Quantitative easing, everyone is doing it!

I'm not bullish on US stocks for a major reason, I think growth will slow. The only avenue of growth for companies is through exporting (i.e. Weak dollar) which is what James Altucher of Formula Capital is arguing for a bull market. I agree with him in a perfect world where the world's interest is the US' interest...... however,

James Altucher of Formula Capital is a moron. I watched some of his videos on CNBC. His whole bullishness is predicated on what is going to drive stock market profits is the low dollar. He fails to consider one huge monkey in the room, China. China is NOT going to sit by idly while US and Europe trash their own currency. China will devalue their yuan and join in the race to the bottom.

So, until China decides to devalue the yuan, the markets will do alright. But, once the devaluation happens, the stock markets sell off. The US dollar will appreciate, and guess what, the profits of US companies will go with it. That is why I'm not bullish on US stocks. In this case, there is nothing the FED can do. They can ease even more, but I think they won't once China shows the US they have the gonads to wreck their own currency and go toe to toe with US in the trashing of their own currency.

In simple terms, the Yuan will not go up against the US dollar, stock investors will see this (they don't now) and slash their growth estimates for stocks, thus sending markets back down into correction or a bear market.

Honestly, I don't even think central governments care about gold. So what if it goes to ten or twenty thousand an ounce? Honestly, they will care more about what is happening with their economic well being and whether people are working than what happens if some shiny metal is worth ten or twenty thousand bucks an ounce.

MASkargo sees China revenue falling, China's hard asset binge

From the Business Times:

Malaysia Airlines Cargo Sdn Bhd (MASkargo), the air cargo unit of Malaysia Airlines (MAS), has warned that revenue from its operations here could fall 20 per cent this year on lower yields and capacity.

Shanghai is the second biggest contributor to MASkargo's overall revenue, after Kuala Lumpur, accounting for some 30 per cent contribution.

The Chinese station saw revenue drop 50 per cent in the first half compared with the same period last year.

It handled some 50,000 tonnes of cargo last year.
Parent MAS' capacity cuts on passenger flights in the first half of the year also affected MASkargo's bellyhold capacity.

MAS reduced its flights here to eight times a week from 14, while MASkargo trimmed its freighter service to 10 times a week from 13.

Song said that things were looking up now, based on China's trade figures which show signs of a recovery since September. This has enabled air cargo companies like MASkargo to gradually raise their freight rates again.

Quarter-on-quarter, Song expects MASkargo to post 35 per cent revenue growth in the fourth quarter.

The article had me fooled for a moment into thinking MAS will see china freight continue to decline, when in fact, it already has. Mostly, I see a recovery in growth q-o-q as pointed out by the last sentence. This is hardly newsworthy. If the Baltic Dry Index is any indicator, freight rates will not be as good going forward. China has been reported going on a massive commodity buying spree and while they mean good, it is way too early as this economic downturn has still a prolonged period to go.

It would not surprise me, next year, to see the same headline again as China retracts from its recent asset buying spree and realize that they have bought way too early in the economic cycle.

Goldman Gears Up in China, with a margin of safety

From the WSJ:

Chinese car maker Geely Automobile wants to be taken seriously. It now has one seal of approval: Goldman Sachs Group's private-equity arm is investing $245 million through a convertible bond.

Geely will use the money to expand in China as it continues to reinvent its image. Its current reputation is of a company producing cheap, unreliable -- and sometimes eccentric -- vehicles. At the Shanghai auto show it unveiled a Rolls-Royce look-alike with only one passenger seat.

This has left it trailing a frothy Chinese market. Its sales this year were up 22% by the end of August, far behind the sector's 32%, JDPower figures show. The company is 10th in China, with a 2.9% share -- hence its multiple of 11.5 times expected earnings, even after Wednesday's 19% stock jump. Rival BYD, with Warren Buffett's backing and a hopeful future in electric cars, trades at 65.2 times.

Geely's investment in research and development and recruitment of overseas executives seem to be paying off, with better feedback on its pipeline of models. The next planned step could be bidding for Sweden's Volvo through Geely Holdings, Geely Auto's unlisted parent.

But Volvo would be a big bite, given Geely's small acquisitions to date and the challenges of cross-border auto deals. While Goldman is betting on a red-hot market, Geely still has to prove it can put the money to good use.

The Goldman Sachs investment seems like a smart bet. Convertible bonds will ensure that the investment doesn't suffer the same volatility of stocks yet will have the potential upside of a cyclical stock entering a strong earning phase. Convertible bonds seem a popular way to go about investing in this turbulent time. Buffett used it on Goldman and now Goldman is using it on others.

Of course the downside risk is that Geely hits some snags in its acquisitions or China changes the rules, but probably those things will not happen.

Anyhow, companies with a lot of convertible bonds would be wise to remember there are two sides to every coin. The cost of capital goes up as the shares get converted. Excessive use of convertible bonds may weigh on share prices and cause under performance.

Wynn ups size of Macau IPO to US$1.6b

From The Edge Malaysia:

HONG KONG: Las Vegas casino company Wynn Resorts has raised the size of the initial public share offer in Hong Kong for its Macau unit by around 25 percent, according to sources familiar with the matter, seeking to raise up to US$1.6 billion, according to Reuters.

U.S. casino operators, grappling with high debt levels and a recovering economy, are hoping to boost valuations through spinoffs in China's gambling hub, Macau, the former Portuguese colony located an hour away from Hong Kong by ferry which now hosts the world's biggest gambling market that raked in record bets in August.

Macau casino offers from Wynn and its rival Las Vegas Sands come amid an expanding pipeline of other Hong Kong IPOs.

Wynn Macau previously sought to raise up to $1 billion, but after positive feedback from investors it has raised the offer and the company now plans to sell 25 percent of the division, up from the 20 percent it originally expected to sell.

The price range of the offer is expected to be HK$8.52-10.08 per share, the sources said on Sunday, with at least 1.25 billion shares being sold. The sources have direct knowledge of the offering but were not authorised to speak publicly about the deal yet.

The IPO has attracted a combined US$250 million from several so-called "cornerstone investors," or investors who take a substantial stake in the company before the offering, one of the sources said.

Among them is Thomas Lau, the billionaire managing director of Lifestyle International, the retailer that operates the Sogo department stores in Hong Kong's Causeway Bay and Tsim Sha Tsui districts and the Jiuguang Department Store in Shanghai.

Another is Walter Kwok, of the Kwok family-run Sun Hung Kai PROPERTIES [], Asia's largest property group by market value. Malaysia's wealthy Guoco family is also investing in the IPO.

Wynn's second resort in Macau, called Encore at Wynn Macau, is scheduled to open in the first half of 2010, the company said in the IPO prospectus. The total budget for the CONSTRUCTION [] is about $650 million and so far construction costs have totalled about half that amount.

The company is funding the construction through existing cash balances and cash flow from operations, it said in the filing.

Wynn's archrival Las Vegas Sands which has filed an application for a possible listing on the Hong Kong stock exchange, aims to raise $1 billion to $2 billion through the sale of a minority stake in its Macau operations at the end of November or early December.

But analysts say Wynn's offering in Hong Kong could be better received than the Sands one due to its lower debt levels and its strong brand name.

Wynn, which had shelved its plans to list its Macau assets late last year amid the stock market plunge, will kick off its roadshow for the deal on September 21. The shares could be priced on October 2.

JP Morgan, UBS AG and Morgan Stanley have been designated to handle Wynn's Hong Kong listing. - Reuters

Looks like liquidity in Asia is live and well. The stock markets have given a way for companies to get cash despite tough credit markets. Liquidity eventually will overflow from the market to the company's coffers, but not in the most effective way. Money raised through ipos and rights issues are expensive in terms of cost of capital but investors haven't gotten the memo yet.

Pinpoint Funds Beat Peers With China Stocks, Bonds. The power of China's command economy

From Bloomberg:

Pinpoint Investment Advisor Ltd., a hedge fund manager of $560 million, returned as much as four times its Asian peers this year through July with profits from a rebound in Chinese stocks and debt securities.

The $70 million Pinpoint Opportunities Fund, which gained 85 percent in the period, invested about half its assets in convertible and high-yield bonds, including those of Chinese property developers, said Duanmu Yongshan, Pinpoint’s Hong Kong- based chief marketing officer. The $300 million Pinpoint China Fund returned nearly 51 percent in the period, he said.

Stock-focused hedge funds, the hardest hit in Asia amid last year’s market slump, are leading the recovery in 2009. The Eurekahedge Asia Long/Short Equities Hedge Fund Index returned 19 percent this year through July, the best-performing strategy among eight tracked by the Singapore-based data provider. The index fell 22 in 2008, the worst since at least 2000.

“We think fundamentals will play an increasingly more important role relative to liquidity for the second half,” said Duanmu in an interview on Aug. 24.

The China Fund, which targets companies with a market value of more than $2 billion in Greater China, bet on a recovery in Chinese property and banking stocks it bought, he said. He declined to name specific companies.

One thing we can learn when we look over this fantastic bull run (although I believe the market still will retract.) is that most people underestimated the power of China's ability to get its banks to lend. When China says its going to do something. The speed of which it can achieve that goal is unbelievable. US has been trying to get its banks to lend for the last year plus and still to no avail.

China Loan Growth

China Claims Evidence Shows Rio Tinto’s Hu Stole State Secrets

From Bloomberg:

China said it detained Rio Tinto Group’s Stern Hu, head of iron ore operations in the country, after obtaining evidence he stole state secrets.

“Competent authorities have established the evidence before they took action against anyone,” the foreign ministry’s spokesman Qin Gang said in a regular press briefing in Beijing. Hu, an Australian national, and three Rio workers, all Chinese citizens, were arrested by the Shanghai state security authority, the official Xinhua news agency reported earlier today.

Chinese mills and iron-ore producers are continuing the longest-running negotiations in the 40-year history of setting annual prices for the steelmaking material. China, the largest buyer, rejected Rio’s push for a 33 percent price cut, which was agreed to by rivals in South Korea and Japan, and is seeking a steeper discount to counter losses as demand drops.

Hu “is suspected of stealing Chinese state secrets for foreign countries and was detained on criminal charges,” the ministry’s Qin said. The act “caused huge loss to China’s economic interest and security,” Qin said, without elaborating on how Hu stole the secrets.

Rio’s staff stole state secrets by corrupting employees at Chinese steelmakers, the China Business News reported on its Web site, citing the Shanghai state security authority.

This reeks of desperation. Is it coincidence, the Chinese government arrest the long-term negotiator after long term contract talks have failed? Sounds like China is taking these long-term negotiations a bit personally. Who's the big bully now?

Some of the comments claim that iron ore manufacturers should bend to China's will. I doubt they will, seeing how China reacted to the unsuccessful contract negotiations. China will come to them after the smoke has cleared, obviously China still wants the long term contract. Probably the suppliers will demand more due to the risk that China will pull a similar stunt.

Roubini comments about China

From Roubini's RGE Monitor:

Roubini had recently been in China and met officials there. We talked about the bind that the world economic slowdown had created for China’s leadership—not despite but because of its huge trade surpluses and foreign-currency holdings. Many Chinese commentators have blamed American overborrowing and excess for dragging them into a recession. But even they realize that the very excess of American demand has created a market for Chinese exports. Chinese leaders would love to be less dependent on American customers; they hate having so many of their nation’s foreign assets tied up in U.S. dollars and subject to the volatility of American stock exchanges. But for the moment, they’re more worried about keeping Chinese exporters in business. To do that, they want to prevent their currency from rising. And for reasons laid out in detail in a previous article (“The $1.4 Trillion Question,” January/February 2008 Atlantic), the mechanics of finance require them to keep buying U.S. dollars and entrusting their savings to the United States. “I don’t think even the Chinese authorities have fully internalized the contradictions of their position,” Roubini said.

I agree. But I can report that for these past six months, virtually every economic conference I’ve heard of in China and every special supplement in a Chinese business publication has been devoted to the changes the country would have to make in order to reduce its vulnerabilities.

This was released on June 25, 2009 coinciding with what I wrote on how I doubt the export model will change. From what I highlighted, it's obvious the Chinese are just huffing and puffing, even Roubini acknowledges. I think China will be all talk until they actually do something substantial which could involve lifting the currency controls and not buying so much US debt.

Lets see if they will be able to take the tough medicine. If not, I see no reason to change my outlook. All this talk about a new super currency may help, but it all comes back to whether China will continue to grow through pushing exports. Nothing wrong with growing through exports, but keeping output artificially higher by manipulation has consequences.

Furthermore, China has not shown signs of trying to stop securing cheap sources of commodities evidenced by their pursuit of large multi-national commodity suppliers such as Rio Tinto. They must think that they can buy entire value chain and keep all the profits for themselves! I think it's not so easy. This is a good thing because the world needs to help keep China in check from overproducing. The world needs sustainable, healthy growth as opposed to the binge-style of growth over the last few years.

Why commodities will do well over a longer horizon (but not now).

Currently, China has been buying up lots of commodities. I believe they think that commodities is one of the most important investments they can make. But likely most of the purchases at this point is speculative and probably unneeded unless they are willing to let the supplies sit their for years.

The major reason commodities will do well over a longer period of 5+ years is mainly because nothing has really changed. China will continue to dump exports and piggy back on the the US and other developed nation's economies. They will find it harder to do so as time goes on as they will have to manage their currencies with other developing nations besides the US.

As you can tell, this is not a really healthy or effecient way of running an economy. By force feeding products to developing nations, we have a problem. The other economies don't really need the exports. By making exports cheaper than they are supposed to be through currency manipulation, quantity of products supplied to the world grossly exceeds what is effecient.

But alas, nothing is perfect. If nations can't play fair with each other, it will show with commodity prices. To keep this oversupply of products gravy train going requires an equally sizable oversupply of commodities. So this is a nice gutcheck against those countries who piggy back through export oriented economies.

The export model has taken a gut check, but there are no indications that countries will change their growth through exports philosophy so the picture for commodities is still strong. Also contritbuting to this is monetary abuses by nations. So once the monetary abuses abate or the world has an oversupply of commodities, we will probably see the commodity prices come back down.

The other way the commodity picture might turn bad is for world nations to start paying down debt. Most nations, though aren't doing the right thing as all they can think about is spending their way out of a recession. Most countries' leadership lack the mettle to take the tough medicine and would rather put it off for later. As long as we have this, the outlook for commodities looks good.

Can't have your cake and eat it too in export dependent economies

"Live by the sword, die by the sword" prevails as a prominent theme throughout the recent financial crisises. China has its part to blame in fattening the US economy by providing cheap exports and fueling their consumption binge.

No one should really depend on China to bring their economies back from the brink. China's prosperity depends in large part on the US prosperity. Their whole financial system is basically built on exporting everything they possibly can to the US. So whoever would depend on China utlimately also depend on the US. I can think of several southeast asian countries that fit the mould.

The countries which piggy back on others through exports enjoyed some fantastic propserity will also share some fantastic pains during this global recession. Those countries will never be decoupled from global growth as long as exports make up a large portion of their gdp.