Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘chinese economy’

What the Breakout in the Gold-to-Copper Ratio Is Telling Us

By for Profit Confidential

Copper Flashing a Buy Signal for GoldCopper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.

When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.

If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.

Below, you’ll find a chart of the gold-to-copper ratio.

GOLD - Spot (EOD) Copeer ChartChart courtesy of www.StockCharts.com

Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.

And the weekly chart of copper prices looks terrible too:

Copper - Spot Proce (EOD) CME ChartChart courtesy of www.StockCharts.com

Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More

What the Collapse in Copper Prices Means for Investors

By for Profit Confidential

Why Are Copper Prices CollapsingAlmost daily, there’s a new piece of information coming out about the Chinese economy that suggests economic conditions there are worsening. We see China’s manufacturing sector is contracting and there’s a credit crunch in the making.

The Wall Street Journal ran a story last Friday on the state of the Chinese economy and its rapid decline in growth. It cited Premier Li Keqlang’s warning to investors that China was “likely to see some corporate defaults in debts.” (Source: “China Reports Broad Economic Slowdown,” Wall Street Journal, March 14, 2014.)

The economic slowdown in the Chinese economy is another reason why the U.S. economy will slow down in 2014.

Too often investors forget that China is one of our major trading partners and a significant number of American companies operate in China. If the economic slowdown in the Chinese economy gains strength, then those American companies selling goods to China and those operating there will see their profits shrink.

As the Chinese economy boomed over the past 10 years, the prices of copper and other base metals needed in the building of the country’s infrastructure skyrocketed. Now, with an economic slowdown looming in the air for the Chinese economy, base metal prices, especially copper prices, are sliding lower.

The chart below shows how copper prices have declined significantly since the beginning of 2014.

Copper - Spot Price (EOD) CME ChartChart courtesy of www.StockCharts.com

How will lower copper prices affect North American investors? Those companies in the U.S. economy that deal with base metals, such as copper, will see their profitability decline; thus, their stock prices will decline.

On a macro scale, the sharp decline in copper … Read More

Why the Chinese Economic Slowdown Matters

By for Profit Confidential

Chinese Economy to See Black Swan Type EventUnderstanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.

While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.

In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)

And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.

And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:

WisdomTree Dreyfus chinese Yuan fund ChartChart courtesy of www.StockCharts.com

Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.

There is no doubt in my mind … Read More

Investment Opportunities in Depressed Chinese Stocks

By for Profit Confidential

Where to Find New Investment Opportunities in the Emerging MarketsThe Securities and Exchange Commission (SEC) is currently shutting down numerous Chinese shell companies trading on U.S. exchanges, such as the over-the-counter market and the highly speculative Pink Sheets stock exchange.

This is good and is something the SEC needs to continue to pursue and enforce, so domestic investors can regain some lost confidence towards Chinese stocks.

The American appetite for Chinese stocks has been picking up; albeit, it’s nowhere near where it was a few years ago when Chinese stocks were all the rage.

Yet if you think there’s little interest in Chinese stocks, take a look at some of the sizzling debuts of the few Chinese initial public offerings (IPOs) that listed in the U.S. last year.

There are now worries China may be set for a downside slide. I have been hearing how the Chinese economy was set to burst, especially regarding the real estate and financial sectors in China. So far this has yet to happen, but we are continuing to hear continued bearish comments towards China.

It’s true the Chinese economy is stalling and may find it difficult to get back to its former double-digit growth, but with gross domestic product (GDP) growth at 7.7% in 2013 and estimated to rise 8.2% this year, according to the Organisation for Economic Co-operation and Development (OECD), these are not bad numbers. By comparison, the U.S. economy is predicted to grow 2.9% in 2014, according to the OECD. (Read “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”)

A recent showing of contraction in Chinese manufacturing in January was used by the Chinese bears … Read More

Uncertainty in Emerging Markets Creating Certainty in Only One Market

By for Profit Confidential

This Is the Only Play that Will RewardFasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!

I’m being too bearish? Not after you read this…

In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.

While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)

The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.

But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.

China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)

European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More

Three Profitable U.S. Plays on the Lucrative Chinese Auto Market

By for Profit Confidential

Chinese economyIt’s no secret that China is the biggest market for numerous raw materials, such as cement, steel, coal, copper, and oil, along with end-products, such as vehicles and mobile phones.

The growth of the middle class and wages in the country is the vital attraction for companies to go and set up shop there. Credit Suisse estimates the household wealth in the country will double to $35.0 trillion by around 2015, based on achieving sustainable gross domestic product (GDP) growth at or near the current growth rate. Moreover, the government’s strategy to drive domestic consumption will also help to push up the demand for goods and services.

An area in the Chinese economy that I continue to believe has tremendous long-term potential is the auto sector, but the short-term will pose some hurdles due to some buying limits imposed by the government.

The Chinese motor vehicle market is the largest in the world, and it continues to distance itself from the United States. The upward demand for vehicles remains in spite of the government’s efforts to limit vehicle sales in many of China’s largest cities in an attempt to cut pollution.

As a potential market for vehicles, China remains tops. Auto sales surged 16% in November following a 24% jump in October, according to the China Association of Automobile Manufacturers. (Source: China Association of Automobile Manufacturers web site, last accessed December 11, 2013.) About 1.7 million vehicles were sold for an annualized growth of 20.4 million. By comparison, sales of autos increased nine percent in the United States in November to an annualized rate of 16.4 million vehicles, according to … Read More

OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar

By for Profit Confidential

consumer spendingGet ready for the massive consumer push by the Chinese over the upcoming years and decades as the government strives to drive the economic engine via consumer spending.

The modification to the current one-child policy, which I recently discussed in these pages, will help create an even bigger middle class in the country that will drive up the demand for goods and services. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)

The Organization for Economic Cooperation and Development (OECD) has become more bullish on China, and predicts Chinese gross domestic product (GDP) growth will rise to 8.2% in 2014, driven by a rise in domestic consumer spending. (Source: “OECD sees China growth accelerating in 2014,” China Daily, November 20, 2013.) The OECD even goes as far as to say the Chinese economy could surpass the U.S. economy to become the world’s biggest economy by 2016. While this is faster than I expect, it’s clearly not impossible, given the rise in income levels and spending.

The middle class in China will drive the economic engine of the country, unlike what we are seeing in America with the declining spending prowess of the middle class. In fact, what we are seeing in China is similar to the power of the U.S. middle class that drove the Industrial Revolution in the late 1800s and early 1900s.

If China can emulate what happened in the U.S. then, there could be some golden years ahead for the Chinese economy.

To play the expected rise in consumer spending in China, which is increasing at double-digit rates and is likely to continue … Read More

China’s Expected Baby Boom a Boon for U.S. Business

By for Profit Confidential

Chinese economyThere you have it; the latest great news out of China, I think, will help drive sales of some U.S. companies going forward.

The news? There are going to be more babies born in China over the foreseeable future. In a surprise and strategic move, the Communist Party of China decided it was time to increase its baby population and look towards the future of the country.

Under the country’s new plan, the one child policy will be modified to allow two children per family in cases where one of the parents came from a one-child family.

As I said, this is huge; it could be a critical turning point in the direction and growth of the Chinese economy. (Read “Time to Look at Chinese Stocks Again?”) While the change in population control may seem archaic to us here in America, in China, this is a major change that could impact the country for decades going forward.

Make no mistake about it, China is ambitious and wants to expand its economy more and become the biggest economy in the world. This will inevitably happen; it could even take less than the previously estimated 20 years, given the new baby policy along with the opening of some state-operated industries to private investment and foreign companies.

And while the Chinese government wants to make sure there are sufficient babies born to replace the aging population, a key objective of the change is to inevitably drive up domestic consumption in the Chinese economy in the decades ahead.

The Chinese economy will see rising demand for food, homes, apparel, household goods, and … Read More

Time to Look at Chinese Stocks Again?

By for Profit Confidential

Time to Look at Chinese StocksThere are still many on Wall Street who frown on Chinese stocks and China. When word was spreading that the country’s real estate market was going to implode, China was a cesspool for capital.

Well, I don’t belong in that group of investors. Many of my readers will recall how I remain bullish on China and Chinese stocks in particular. Just take a look at many of the top-performing stocks over the past few weeks, and you’ll see that there are numerous Chinese small-cap stocks charging up on the charts. The buying has been driven by a move to seek more returns in regions, like China, that have largely not followed U.S. stocks higher.

Take a look at the S&P 500, as shown by the red candlesticks in the chart below, versus the Shanghai Composite Index, as reflected by the green line.

The obvious finding is that the S&P 500 has continued its upward move, while the Shanghai Composite Index has been unable to find any rhythm on the chart, based on my technical analysis.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

In my assessment, the divergence between the two indices has resulted in a buying opportunity for Chinese stocks.

Since making its initial acquisition in a 20% stake of specialty chemicals maker China National BlueStar in 2008 for $600 million, private equity firm The Blackstone Group L.P. (NYSE/BX) has been steadily involved in buying Chinese companies. Blackstone just signed a definitive merger agreement to buy China-based IT services firm Pactera Technology International Ltd. (NASDAQ/PACT) in a $600-million deal. Of course, the Chinese government, via its overseas investment fund, invested $3.0 billion in … Read More

My Bet: New Fed Chief Loves Printing Presses More Than the Last Guy

By for Profit Confidential

corporate earningsCompanies in key stock indices have started to report their corporate earnings for the third quarter of this year. Not surprising, they are weak and show signs of stress.

According to FactSet, up until October 4, 90 companies in key stock indices like the S&P 500 issued negative guidance about their third-quarter corporate earnings per share. This is the highest number of companies posting negative guidance since the research company started to track earnings guidance back in 2006. (Source: “Earnings Insight,” FactSet, October 4, 2013.)

The corporate earnings growth rate for the S&P 500 is expected to be about three percent in the third quarter, and just like the last quarter, once again, a significant portion of the boost in earnings will come from the financial sector. If you take the financial sector’s corporate earnings out of the equation, earnings growth rates drop down to about 1.7%. Take away all the stock buyback programs public companies have conducted this year, and the earnings growth picture gets really ugly.

I think the smart money is sensing companies are struggling to grow, so they are starting to pull money out of the market.

According to the Investment Company Institute, for the week ended September 25, the long-term U.S. stock mutual funds had a net outflow of $3.8 billion in capital. Similarly, for the week ended October 2, the net outflow continued and increased to $4.12 billion. (Source: Investment Company Institute, October 9, 2013.)

Key stock indices like the S&P 500, Dow Jones Industrial Average, and the NASDAQ have shed some gains recently; they are much lower than their all-time highs posted just … Read More

Revenue Growth for S&P 500 Hitting a Brick Wall

By for Profit Confidential

In 2010, on average, for every one dollar in sales posted by the S&P 500 companies, $0.135 came from Europe. In 2011, this number declined to $0.11. In 2012, sales from Europe accounted for only $0.097 for every one dollar of sales generated by the S&P 500 companies. (Source: S&P Dow Jones Indices, August 2013.) These statistics should not be taken lightly.

The debt ceiling fiasco and the U.S. government shutdown are front and center now. Europe has been pushed to the back of the stage in spite of the fact that continued troubles there will have a negative impact on the S&P 500 companies.

Even though there has been growing optimism towards Europe, the region’s troubles are staggering. Unemployment in the common currency region of Europe remains ridiculously high. Bad debt is everywhere, and economic uncertainty remains high.

England, one of the biggest economic hubs in Europe, looks to be stalling once again after seeing menial growth. British industrial output declined 1.1% in August. This was the biggest drop since September of 2012. Output in the manufacturing sector fell 1.2% and other sectors, such as pharmaceuticals, electronics, and food and beverages, witnessed a decline as well. (Source: Reuters, October 9, 2013.)

So if Europe is far from being “out of the woods,” where will the S&P 500 companies get sales growth from? Growth in the U.S. economy is almost nonexistent and the Chinese economy is slowing, too.

Europe is an integral part of the global economy. The longer it takes for Europe’s economy to recover, the more scrutiny there will be on the revenues of S&P 500 companies. In … Read More

Why a Turnaround in the Eurozone Won’t Happen: U.S. Companies Beware

By for Profit Confidential

 U.S. economyOn Sunday, we saw the results of the election in Germany, the powerhouse of the eurozone. Angela Merkel won again. Her re-election sent a wave of optimism through Europe. I can just hear the chants declaring “the worst is over for the eurozone” starting up again.

Sadly, the reality is completely the opposite. The eurozone is still deep in trouble and an economic slowdown still persists there. My opinion has not changed about the region: the downturn is going to stay for a long period of time.

In July, industrial production in the region declined by 1.5% from the previous month. Compared to the same period a year ago, industrial production in the region was down 2.1%. (Source: Eurostat, September 12, 2013.)

Looking further into the industrial production figures for the eurozone; it’s apparent the economic slowdown is far from over. Capital goods production in the eurozone fell by 2.6% between July and June. Historically, capital goods production can be considered as one early indication of where an economy is headed.

A record unemployed population in the eurozone still remains an issue and further strengthens the argument of the depth of the economic slowdown. Unemployment is not only high in the debt-infested countries in the region; it has also become a problem for even larger countries like France.

Bad bank loans in Spain, the fourth-biggest hub in the region, reached a record high in June, with 11.6% of all bank loans now outstanding considered “bad.” And the biggest lenders in the eurozone country are saying this rate will increase. (Source: Reuters, August 19, 2013.)

With all this, what continues … Read More

Your Portfolio Stopped Growing? Here’s Why You Really Need to Think Chinese

By for Profit Confidential

Chinese stocks China is not dead for investments, folks! In my previous article, I talked about the travel sector and the staggering potential for growth in the emerging markets—but this isn’t the only investment opportunity that may be arising in the second-largest economic hub.

Yes, many analysts and mainstream media outlets have been suggesting China is no longer a viable region for investments. I even heard a hedge fund manager say the potential in U.S. stocks is greater than that of China. While I do favor U.S. companies, to overlook China makes absolutely no sense. (Read “Why Chinese Stocks Are Taking Off All of a Sudden.”)

Just take a look at the recent economic numbers. Assuming they are valid, these numbers prove that there are clearly reasons to get excited about shifting some capital to Chinese stocks or multinational companies that derive a major portion of their revenues from China.

The key exports metric has been rising for two straight months. The country reported a healthy 7.2% rise in its exports in August, up from 5.1% in July and -3.1% in June, according to the General Administration of Customs. (Source: Orlik, T. and Kazer, W., “Economy in China Benefits From Stronger U.S. Demand,” Wall Street Journal, September 8, 2013.) This is extremely positive and indicates that demand for the global economy is on the rise.

A strong Chinese economy makes for a stronger global economy.

With the economic renewal, we are seeing a demand for raw materials from China. China imported 526.7 million metric tons of iron ore for the 12 months to August, up 8.1% year-over-year. (Source: “Freight … Read More

Scary Story on the Booming Auto Sales No One Is Talking About

By for Profit Confidential

U.S. economyAutomakers in the U.S. economy are getting a significant amount of attention these days because they are selling more cars. In August, total light vehicle sales by the automakers in the U.S. economy increased 17% from a year ago. They sold more than 1.5 million cars in August compared to 1.28 million cars last August. (Source: Motor Intelligence, last accessed September 10, 2013.)

On the surface, sales reported by the automakers are exuberant. They show consumers are spending. And if this continues, maybe we will see some economic growth in the U.S. economy.

Sadly, this is a one-sided conclusion. When I look into the details, it turns out Americans are indeed buying cars from automakers—but on borrowed money.

Here’s what you really need to know other than just focusing on the sales by automakers:

Since the Federal Reserve introduced its easy monetary policies, there has been a significant increase in auto loans to the subprime borrowers—those with a low credit score of less than 620—compared to the prime borrowers—those with a credit score of 760 and above. (Reminds me of the housing crisis we saw in the U.S. economy not too long ago.)

In the second quarter of 2009, there was $10.8 billion of outstanding auto loans to the subprime borrowers in the U.S. economy. Fast-forwarding to the second quarter of 2013, this number stood at $21.2 billion—an increase of more than 96% in just a matter of a few years. In the same period, the amount of auto loans to prime borrowers only increased 38%! (Source: Federal Reserve Bank of New York web site, last accessed September 10, 2013.)… Read More

Chinese Economy Screaming “Troubles Ahead” for Global Economy?

By for Profit Confidential

I keep a keen eye on the second-biggest economy in the world simply because China is experiencing an economic slowdown that can and will affect the U.S. economy, and hurt the profitability of our U.S. multinational companies.

Since the beginning of this year, the economic slowdown in the Chinese economy has been gaining strength. In the second quarter, we saw the economic growth rate in the Chinese economy fall: the second-biggest hub in the global economy grew at 7.5% in the second quarter, compared to 7.7% growth in the first quarter.

When it comes to economic analysis, one thing I focus on is the long-term trend in statistics. When I do just that, the Chinese economy is going the wrong way—and I believe there’s trouble ahead for China.

We’ve seen this in the past with our own economy; when there’s too much credit and rapid expansion, an economic slowdown usually follows. Just look at what happened during the housing boom in the U.S. economy—credit grew, and we saw ruthless lending practices to attract subprime borrowers.

Right now, we are witnessing a significant amount of credit expansion in the Chinese economy. The total credit to the private sector has increased more than 166% between the first quarter of 2008 and the last quarter of 2012. (Source: International Bank of Settlement web site, last accessed September 10, 2013.) In the chart below you can clearly see how much credit has risen in the Chinese economy. This should be taken as a warning sign of just how deep the economic slowdown in the country must be.

Credit To Private Sector Chinese Economy Chart

My concern? What happens to the profitability … Read More

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