Friday, July 31, 2009

Party on! The bill is on China!

Keep Rockin'!

In the US, Wyeth, JNJ, Time Warner, Conoco Philips, Alcoa, Intel and host of other companies all beat revised earnings with negligible top line growth and extensive spending reductions. So behind the glitter of good earning reports lie a litter of disgarded workers who are victims of CEOs trying to prove they can make their financial targets.

On one hand, employment numbers are being interpreted as showing that unemployment is easing. But it could just as easily be interpreted as not improving because people are falling off the unemployment rolls.

So what is the cause for optimism? The CEO of Alcoa pointed to surprising resilience in the China market driving sales growth in that region. Catepillar also noted an uptick in sales due to large capital expeditures for infrastructure projects in the Middle Kingdom. The world's largest exporter expanding raw material consumption and investment spending in the face of the largest decline in imports across the global economy in decades? Sounds strange.

Based on initiation of the China stimulus package, in the Q1 of 2009 China increased lending 1000%. Within three months, there were more cars sold in China than in the US for the first time ever. Commodity prices took off as manufacturers in China replenished inventories to prepare for the domestic recovery. The optimism is reflected in the Baltic Dry Index chart.

Yet the amount of goods moved within the US declined to 20% YOY levels. It is probable that this indicates a significant decrease in China's exports to the US.

Moreover, the world economy overall is so bad oil demand is very weak and no amount of stimulus has been able to change that.

On the other hand, even domesticly, China's economic strength looks suspect. China claims growth is at nearly 7% annualized. But electrical output, the most reliable measure of industrial capacity utilization, is down 5% annualized and indicates that there is less production occurring.

Better yet, China's new lending spree that is authorized by the central government is executed at the local level and according to reports is carrying up to $4T in debt. I do not dare speculate how that burden come to bear on the markets. But it is bound to have an effect some time.

For now, we can just enjoy the party. In fact the Chinese are opening 4000 retail stock market accounts a day. Over the past month IPOs have been white hot at offering. Sounds like 1999, I like the music, I even might do a jigg or two. But my money is staying on the sideline so this party will not end up left with part of the tab.

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