Wilderness equals peace

Mint – Blain’s Morning Porridge 

“These things they misname empire; and where they make a wilderness, they call it peace..”

Lots of stuff going on out there, but all eyes on China and how the government is trying to hold the fragile stock market together. The measures have been extraordinary – but seem to have stemmed the arterial bleeding in the short term as the market bounced a little this morning. (Is this a deceased panda bounce we wonder?)

But whatever happened in China stocks this morning, it’s not grown-up invisible-hand market capitalism. When the Party is offering rewards to informers reporting on a “malicious” short-selling hotline, large swathes of the market have been banned from selling, and it’s only repeated cash injections keeping many market participants afloat, maybe it’s time for fundamental reappraisal?

One thing an experienced China hand told me yesterday: “watch for division between Shanghai and Beijing”. I think I understand…just how significant will market forces prove within the China politocracy?

The Financial Times reports the official government line assuring the public that the “overall positive direction for the stock market has not changed”. It has the whiff of that classic communist announcement of defeat: “our brave defenders of the motherland have victoriously advanced in a retrograde direction.”

Some traders see the ongoing correction continuing with further downside bust to come – looking at the charts we’re not that far away from the Shanghai Composite at 3200 – which would be a 5% retracement of the gains since the market went parabolic in March last year. That fits the prognosis that a slowing China economy is caught in a global recession which could shortly reverse as global growth drivers come into play. If you buy that scenario, then perhaps China is a possible bargain – at some point.

However, that same chart reminds of the last big China rally into the 2007 crisis which then crashed and saw a staggering 66% correction over the following year before 5 furthers years of flatlining. Maybe China is different?

More than a few China watchers aren’t looking at the numbers or correction targets – or even the likelihood China GDP dips below the critical 7% line in the sand trigger potential social unrest.

They are examining the effect on the political psychology of the country in the wake of repeated economic disappointments and short-falls. There’s speculation the Chinese may attempt to play some distraction tricks to refocus domestic attention from crashing stock markets. In era of change in the Party, which seeks to restore its relevance and supremacy, you’d be foolishly unwise to discount Beijing just to please Shanghai. Politics and markets never play well.

Meanwhile, it’s likely we’ll get positive GDP numbers from the UK this morning, confirming 2.5 years of growth, and boosting speculation this week’s MPC meeting could see a split vote on the timing of a UK rate hike. Interesting…I still think they’ll follow the US.

An article on CNCB this morning reports former OECD economist Michael Ivanovitch of MSI Global saying the US Goldilocks economy is here: 2.9% annual growth, no inflationary pressures and jobs growth. He points out low inflation is largely due to the 23% drop in energy prices and the 20% appreciation of the dollar – both trends set to continue!

However, Ivanovitch then looks at trade deficits and how to force “Germany, China and Japan to realign their demand management policies in order to stop living off the US economy”. Wowser. He goes on: “Germany is the worst offender. 8% of GDP – a whopping US$300bn – Germany needs to generate more growth from domestic demand..” but it won’t happen as Germany’s “disastrous austerity diktat to the recession-shattered euro area” is set to continue. He concludes that Germany is destabilizing Europe, 20% of the global economy” and by “sapping the area’s growth and employment, Germany has become a political and security issue for the West”. Hmm…

And finally this morning some more stuff on Friday’s rise in Amazon. I am indebted to a very senior US investor for the following observations. I was told I’d fundamentally failed to analyse Amazon correctly…

“The $92m was Amazon’s *quarterly* profit.  If they can do this every quarter, that’s $368m for a year.  The correct calculation is total cap ($265bn) divided by profits ($368m, if we annualise their awesome quarter).  With this calculation, by sheer coincidence, we still get a PE of 700x. 

Unfortunately, trailing 12-month profits are a loss of $200m.  So, the correct PE ratio is [negative] -1300x. Now, if the market is trading at 20x, this means that AMZN is cheaper than the market by 1320 PE ratio points! That’s pretty darned amazing.”

Of course, I know nothing about stock markets… but I’m not a buyer…  

 

Out of time, and back to the day job.. No Porridge tomorrow..

 

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

[email protected]