Chinese Business Bubble Ready to Burst

March 26, 2011 1 comment

Chinese business is on the brink of one of the largest bubble bursts of economic history.  This “made in China” bubble would have a large impact on the global economy

What is China to do? China’s rapid growth has been called an “extraordinary historic event.”  With an expected double-digit growth to the tune of 10.5% according to the IMF, this would truly be an historic event.  But is it worth investing in China? According to a few industry pundits, China is the next big  shorting opportunity.

Growth Measured in Light Years

Everything is growing quickly in China.  Most of the products the United States receives are made in China.  The Chinese are producing property, automobiles and clothing on a large scale.  This production is the driving force behind the incredible growth.  This kind of growth has never been sustained, primarily because this kind of growth has never existed.  James Rickards, former general counsel for hedge fund Long-Term Capital Management LP, calls China the “greatest bubble in history.”  The surge in GDP means that China will have to raise interest rates to keep asset prices in check.  Recent numbers show “property prices rose at the fastest pace in almost two years in February.” As of December 2010, the average price:rent ratio in China was 39. This is 17 points higher than the United States before the housing crisis.  Construction is largely responsible for creating a housing bubble.  “Today, construction accounts for 60% of the Chinese economy“, this is larger than the 15% of GDP in the US before the housing crisis.  Housing continues to grow despite the glut of current available housing.    E-House China Holdings Limited (NYSE: EJ), the largest Chinese real estate services company, was recently downgraded to an “underperform” by Zacks Investment Research. China must act quickly because as we found out in 2008, there is no easy way to bring property prices down once they have climbed to exorbitant heights.

Beijing Traffic. Jason Lee - Reuters

Calling a Shorting Opportunity Early

Recently, hedge fund manager Mark Hart has launched a new fund that bets against China.  Hart has become a beacon for calling a good shorting opportunity early.  In 2006, Hart launched the sub-prime debt fund that achieved unbelievable performance with the later sub prime meltdown.  In 2007, he launched a fund that capitalized on the European debt crisis.  Hart’s track record has made it clear, he can spot a bubble when he sees one.  China is now square in his cross-hairs.

Hart joins the short side with James Chanos, another well known short seller. Chanos, president and founder of Kynikos Associates, shorted Enron from $90 to $1 in 2001.  Chanos warns that China’s economy can’t sustain this growth for much longer.  A credit excess defines a bubble and China is the biggest credit excess of our time.

Marc Faber, prominent doom investor, has gone as far as predicting that China may crash within the next few months based on its property bubble.  Kenneth Rogoff, former chief economist of the IMF, also said “China’s property market is collapsing” and that it will hit its banking industry first.

Chinese property isn’t the only industry growing at incredible rates.  The Chinese auto industry is moving quickly to fill the demand for personal transportation.  Last year, with a 30% increase in sales, China sold more cars domestically than any other country had sold at any time in history.  Chinese consumers buy more cars than their highway systems can handle.

Rising traffic is responsible for the deteriorating transit ways. Deterioration is occurring faster than China can manage. A bad situation turned worse after a 100 kilometer traffic jam immobilized a transit way in August of 2010; the worst traffic in the world now belongs to Beijing.

Chinese imports are raising the prices of commodities. From June to December 2010, graphs show the increases in commodity prices fueled by Chinese consumption.
China exports products from the raw materials that it imports.  The growth in Chinese investments and “speculative capital” combined with imports of soft commodities, metals and other raw materials have given the Chinese economy the boost that it needs to push through the double-digit growth.  The imports have caused a rally in mining companies and commodities primarily in Australia.  The largest population on Earth has an insatiable appetite for commodities.

China expected to account for a third of the world’s economic growth in 2011

It is clear that China is not the safest investment.  If Hart and Chanos are right about their feelings regarding the Chinese bubble, then we can expect a rough economy into the future.

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References

http://www.telegraph.co.uk/finance/china-business/8261740/Hedge-funds-bet-China-is-a-bubble-close-to-bursting.html

http://www.bloomberg.com/news/2010-03-17/china-is-in-midst-of-greatest-bubble-in-history-ex-ltcm-s-rickards-says.html

http://money.cnn.com/2011/01/12/news/companies/china_auto_bubble_risk/index.htm

http://www.investorplace.com/26076/reasons-for-investors-to-short-china-stocks/

http://www.nytimes.com/2010/01/08/business/global/08chanos.html

http://www.southwestbusiness.co.uk/thoughtfortheday/Thought-day-Don-t-bet-Chinese-just/article-2769323-detail/article.html

http://www.huffingtonpost.com/2010/07/06/kenneth-rogoff-chinas-pro_n_636096.html
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Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Real Estate: The Real Situation

February 3, 2011 Leave a comment

2008 is well behind us.  The market crash is now a distant memory.  What has happened with real estate since then?
It seems that with all the good news about real estate there is still reason for alarm. Real Estate companies and reports are showing positive changes while indices show further weakening. We are not out of the dark yet.

Residential

A study published by the University of Florida has reported an optimistic “slowly but surely” gain in sales of single family homes, condominiums as well as a gain of office and retail occupancy and capital availability.

In contrast to University of Florida’s study, Clear Capital reported that Florida home prices are expected to decline. Florida falls into a class that will likely see the largest expected price drops in home values over 2011. Alex Villacorta, senior statistician at Clear Capital, reported that many markets are continuing to decline. Although Clear Capital expects Florida prices to continue to drop, they paint an optimistic picture for a few select markets.

Clear Capital’s top five cities expected to rise in 2011:
1. Washington, D.C.: 6.5 percent price increase
2. Houston: 3.6 percent price increase
3. Honolulu: 3.4 percent price increase
4. Memphis, Tenn.: 3.2 percent price increase
5. Columbus, Ohio: 2.1 percent price increase

Sales of single family homes have stopped falling, but new construction is still down.

Home values continue on their rocky path as the Case-Shiller Index, the leading indicator of home values. Case-Shiller indicated a 1.6 percent decline from the previous year, the biggest 12 month decline since December 2009.

January 25, 2011, Case-Shiller reported that prices weakened in 9 major cities and 20 metro areas. The biggest declines included Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland (OR), Seattle and Tampa. The nine major cities have fallen to their lowest values yet, even lower than the spring quarter of 2009. Read the full report here Atlanta is now at a new 10 year low. Analysts have called this the “double-dip” in home prices.
2011 could expect to see a new wave of foreclosures.

Commercial

The commercial real estate market looks much brighter. The Real Estate Roundtable says that first quarter of 2011 Real Estate Roundtable Sentiment Index shows the best results since the survey of senior commercial real estate executives began in 2008. Blackstone Group LP saw a 56 percent profit gain, or 46 cents per share, attributed to its commercial real estate investments, beating the 30 cent gain estimated by analysts. A solid rebound in commercial real estate has helped the firm to keep its winning streak. Blackstone’s leveraged buyouts have increased in value thanks to deals that include Hilton Worldwide Inc.

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References

http://www.businessweek.com/ap/financialnews/D9L4O5DG0.htm
http://www.bloomberg.com/news/2011-02-03/blackstone-profit-increases-56-as-value-of-real-estate-investments-gains.html
http://www.realtor.org/rmodaily.nsf/f3c66d0c6457c1e1862570af000cb13b/6845a6cb785107fb86257826004fc50c?OpenDocument
http://www.star-telegram.com/2011/02/01/2815423/fort-worth-home-prices-expected.html
http://www.bloomberg.com/news/2010-12-28/u-s-property-values-decline-more-than-forecast-in-s-p-case-shiller-index.html
http://housingdoom.com/2011/01/25/case-shiller-index-a-mini-double-dip-or-something-bigger/
http://www.dsnews.com/articles/sp-case-shiller-index-points-to-double-dip-in-home-prices-2011-01-25
http://www.mortgageorb.com/e107_plugins/content/content.php?content.7713
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Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Apple’s Future is Based on Jobs’ Health.

January 21, 2011 6 comments

Apple’s biggest asset is under threat.  Steve Jobs, Apple’s founder and CEO is facing serious health problems.  How will Apple continue without their CEO that plays roles such as:  innovator, R&D, think tank and almost everything else?

Jobs has been a visionary since he created Apple.  He was too much of a visionary and not enough of a CEO when Apple, through a series of complicated actions, removed him as Chairman in 1985.  Read the full story here.  Jobs went on to create another computer company, rightly named, NeXT.  Apple was not happy. NeXT posed a surprisingly large threat to Apple with no customers or products.  Apple later acquired NeXT for $400 million in 1996 and brought Jobs back into the company from which he was dismissed just 11 years earlier.

The Return

The red dashed line represents $3.42

In 1997, Apple (Nasdaq: AAPL) was essentially a penny stock when Jobs retook the CEO position as interim (he dropped the “interim” from his title in 2000).

Since then, it has been a wild ride with an incredible bull market for the stock thanks to its exhaustive pipeline of ideas, lineup of fantastic products and award winning Apple stores that resemble the products themselves.

The amazing and future-forward products are the results of Steve Jobs and Steve Jobs alone.  It may surprise many to find out that Apple does not have a consumer research department or even a market research department.  In a traditional corporation the market consumer research department will try to assess what the people want and what they could be asking for in the future.  When posed with the question “what consumer and market research has Apple done to guide the development of the product?” Steve Jobs’ classic response was “none, it isn’t the consumers’ job to know what they want”.  Jobs had asserted his confidence in his own intuition.  And why shouldn’t he? His intuitive sense has given us the iMac, MacBook, iPod, iPhone, iTunes, iPod Nano, iTouch, the app store and of course the iPad.  Jobs’ consumer clairvoyance has been nothing less than remarkable.

Apple products have been known to dive headlong into saturated and mature markets.  Jobs is a mastermind when it comes to marketing, timing and knowing what will interest the consumer.  One of the best examples is the iPhone.  The cellular market was at a mature stage when Apple announced plans to make a phone.  Taking usability to the next level and features that offer a superior user experience, the iPhone was setting the bar high.  While phone companies were measuring success with a yard stick the iPhone was warming up for a pole vault.

Apple’s courage was strengthened.  With Jobs at the helm, Apple moved to create a completely new market that fell between PDAs and computers with the iPad.  Jobs’ success was outstanding, almost cocky.  During the recession when competitors slashed prices, Apple products commanded a premium in their respective markets.  Apple was flying high news of Steve Jobs’ health issues surfaced.

A Painful Exit

Jobs’ health problems became openly public when he announced his medical leave.  “At my request, the board of directors has granted me a medical leave of absence so I can focus on my health. I will continue as CEO and be involved in major strategic decisions for the company,” written by Steve Jobs himself.  Jobs is a magician on the stage. Watchers are in awe of his perfectly choreographed theatrically-steeped performances.  Jobs knows the importance of using mystery and suspense.  Fans of Apple have noticed the visible changes that Jobs has taken on in recent years.  From a jovial Jobs in 2007 to a visibly tired and frail looking Jobs in 2008, a show that fans did not enjoy.

“At my request, the board of directors has granted me a medical leave of absence so I can focus on my health”

What will Apple do if Jobs is gone permanently?  So far, markets have shrugged off his absence with a 4% pull back, minor, considering Apple is effectively losing its Consumer and Market Research, innovative and future development departments.  Analysts agree, such skills are hard to find. Once Jobs leaves there will be some enormous shoes to fill.

Steve Jobs in 2007 and 2008

The Risks

Public corporations have to furnish shareholders with proper financial statements that help the investor evaluate the risks involved and gain an overall picture of the health of the company.  Every investment has inherent risks, unsystematic and systematic. The unavoidable, unverifiable risk that spans all investments is the unsystematic risk.  The risk that is avoidable, that stretches beyond the normal risks is the specific or unsystematic risk.

This specific risk that Apple is dealing with is Jobs’ health.  This kind or risk is not quantifiable nor is it financially reportable, the future success of Apple hinges on Jobs’ health.  It may be a colossal risk that will ultimately drive Apple’s stock price down unless Apple is able to quickly and effectively fill the gap.  We can only hope all the best for Steve Jobs.

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References

http://online.wsj.com/article/SB10001424052748703954004576090033391229562.html

http://www.schaeffersresearch.com/commentary/content/opening+view+us+stock+futures+rise+ahead+of+earnings%3B+apple+in+focus/observations.aspx?ID=104554&single=true

http://online.wsj.com/article/SB10001424052748704307404576080313626225674.html?mod=WSJ_hps_editorsPicks_2

http://www.nytimes.com/2011/01/19/technology/companies/19innovate.html?partner=rss&emc=rss

http://www.macobserver.com/news/00/january/000105/jobsiceo.shtml

http://lowendmac.com/orchard/06/1002.html

http://news.cnet.com/Apple-acquires-Next,-Jobs/2100-1001_3-256914.html

http://isource.com/2011/01/19/classic-steve-jobs-line-on-ipad-product-development-and-consumer-research/

Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Consumer Debt

December 28, 2010 2 comments

Spending is fueling our economic rebound and subsequent growth, but at what cost?

Here are some quick facts about US consumer debt.
>The debt of  US consumers has grown to a staggering $2 trillion.
>43% of American families spend more than they earn…each year
>The average family carries $8,000 in debt on credit cards alone.
>Personal bankruptcies have more than doubled in the past decade.

In an effort to grow the economy, historically low-interest rates have encouraged more borrowing.  “About 43% of U.S. families spend more than they earn, according to a Federal Reserve study. And on average, Americans spend $1.22 for every dollar they earn, according to Myvesta.org.”  This is amazing.  Yes, it is pulling our economy up, but are there downsides? According to Dave Ramsey there is no such thing as using a credit card responsibly because all credit card debt is bad debt.  Credit cards are the biggest contributor to US debt.  A study revealed that people spend more when using credit cards versus cash.  To curb unnecessary spending Ramsey suggests that people switch over to cash or at least to a debit card to increase the emotional impact of the money leaving you.

The government has it’s own spending problem.  In October of 2009 the national deficit climbed to a staggering record of “$1.42 trillion, more than triple the record” set in the previous year.  Most of the money went to military spending.

Government Spending Pie Chart

In 1791, U.S national debt was a paltry seventy-five million dollars.  We can agree that Seventy-five million dollars is still a considerably large amount of money to an individual even by today’s standards, but not in comparison to today’s government debt figures.  As of February 2008, the debt was rising at roughly seventy-five million dollars per hour!  The government is not setting a good example to the consumer: spend like there is no tomorrow today.

Eventually, the over-spending has to stop for both consumers and government.  The consequences of over spending is bankruptcy for the consumer  and devalued dollar and debt to foreign nationsfor the government.

Can the US file for bankruptcy?

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Check out the National Debt Clock in real-time here.

How does your debt compare?

The Truth About Credit card debt

Obama team makes it official: Bugdet deficit hits record. By a lot.

Causes and Consequences of the National Debt

Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Stocks soar, but the really hot commodities are futures.

December 21, 2010 Leave a comment

Stocks have been doing pretty well since September 2010.  With a 17% run-up from September to December stocks are looking like a good investment once again.

Barchart.com

With the help of unemployment slowly scaling back and retailers collecting profits, stocks have taken a quick ride to levels not seen since the 2008 crash.  M&A activity has been on the rise and was up 23% in August compared to the same month in the previous year. (full story)  The increase in stock prices has been undoubtedly amazing, but what’s astonishing is futures prices climbing higher with some staying power.

Stocks are hot, but futures are on fire with incredible rallies.  Speaking with futures broker Domingo Williams of Mastel Grain, here is an abridged version of what has happened in futures recently:

Wheat prices continue to climb with Australian wheat crops suffering from too much rain and a recent quality concern.

Russia is having difficulty with getting enough moisture for their winter wheat crop. If enough snow cover doesn’t come quickly they stand to lose a substantial portion of the crop.  With this information alone I have been buying wheat bull spreads.

Soybean prices are climbing on Chinese demand.

Corn worries are already running high with an expected tighter carry out.

Other noteworthy happenings


Demand for silver has taken off very well as a result of gold’s climb to all-time highs.

Crude oil is in the process of a comeback, but it may be too early to call it.

The US Dollar has recently found stability against the Euro.

The weakening USD has provided some fuel for futures rallies, but with recent stability, futures seem to be providing their own fuel as demand continues to usher in new longs.  With the government keeping interest rates low we can expect for this solid recovery to continue.

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All charts courtesy of Barchart.com

Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Euro: The bounce back

June 17, 2010 Leave a comment

The Euro has been in it’s most recent decline starting late 2009.  With debt fears adding weight every week, it has looked very grim for the Euro.  The declining trend took a breather and then reversed on June 16 after testing new but failing to violate the support.

The Euro has moved through its confirmation point of 1.2254 and  is now aiming at a new breakout point at 1.2453, if it crosses it we can expect to see a new target of 1.2784.

Looks like right now would be a good time to take that European vacation that you’ve been planning for so long.

The entire article: http://barchart.com/headlines/story.php?id=347573

Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

Ford Motors leaves Mercury to rust

June 1, 2010 Leave a comment

Ford denies reports that Mercury is the next brand to retire to the auto graveyard.  With only four vehicles in its line-up, Mercury fails to stand apart form the Ford brand.  The brand was originally started during the Great Depression for the budget minded buyers.  Mercury is now joining the other departed brands like Pontiac, Oldsmobile, Saturn and Plymouth.

Read full story: http://blogs.wsj.com/drivers-seat/2010/05/29/mercury-the-next-domestic-car-brand-to-die/

Disclaimer: This blog is for information purposes only.  It is not financial advice.  All investments involve risk.  Consider risks carefully and seek the advice of experts before investing.

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