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  • Rising Chinese Utility Rates Create Long Term Opportunity for Domestic Metals Investors [View article]
    Aluminum is dead weight, mate.

    I would be very cautious about looking at metals, especially aluminum. You could make a long term case for iron ore, copper & zinc but you must consider the fact that the Yuan has risen around 14.5% against the Euro, making its exports more expensive for its largest export market.
    May 23, 2010. 11:31 PM | 1 Like Like |Link to Comment
  • China and the Future of U.S. Stocks [View article]
    Yup. Agreed.

    I would only add that China has the potential to deliver a psychological shock in a way that Europe is unlikely. The retail crowd expects Europe to have problems and it has been a slow realization that China has significant structural problems as well. Keep in mind that China actually ran a trade deficit for the first time in 6 years in March. April's surplus was by a hair. The counter argument says that the deficit was caused by large commodity demand pull for economic inputs but the data doesn't support this. I would add that the run up in commodities has been largely an financial phenomena and not demand related.

    The black swan moment will occur when China is forced to devalue.
    May 19, 2010. 01:37 PM | Likes Like |Link to Comment
  • China and the Future of U.S. Stocks [View article]
    Perhaps but China is not the least bad investment. Broad commodity indexes can provide some diversification, generally low correlation to equities (often negatively correlated), an inflation hedge and potentially a currency hedge.

    If people are a little more sophisticated with commodities they can play specific ETFs.

    The global economy is in bad shape, the only difference with China is it is not as readily apparent.
    May 19, 2010. 01:29 PM | Likes Like |Link to Comment
  • China and the Future of U.S. Stocks [View article]
    Like everywhere else, China has a basket full of problems. It is still largely dependent upon exports to Europe (22% GDP) & the US (20%). China's export economy has felt an anemic recovery that will be significantly curtailed by a rising dollar, making exports to its largest market (Europe) relatively more expensive. Moreover, the Euro economy is recovery more tepidly and slowly than the US. (leper with more fingers). China will eventually be forced to devalue the Yuan. This is not a novel idea and was first postulated (to my knowledge) by Sogen's Albert Edwards who has more credibility in this area than most.

    It is also worth noting that the rotational bias into Euro-denominated reserves over the last year and a half is not helping.

    A significant component of the domestic economy is tied to real estate and infrastructure build. Real estate is in a bad spot as future real estate purchases are in the process of dropping off a cliff. China bulls suggest that the PRC real estate mkt is inoculated from a crash but demand is demonstrably falling away (according to DB).

    Bank NPLs are swelling, leading officials to call for more stringent loan evaluations and terms, higher capital adequacy ratios and infusions of cash.

    Since the equities market has rolled over, the ability of companies to successfully speculate in the market and artificially inflate earnings is also diminishing.

    Besides govt spend, where are the real engines of growth? To save the knee jerkers from choking on their coffee I will also stipulate that the US and Euro economies stink and the longer term scenario is bleak with massive structural problems.

    If I've missed something, by all means please illuminate me.
    May 19, 2010. 08:15 AM | Likes Like |Link to Comment
  • Why Markets Won't Fall by More Than 10% [View article]
    You say that China will resume its growth but how, precisely? They are an export driven economy with 22% derived from Euro zone and 20% from the US and demand is low. Chinese tend to be large savers in large part because there is only a minimal social safety net. One cannot simply flip a switch and turn a society of massive savers into consumers. The attempt to manufacture domestic demand and manufacture economic growth has caused much of the problem for China, in the form of rising NPLs and hollowed out industries.

    There is now ample evidence that the spike in commodities has been more a financial driven event than a demand driven process.

    A well known analyst emailed me the other day and described a lengthy call he had with a China contact. He described what is getting ready to happen in China is that the govt is going to "sit on the shoulders of the speculators". The ramifications are potentially profound when one considers that land speculation has been a primary collection point for local govt taxes and a significant driver of PRC GDP growth. We now have a good idea that somewhere in the neighborhood of 20-25% of aggregate stimulus has been funneled into speculative investments, be it equities or real estate speculation.

    Michael Pettis has a good feel for this issue and if I may paraphrase, I believe he is saying that the NPL problem will not result in failing banks but rather will likely create a drag on GDP growth because we are talking about re capitalizing the SOCBs.
    As far as jobs go, the govt has been infusing capital and resources for make work jobs for quite some time, which has led to much of the supply over hang that afflicts some industries.

    The point I am making is simply that China should not and cannot continue to be viewed as a global economic driver in its current state. It is a bit of a paper tiger, full of potential but authoritarian regimes necessarily and ultimately incompatible with a robust and healthy economy. The levels of control help mask inefficiencies and system problems but they cannot make them disappear.
    The fact that China has enjoyed the psychological role of global economic driver/savior suggests that when the myth and reality begin to collide this will have a significant market impact.
    One final thought, a year ago I and a number of others were in the minority regarding the possibility of a real estate bubble. Albert Edwards published a significant report at SoGen that laid out a bleak scenerio. Any Xie was on record, Edward Chancellor (one of the foremost bubble experts) came down on the bubble side of the ledger. Victor Shih wrote about this topic, Stratfor and other folks. After the Pivot Capital Report was picked up by Chanos the idea broke into the mainstream.Prof Chovanec nailed it down further by pointing to one of the largest property developers who flatly stated "this is a bubble and the economics no longer make sense". Now, I think the majority of folks recognize that there is a significant real estate bubble.
    This is a slow moving train wreck.

    Next, the equities will start to be taken down and more talk about the need to recapitalize banks.
    This is not a collapse or a crash but it is and will be a significant event.
    May 6, 2010. 01:44 PM | Likes Like |Link to Comment
  • Why Markets Won't Fall by More Than 10% [View article]
    I absolutely concure. We are facing massive problems going forward. My intention was not to suggest that China alone was a problem.
    May 5, 2010. 07:54 PM | Likes Like |Link to Comment
  • Why Markets Won't Fall by More Than 10% [View article]
    Third risk: Serious problems in China. A leading bank is projecting a massive deceleration in real estate transactions between 60-70% in the coming weeks. A recent survey indicated that approximately 80% of real estate transactions were speculative in nature. 65% of would-be real estate purchasers have canceled or are delaying decision to buy. Nearly 60% expect real estate prices to fall. There is a rising fear of stagflation. Inflation is rising and will likely be double digit by year end. The govt is expected to overshoot and may impose price controls which will squeeze margins. An enormous percentage of GDP is oriented around real estate and infrastructure spend.

    Psychologically the impact should be significant as most people who do not follow China extremely closely are perma-bulls. We frequently hear things like "China is the lone bright spot" "China remains the global engine of economic grow". This view is rubbish. Huge structural problems exist in China above and beyond real estate. The NPL problem is really big and getting much bigger.

    Victor Shih has addressed this recently.
    "He estimates that local governments have amassed about 11.4 trillion yuan (around $1.7 trillion) worth of debt at the end of 2009, or roughly a third of China’s gross domestic product for that year, and that they’re likely to borrow a further 12.7 trillion yuan by the end of 2011. He also thinks at least 25% of that will turn bad"

    There are actually quite a few notables lining up behind the general thesis of the Chinese paper tiger. While some focus on various aspects and varying degrees of malaise, the each tend to zero in on the fact that the common perception of a raging economic miracle is ill conceived.

    One can attempt to rationalize away the collecting data points but this is a significant process that has begun and will play itself out over the coming year or more. What should be unsettling is the fact that the Euro-crisis is receiving all of the attention and few are looking east at the moment. Greece is fairly small, a known problem, quantifiable and we can all reasonably plot the trajectory of Greece's eventual failure to follow the terms of either their bailout or membership. Less can be said about the certainty of a China related problem. Taken together, I think it presents unique challenges for investors.
    May 5, 2010. 01:59 PM | 4 Likes Like |Link to Comment
  • Bubble in the Boonies, China Edition [View article]
    BenGee, banks are not off the hook, they are very much on the hook. Who do you think loans the money for the SOEs to speculate on the property? Who do you think loans money to the apartment speculators? We're talking about a significant and growing NPL problem among SOCBs as a result.

    This is very much a banking problem.
    May 3, 2010. 10:29 AM | 1 Like Like |Link to Comment
  • Bubble in the Boonies, China Edition [View article]
    These units are largely empty shells.....moreover, speculators frequently have multiple units.....

    This is a massive bubble, period.
    May 3, 2010. 10:26 AM | 2 Likes Like |Link to Comment
  • The Collapsing Iron Ore Boycott [View article]
    Thanks for your very thoughtful and detailed response. I will be sure to take a close look at this company.
    May 1, 2010. 03:20 PM | 3 Likes Like |Link to Comment
  • The Collapsing Iron Ore Boycott [View article]
    Wildebeest, you clearly follow commodities, what specifically do you like about GBG?

    Also, do you like other metals, and if so which ones?
    May 1, 2010. 01:31 AM | 3 Likes Like |Link to Comment
  • The Collapsing Iron Ore Boycott [View article]
    Great follow up. I really appreciate your nuanced and indepth understanding of this complex industry.
    May 1, 2010. 01:21 AM | Likes Like |Link to Comment
  • Bubble in the Boonies, China Edition [View article]
    Malin, I would suggest that the equities market is a bubble as well. Around 20% or so of aggregate stimulus is estimated to have poured into real estate and equitites. I might add that the IPO euphoria is wearing off as more sober minds contemplate the realities what it actually means to own a slice of a Chinese company. Put differently, one should consider regulatory oversight, non standardized accounting, opaqueness, overly optimistic investor sentiment and the manner in which many company balance sheets were deodorized (specifically stripping away bad debt and injecting capital) prior to an IPO.

    On a different note, I do not believe the economy is nearly as strong as it is commonly believed to be. GDP growth tends to be over stated and a significant component of GDP is directly related to govt spend.

    Depending on the outcome of additional Washington initiatives, a more productive investment can be found in bottled water, canned goods and ammunition.
    Apr 30, 2010. 08:40 PM | 1 Like Like |Link to Comment
  • Pricking the China Housing Bubble [View article]
    I should have articulated my point better by stating something to the effect that bubbles all share the characteristic of a departure from normal economic decision making. Be it a fad like tulips, dot com stocks or California real estate, in each instance there was a radical departure from an established norms in the way in which investments were evaluated. In each case I can think of, there is a discounting function that attempts to justify the bubble and one's participation. This is the only way we can rationalize huge premiums for Internet companies that can't make money or flowers or real estate loans to people without sufficient incomes.

    Nonetheless, I think folks will understand the basic view I was attempting to articulate, albeit somewhat convelutedly.
    Apr 22, 2010. 03:18 AM | Likes Like |Link to Comment
  • Pricking the China Housing Bubble [View article]
    Mark, I think the way many people look at the Chinese real estate bubble is to say the economics simply don't make sense. It makes little sense to build housing or a huge mall if you end up with a negative yield. This is the point made by Chanos and more importanly, a point made by Chinese developer Zhang Xin.

    "Today [December 3] there was an auction, look at this price, it’s crazy. It was down to two SOEs competing. [Nowadays] if we want to bid on residential land it is unlikely we will get it. It is so expensive and all the SOEs are bidding the prices up to the sky."

    "Basically . . . our strategy is to sell everything we have. The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return. But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not. People just want to hold [property], even if it is empty.

    . . . Now, if you look at the prices for the property being sold versus the rent you collect there is a real disconnect. Prices are too high, rent is too low, so if you hold property in order to get yield you are likely to get very little. For us it makes no sense to hold property, so our strategy is to sell everything. We see ourselves very much as a manufacturer. We buy land, we build, and then we sell. And the asset bubble has compelled us to be even more of a manufacturer . . . the strategy is to keep a lot of cash, to sell as fast as possible, and to turn around assets faster — even faster than before."

    www.cibmagazine.com.cn...

    I would draw your attention (and other readers) to the role of SOEs bidding up prices to stratospheric prices. SOEs are participants in a choreographed kabuki dance (if I may use cross cultural references). Local governments benefit significantly from high land sales. It is to their benefit to encourage speculation as they receive revenue from the sale. SOEs are not constrained by traditional market forces as they tend to be large, politically connected and maintain close relationships with the SOCB (policy bank). SOEs receive the lion's share of loans yet contribute only a modest sum to aggregate GDP. What we do know is that SOEs have benefited from easy loan practices and various forms of loan foregiveness for bad debts (NPLs).

    So I think what Zhang Xin is putting her finger on is the fact that SOEs can bid up real estate (benefit local governments), can make large investments in real estate (urban employment) but are somewhat innoculated from the economic repercussions of unsound business practices. Point of fact, other utilities are driving real estate investment decisions which benefit the various actors. The net result being that the national government is underwriting a sort of distorted market.

    What are the costs? Massive red ink in the SOCB loan book as NPLs are the cost of the program and individual speculators. But there is also a hidden cost of individual investors who sink large amounts of personal capital into a speculative investment that is ultimately not particularly liquid.As many of these units are empty, they require a greater fool to be willing to pay a higher price to control the asset, who will also not live in or complete the apartment.

    What happens when the music stops and people stop speculating in real estate? What happens to the large number of apartments that are empty and speculators are making payments that represent a significant portion of their income? The economics only make sense in a rising market.

    One final note, a similar process plays out when SOEs prepare for an IPO. The SOCB strips away bad debt and helps clean up the balance sheet, sometimes by injecting additional capital. As a result, large enfeebled companies that have historically been poorly run can be made to look shiny and new.

    When folks talk about Chinese policy banks....this is one manifestation of how government policy is orchestrated. Banks are instrumentalities of the government and can facilitate decisions which on their face, would seem counter productive for the various actors if they were viewed through a traditional economic/business lens.
    Apr 22, 2010. 03:03 AM | Likes Like |Link to Comment
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