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

Posts Tagged ‘chinese economy’

Why China Catches My Eye as a Top Opportunity Right Now

By for Profit Confidential

My Top Three Foreign Investment OpportunitiesA few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.

While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.

My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.

The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.

China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.

The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior … Read More

Investors Forgot Everything That Happened Just a Few Years Ago?

By for Profit Confidential

The Economy and the Stock MarketThere are two important charts I want my readers to see this morning.

The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.

The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).

BAtic Dry Index (EOD) INDX Chart Chart courtesy of www.StockCharts.com

What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.

Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)

Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)

France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)

In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More

How to Profit from China’s Shift in Consumer Spending

By for Profit Confidential

China's Consumers Eager Spend; How  Profit from RiseChina is facing some growth issues, but so are the majority of the countries in the Western Hemisphere.

The country’s new government leader, President Xi Jinping, came on board in March 2013 and is planning to change the landscape of China vis-a-vis a new focus on domestic consumption and a reduction in its dependence on exports and foreign demand.

This new plan will take some time to undertake, but if Jinping can mobilize the country’s massive potential consumer base into a spending machine similar to the United States, then we could see a spending revolution emerge behind the Great Wall.

But while investors in Chinese stocks have faced difficult times over the past few years due to fraud, I feel it’s not enough to avoid the country as a growth buying opportunity. (Read “Chinese Stocks Promise Higher Potential Gains?”)

While it may be true that the Chinese economy is stalling and that it may find it difficult to get back to its former double-digit growth, the gross domestic product (GDP) growth of 7.7% in 2013 was good. The Organisation for Economic Co-operation and Development (OECD) predicts the Chinese economy’s GDP growth will slow to 7.4% this year, compared to an earlier estimate of 8.2% in November. The slowing is attributed to the government’s move to control the credit risk and factory capacity in order to prevent a meltdown.

The fact you cannot ignore is the massive population, especially the more than 300 million middle-class consumers looking to spend their newfound wealth.

In April, retail sales grew by 11.9%, which is pretty darn good, given the growth we are … Read More

And They Say the Economy Is Getting Better?

By for Profit Confidential

Four Largest World Economies Slowdown ModeThe Chinese economy had been growing at about 10% a year, like clockwork, for years. Now, China is in the midst of an economic slowdown, with growth expected to come in this year at 30%–50% below China’s five-year average growth rate.

Why is China’s economy growing so slowly, and why does it matter to us here in North America?

Manufacturing, the key component of China’s economy, is quickly slowing. The HSBC Chinese Purchasing Managers’ Index (PMI) declined for the sixth consecutive month in April, registering at 48.1. Remember that any reading below 50 for the PMI suggests an outright contraction in the manufacturing sector. (Source: Markit, May 5, 2014.)

Japan isn’t faring any better; the third-biggest hub in the global economy is facing its own economic slowdown. The government and Japan’s central bank are trying to boost the economy by printing more and more money, but they are failing miserably. Japan’s gross domestic product (GDP) growth has been abysmal for years.

Germany is the only country in the eurozone showing some resilience. Other eurozone countries, like France, Italy, and Spain, are also facing an economic slowdown. Bad debt, tight lending requirements, and high unemployment remain the biggest problems in the common currency region; so big, the European Central Bank (ECB) wants to take the same course as the Federal Reserve and the Bank of Japan and start printing more paper money.

In the U.S., we, too, have a soft economy. The first quarter of 2014 proved to be terrible for corporate profits growth. And if the rest of the world is in an economic slowdown, I don’t know how … Read More

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

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