android models proliferate. Unlike Xiaomi, NQ Mobile is a software company and not a hardware vendor. So Xiaomi has a edge in creating custom Android ROM for the hundreds of Android models in the market. My only caveat on NQ Mobile's mobile platform strategy is its limited resources due to its size. NQ Mobile would have to compete with Xiaomi in lining up developers, OEMs and carriers. If NQ Mobile ends up getting bought by a large device OEM like Lenovo, then NQ Mobile might stand a chance against Xiaomi.
    Jan 17 05:47 AM | Likes Like |Link to Comment
  • Vipshop's Misleading Financials: A Secondary On The Way [View article]
    Is anyone here still short VIPS, going from 34 to 99 in less than eight months? Shorting a high-flying stock like VIPS in the fastest-growing e-commerce market in the world is like shooting yourself in the foot. I feel your pain...
    Jan 16 09:59 AM | Likes Like |Link to Comment
  • Japan's current account deficit surges [View news story]
    How about Bernankenomics? Designed to succeed?
    Jan 15 04:11 AM | 1 Like Like |Link to Comment
  • Japan's current account deficit surges [View news story]
    Is this the beginning of the end?
    Jan 14 09:10 AM | 2 Likes Like |Link to Comment
  • Short The Lemon [View article]
    Finally! Lulu's brand isn't going anywhere, not in the U.S. nor internationally.
    Jan 13 05:33 PM | Likes Like |Link to Comment
  • Vale Is A Bargain Today [View article]
    I agree that increased consumer-driven demand for housing, cars, appliances will offset decreasing demand from infrastructure spending but China wants to cut excess steel production capacity:

    So I think Ramadeva44 is still right: those boom times are over because of 1). China's ongoing shift to a consumption-driven economy and 2). China's ongoing restructuring to cut excess capacity in its steel industry.

    The pollution caused by the steel industry has reached alarming levels in China's Northeast. Hebei and Shandong, in particular, have targeted 80 million tons of steel production capacity cuts over the next five years.
    Dec 31 10:30 AM | Likes Like |Link to Comment