Posts Tagged 'CNBC'

The Only Difference Between China and Spain is the Color of the Rice

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China:  Yesterday’s WSJ article on Bo Xilal (page A11) highlights the issue that should provide pause to anyone blindly bullish on China and materials stocks.   It reveals a story of monstrous leverage using property as collateral.  When Bo Xilal rose to the top political seat in Chongqing, the city’s debt was estimated to be 162 billion yuan. At the end of 2011, at least one informed estimate approached 1 trillion yuan.  I like the sound of “trillion” but it only translates into roughly $150 billion, perhaps not bad for one of China’s fastest growing cities.   And maybe that’s not a lot by Western standards for a permanent population of 28 million but the rate of change is significant and places Chongqing’s debt at 100% of GDP versus China’s broader estimate for the country at 22%.  The proceeds of borrowings and  land sales went into highways, state owned businesses and social welfare programs.  But unfortunately, these expenditures don’t throw off enough “income” to offset the cost of the leverage.  (Let me know if you’ve heard this story before – perhaps while travelling through the warmer climes of the EU.)  Taking on debt against land at all time high prices is exactly what got the rest of the world in trouble.  Add in the debt on developers’ balance sheets and leverage at the business level through off-balance mechanisms such as LOC’s and household real estate purchases at prices that exceed current levels  and the only difference between China and Spain will be the color of the rice.  Of course that’s an exaggeration but suffice it to say that perhaps China does not have the iron grip on its politicians, people and economics that so many pundits, economists and portfolio managers give them credit for.  With the central government’s decreasing appetite for individual excess – 感謝什麼,博 (Translation: Thanks for nothing, Bo)  I doubt that there will be as much sympathy for fat cat capitalists who have traded their Mao suits for Prada as was shown to the indebted by the rest of the world.  And I doubt Chongqing is the only city modernized by taking on significant debt as Bo is not the only politician seeking to climb the political ladder by leveraging the future.  In fact it is estimated that local property sales accounted for approximately 40% of revenues and lending for cities throughout China.  Wu and every other politician has been very clear in stating that property prices remain too high.  Three cities, including Shanghai, have tried to ease property controls but the government forced their immediate cancellation.  Yup, the rulers on high are resolute n sending a message that excess, driven by inflating property values at the risk of the people, is over.  The only question is if they caught it in time.  Fortunately, I don’t have to answer that question since the near term impact will be the same.

The great unwind in China is on its way.  Let’s see how that works out as their export economy fades.  And how it works out for us.

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Slovenia Could Imperil EU Bailout; Operation Chubby Checker a/k/a Operation Twist; The Recession is here.

Little old Slovenia, that old communist country, could be the fly in the ointment. The government fell last night and elections are not yet scheduled but the party that seems to be in favor of assuming power is apparently less benevolent than the outgoing politicians. Slovenia’s Democratic Party is also much less benevolent than the US Democrats but I guess the word “Democrat” has different definitions in former communist countries than here. They believe that countries like Greece should pay the piper themselves and that it shouldn’t fall on the Slovenians to give up their hard earned cash to profligate spenders. The issue with this is that the approval of the new ESFS proposal requires unanimous approval from all 17 members . If the Democratic Party does assume power, there is no guarantee the Slovenians vote to approve the bailout making for, at least, some suspense. The markets don’t need more uncertainty.

Alpha Natural Resources noted slowing demand in Asia for coal as one reason why they cut guidance today. This is not a good sign. China was supposed to be a bastion of strength. Copper, FCX, at lows, transports getting smeistered, these are the front end of the recession. I’m short CNX and BTU. The rails, who of course benefit from coal shipments, are feeling tremendous pain. CSX had already lowered guidance as did FDX.

In 2002, Bernanke made a speech about Kennedy’s use of Operation Twist and it wasn’t so favorable (link below) Granted the speech referred to Japanese deflation issues but is nonetheless very telling. Quote is from the footnote 11.

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

“An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to raise short-term yields and lower long-term yields simultaneously by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was rather small in scale, did not involve explicit announcement of target rates, and occurred when interest rates were not close to zero.”

Like Chubby Checker, the inventor of the only twist that worked, this move will be for entertainment purposes only since it will have less of an affect on the economy than Chubby’s record sales. And it will hurt the banks.

HPQ – sell it. The Board should be fired. You approve such a radical change in direction such as buying an overpriced software company and the spinning off of your PC business and then you fire the CEO. Can you think of a worse nightmare for a CEO than having the stock decline when you are hired then spike when you get fired. Whitman, a brilliant internet pioneer, is not the answer. EBAY is a retailer, HPQ is, well what is it? It’s a declining hardware business. ORCL isn’t buying HPQ. $60 billion is an awful big price tag for a “told you so” by Hurd even if it were his decision which it’s not.

Most troubling about the bank debt downgrades is the reason. It’s crazy logic. Does Moody’s see a need for the government to bail out the banks? If so, their debt won’t be worth anything so the downgrade should be to junk. If the Lehman deja vu isn’t an issue, then there shouldn’t be a downgrade.

Guess what? I’m still bearish.


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