The Big Picture for the Week of December 25, 2011

In my 2012 outlook piece for Seeking Alpha and in the upcoming 2012 Roundtable for Bespoke Investments I have some positive things to say about investing in China. As the chart below shows, investing in China has been rough for the last few years. Since the 2007 high for the S&P 500 the Shanghai Composite is down about 60% and the Hang Seng is down about 30%. One thing that is true in general terms is that markets can correct in time not just price. After four years of going down in fits and spurts it is possible that the China markets are now ready to go up. We can explore this a little further in this post and you can draw your own conclusion but correcting in time is not an outlier phenomenon. In mid 2007 we sold out of Sinopec (SNP) and a little over a year later went into China Mobile (CHL). SNP was a great hold, I became wary and moved into a less volatile name with CHL but that was a mediocre hold at best and we sold it. After having no China exposure for a while we added an underweight by virtue of China’s weight in Market Vectors Coal (KOL) and iShares Emerging Market Infrastructure (EMIF)–our China weighting is about 1% by way of these funds. The negative argument for investing in China surrounds anything to do with real estate, over capacity, empty cities, debt loads of the banks and debt loads of the municipalities which contributes to questions about whether China will be in for some sort of hard landing. There are...

The Big Picture for the Week of December 25, 2011

In my 2012 outlook piece for Seeking Alpha and in the upcoming 2012 Roundtable for Bespoke Investments I have some positive things to say about investing in China. As the chart below shows, investing in China has been rough for the last few years. Since the 2007 high for the S&P 500 the Shanghai Composite is down about 60% and the Hang Seng is down about 30%. One thing that is true in general terms is that markets can correct in time not just price. After four years of going down in fits and spurts it is possible that the China markets are now ready to go up. We can explore this a little further in this post and you can draw your own conclusion but correcting in time is not an outlier phenomenon. In mid 2007 we sold out of Sinopec (SNP) and a little over a year later went into China Mobile (CHL). SNP was a great hold, I became wary and moved into a less volatile name with CHL but that was a mediocre hold at best and we sold it. After having no China exposure for a while we added an underweight by virtue of China’s weight in Market Vectors Coal (KOL) and iShares Emerging Market Infrastructure (EMIF)–our China weighting is about 1% by way of these funds. The negative argument for investing in China surrounds anything to do with real estate, over capacity, empty cities, debt loads of the banks and debt loads of the municipalities which contributes to questions about whether China will be in for some sort of hard landing. There are...

The World According To Rosie

ZeroHedge posted the following list from David Rosenberg of things that people are not talking about but should be (at least this is how ZH interprets the list): 1) Hedge funds have not piled into the equity market to play catch-up. 2) The Super Committee did not come to a compromise (and remember Moody’s has the U.S. debt rating on “credit watch” and Standard & Poor’s still with a “negative outlook”.., shades of August). 3) The Europeans have not managed to resolve let alone contain their credit crisis. 4) Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a “Eurobond”. 5) The ECB has not moved towards QE. Nor will it — have a look at today’s WSJ editorial on the matter. Brilliant. 6) Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided. 7) China did not start to ease policy just because inflation rolled off the 6%-plus peak. 8) U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP. We’ve all heard point number one many times, often referred to as window dressing, but this is something that I have never understood how it can be pulled off. To take an extreme example, if a portfolio reports owning nothing but names that are up 20% but the actual portfolio is only up 2% then wouldn’t all credibility be lost? The apparent failure of the super committee should surprise no one. Washington has become...

The World According To Rosie

ZeroHedge posted the following list from David Rosenberg of things that people are not talking about but should be (at least this is how ZH interprets the list): 1) Hedge funds have not piled into the equity market to play catch-up. 2) The Super Committee did not come to a compromise (and remember Moody’s has the U.S. debt rating on “credit watch” and Standard & Poor’s still with a “negative outlook”.., shades of August). 3) The Europeans have not managed to resolve let alone contain their credit crisis. 4) Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a “Eurobond”. 5) The ECB has not moved towards QE. Nor will it — have a look at today’s WSJ editorial on the matter. Brilliant. 6) Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided. 7) China did not start to ease policy just because inflation rolled off the 6%-plus peak. 8) U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP. We’ve all heard point number one many times, often referred to as window dressing, but this is something that I have never understood how it can be pulled off. To take an extreme example, if a portfolio reports owning nothing but names that are up 20% but the actual portfolio is only up 2% then wouldn’t all credibility be lost? The apparent failure of the super committee should surprise no one. Washington has become...

China Is Burning Down

My first foray into investing in China for clients was in 2003 with Petrochina (PTR) which I later replaced with Sinopec (SNP). When I first started blogging I specifically made two overriding points, one was that China was clearly becoming more important in the world economic order (I obviously was not the first mover here) and that it would be a very complicated investment destination for a long time. While these observations are obvious they are also very important. Concerns about Chinese debt are growing; there are more articles being written about real estate debt that seems destined to go bad, the debt problems of the municipalities and Temasek is bailing on (not out, on) the Chinese banks. A point I made a long time ago what that there were bound to be mistakes in managing the country’s new found prosperity. This has lead me to have some pretty consistent views on how to invest in the country which is that I think energy, utilities, industrials, materials and consumer stocks make more sense than financials, real estate and exported related companies. Our exposure for clients is low and comes by virtue of China’s weight in the Market Vectors Coal ETF (KOL) and iShares Emerging Market Infrastructure ETF (EMIF). Aside from the debt issues mentioned above there are also concerns with inflation heating up (there are discrepancies between CPI and the deflator) and growth slowing down (it seems like growth has been 9-10% for years with concerns it will drop to 5-6%). The debt and growing pains issues contribute to the bear case on China. However the Shanghai Composite is...

China Is Burning Down

My first foray into investing in China for clients was in 2003 with Petrochina (PTR) which I later replaced with Sinopec (SNP). When I first started blogging I specifically made two overriding points, one was that China was clearly becoming more important in the world economic order (I obviously was not the first mover here) and that it would be a very complicated investment destination for a long time. While these observations are obvious they are also very important. Concerns about Chinese debt are growing; there are more articles being written about real estate debt that seems destined to go bad, the debt problems of the municipalities and Temasek is bailing on (not out, on) the Chinese banks. A point I made a long time ago what that there were bound to be mistakes in managing the country’s new found prosperity. This has lead me to have some pretty consistent views on how to invest in the country which is that I think energy, utilities, industrials, materials and consumer stocks make more sense than financials, real estate and exported related companies. Our exposure for clients is low and comes by virtue of China’s weight in the Market Vectors Coal ETF (KOL) and iShares Emerging Market Infrastructure ETF (EMIF). Aside from the debt issues mentioned above there are also concerns with inflation heating up (there are discrepancies between CPI and the deflator) and growth slowing down (it seems like growth has been 9-10% for years with concerns it will drop to 5-6%). The debt and growing pains issues contribute to the bear case on China. However the Shanghai Composite is...