Stock Market: China - When Does The Pessimism Bubble Burst?

(Drivebycuriosity) - This morning we got news that China`s economy is getting stronger. In July exports rose 5.1%, imports jumped 10.9% (marketwatch). Both numbers were much better than the economists had expected. Last week we learned that China`s manufacturing & service sector both accelerated their growth (driveby).

But the Chinese stock market doesn`t care. Today the Shanghai Composite Index, which represents the Chinese stock market, closed again in the red. According to Bloomberg this index has tumbled 43% since its temporary peak in 2009. It is funny that the U.S. stocks rose on the China trade numbers today (bloomberg).

It seems that Chinese stock prices are imprisoned by the bad sentiment. Good news is constantly ignored. There is a huge pessimism bubble bloated by the China bears. Blowhards and swashbucklers like Jim Chanos, a hedge fund manager and notorious short seller, and recently New York Times correspondent Paul Krugman, have been banging the "China crash drum" (driveby). According to them, China is suffering from huge structural problems like too high debts and too huge investments into real estate which would cause a "hard landing" of the Chinese economy. The majority of fund managers and other professional portfolio managers seems to believe them.

I reckon that the bear´s view is heavily biased. The pessimists are overstating the problems and are ignoring positive news. China`s growth story stays intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences from the US and other Western nation standards. The Chinese government already started reforms to stimulate consumer spending and is investing massively into infrastructure (railways, telecommunication etc). The recently reported faster growth of the service sector is an early sign that this strategy is working.

Like the Western economies, China gets a lot tailwinds from  technological progress. The country is benefiting from the Internet that makes information much cheaper and easily available which helps the nation to catch-up fast to the Western standards.  "Industries including leisure, e-commerce and transportation are becoming a bigger part of the economy, supporting the government’s efforts to shift the focus of growth away from investment and exports", writes Bloomberg (bloomberg). Fast growing giants like Alibaba (e-commerce) , Tencent (IT-holding) and Baidu (Internet search) are spearheads of China´s advance.

History shows that any bubble has to burst sometime. Therefore it is just a matter of time until the China pessimism bubble pops. I reckon that we will get more positive news from China´s economy in the coming weeks which could be needles in the bubble.

Stock Market: Could An Oil Price Collapse Really Derail The Rally?

(Drivebycuriosity) - It seems there is always a season for scare mongers. Some analysts from the Deutsche Bank claim, that a "perfect storm" of structural, demand, and supply-driven factors could cause a "major pullback" in oil prices (businessinsider). This could "derail the rally in the U.S. stock market" (businessinsider).

I reckon that their conclusion is totally wrong.  A sudden drop of the oil price would work quite to the contrary and should be a boost for the rally on the stock market.

There is indeed a bubble on the oil market which is caused by continuous speculation of possible supply disruptions from the Middle East (driveby). Speculative purchases of oil futures by hedge funds and other players lead to a price that isn`t justified by the fundamentals. Because of the high oil prices consumers have been reducing their oil demand (demand destruction) while suppliers have been pumping more oil.

Todays oil price, which is around three times as high as in the 1980s and 1990, is slowing the global economy (driveby). A sharp drop of the oil price would work like an enormous global tax cut. Consumers worldwide would have more money to spend for other goods and services. Hence a major pullback of the oil price would boost global consumer spending which is the engine of world economy. The majority of companies would benefit. Companies also would operate with fewer energy costs and hence generate higher profits.

Sharply falling oil prices also would cause even lower inflation rates that would lead to reduced interest rates.

A sudden drop of the oil price also could demoralize the oil speculation. Billions of dollars which are now invested in oil futures could flow into the stock market.

Movies: Blue Jasmine

 

(Drivebycuriosity) - Sometimes there is just a thin line between comedy and tragedy, said once W.C. Fields, an American comedian, actor & writer (wikipedia). Many novelists, playwrights and movie makers played with this topic. The movie "Blue Jasmine", Woody Allen´s newest opus, is a felicitous example for this genre (imdb).

The master tells the story of "Jasmine" who´s world had fallen apart. The sophisticated and highly spoiled lady, who had been a part of Manhattan´s elitist society, is now destitute. She tries to kickstart a new existence with the help of her step sister who lives in San Francisco´s red neck environment.

The movie is a dark tale about conflicting philosophies of life,  mental problems, self-deception & self-destruction. It seems that Woody Allan, who is a product of New York City himself, was reckoning with Manhattan´s culture of blowhards and praised instead the common people of the West Coast.  "Blue Jasmine" also is a homage to Polanski´s "Repulsion" (1965, Catherine Deneuve ) and "Falling Down" (1993, Michael Douglas). In spite of the dark topic the film is shot in friendly colors and told in a blitheful style with hilarious scenes.

Cate Blanchett as "Jasmine" proves again why the she is one of Hollywood´s goddesses. It`s fascinating how she impersonated this human wreck with a high attitude. Pink Floyd´s "Shine On You Crazy Diamond" (devoted to their late founding member Syd Barrett) could have been written especially for this character.

Sally Hawkins, as the easy going and cheery step-sister "Ginger", played the earthbound antagonist. The centrifugal forces of this dissimilar relationship are one of the main drivers of the movie.

If there is any Academy Award for the most hilarious and sleazy hair design, Bobby Cannavale should easily earn it. His character as Ginger`s red neck boyfriend seems to shower with olive oil. The teddy bear like Alec Baldwin convinces as Jasmine´s ex-husband and con-artist, a replica of "Bernie" Madoff.

"Blue Jasmin" is very dark chocolate for cineasts. Highly recommended!

Economy: A Tale Of 3 Engines

(Drivebycuriosity) - It looks like that the U.S. economic upswing is gathering speed. At least last week`s economic news is very encouraging. We learned that U.S. consumer spending, the backbone of the economy, rose 0.5 % in June (calculatedriskblog). We also got reports that U.S. manufacturing and service sector both grew faster in July (ritholtz.com).

The data show that the economic upswing in the U.S. got more sustainable. The economy benefits from a continuously rising consumer spending, which is driven by 3 engines:

1. Steady growth of the job market:  We learned that the U.S. economy grew 162.000 new jobs in July and that jobless claims fell last week to 326.000 — the lowest level since January 2008! (ritholtz.com)  Hence the disposable incomes are rising and are animating more spending (income effect).

2. The stock market climbed to a new all-time high. The continuous stock market gains - the S&P 500 rose almost 20% year to date -
are increasing the wealth of most Americans and encourage them to consume more (wealth effect 1).

3. Home prices in the U.S. are recovering: Year-over-year, home prices climbed by 12.%. Home owners feel wealthier and get another inspiration to spend more money for consume (wealth effect 2).

Politics: Are Edward Snowden`s Backers Hypocrites?

(Drivebycuriosity) - There is much ado about Edward Snowden and his disclosure of top-secret United States (NSA) and British government mass surveillance programs. I really don´t like that any government is sniffing around in my personal affairs, but I think the outcry is overdone and the Edward Snowden backers are hypocrites.

1. People who have accounts on Facebook, Twitter and similar web services want to be public. There is no privacy on those sites. The Internet is a system where data packages (any statement) are sent around the world. The tight web that connects all Internet related computers makes them accessible to hackers.

And everybody should know that e-mails aren´t secret. In 2003  the U.S. Securities and Exchange Commission charged Henry Blodget, a former stock analyst at Merrill Lynch, with civil securities fraud (.wikipedia). The New York State Attorney General Eliot Spitzer had published Blodget`s private e-mails to friends where he had described stocks as garbage, stocks that he had recommended to buy as a Merrill Lynch analyst. Nobody is safe.

Publishing on social networks and expecting full privacy is like writing a letter with the line: "Hereby I am ignoring you" .

2. Government surveillance isn't new and isn't constrained to the Internet. There are already government agencies which don´t care much about privacy: The IRS and the tax authorities in other countries (in Germany "Finanzamt") have been sniffing in private matters, especially banking accounts, for a long time. There is not much that is private from the IRS. Do the Snowden backers criticize this privacy loss too?

For years crooks have been breaking into Swiss bank accounts and stealing private data from their customers. The German government (and the governments of federal German states) have been conspiring with the law breakers and thieves and have purchased that stolen data for millions of Euro (foxnews). Do Snowden backers complain about those invasions of privacy?

3. Last week Snowden got asylum in Russia and is backed by the Putin administration. He is now cooperating with a government which doesn`t care much about human rights or privacy and he prefers to live in a country where government opponents are easily thrown into prison.

Stock Market: China - A Hidden Treasure?

(Drivebycuriosity) - Stock Markets all over the world are rising and are reaching new all-time highs. But there is one major market that missed the global rally: China.

The Shanghai Composite Index, which represents the Chinese stock market, lost around 11% year to date and around 5% in the recent 12 months (google). According to Bloomberg this index has tumbled 43% since its temporary peak in 2009 (bloomberg).

China stocks have been suffering from a gloomy sentiment.  "Bets on declines in the largest Chinese exchange-traded fund are surging to the highest level since 2007", wrote Bloomberg last April (bloomberg). It looks like that sentiment hasn´t improved yet.

Public opinion is heavily influenced by notorious China bears such as Jim Chanos, a hedge fund manager and notorious short seller, and recently New York Times correspondent Paul Krugman (nytimes  drivebycuriosity). They all have been banging the "China Crash" drum. The China haters, including many hedge funds and other speculators, are betting on a so called "hard landing" of the Chinese economy.

The fundamentals say otherwise. In the recent 10 years, China´s growth rates have´t fallen below 7.5% (the growth rate in the second quarter of 2013), in spite of the notorious "China Crash" calls. It looks like China`s growth is accelerating again, at least a bit. This week we got news that China`s manufacturing and service sectors both are gaining speed again (bloomberg). Bloomberg also writes, that "industries including leisure, e-commerce and transport are becoming a bigger part of the economy, supporting the government’s efforts to shift the focus of growth away from investment and exports".

I believe in China and in its stock market. The growth story stays intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences to the US and other Western nation values. The Chinese government already started reforms to encourage economic growth and stimulate consumer spending. The faster growth of the service sector is an early sign that this strategy is working.

Beijing also implemented a huge infrastructure program, including ample investments in railway systems and highways, to support the economic growth. And the Chinese monetary policy becomes more accommodating because the risks of inflation are constrained - at least for now.  

Hence I reckon that China´s stock market is a hidden treasure after the multi-year fall. The value of China´s stocks is buried under a heap of rubble like negative rumors and scare mongering. This situation reminds me of spring 2009 as global panic drove the U.S. stock market into a ridiculous deep hole. Since then the U.S. stock market has been rallying and gained 150%, rewarding all who stayed confident.

I believe the Chinese stock market is ripe for a recovery rally. There is even a chance that China might repeat its temporary rally from 2009. According to Bloomberg, the Shanghai Composite Index then doubled in 10 months through August 2009 (bloomberg). Anyway, China´s long term growth perspective should reward any patient investor amply.

Economy: How High Oil Prices Shape The World Around Us

(Drivebycuriosity) - The price of oil is rising again. It seems that the low energy prices, which had bolstered the global economy in the 1990s, are history (.wikipedia  gasprice). Now the world around us is getting shaped by the increasingly expensive energy .

Gas prices at U.S. pumps are close to $4 for a gallon. This is a response to the oil price which is hovering north of $100 a barrel. In the year 2004, after almost 2 decades of cheap energy, the price of oil started its sharp rise and peaked at $147 in 2008 (forecast-chart). After a severe setback in the second half of 2008 the oil price jumped again. Today oil costs around 3-times its average price in the 1990s!

The high oil price is slowing down the global economy because consumers have less money to spend for other goods, thanks to gasoline bill, heating and transportation costs which make many goods more expensive.  And companies have to deal with higher costs. Hence the expensive oil is partly to be blamed for the lamented slow recovery of the world economy since the 2008/09 recession.

But there are other outcomes that even might be positive:

Less Driving

A new study by the University of Michigan shows that American motoring - as measured by miles driven - peaked in 2004 (qz.com). Hence this number started to fall in the same year as oil & gas prices began their steep climb. I reckon that this is not a coincidence. High gas prices spoil the fun of driving, they also make driving less affordable. At least people with a tight budget have to cut back driving.

But there are some positive outcomes. Less driving reduces the emission of car exhaust which is good for the whole environment and the health of everyone. It also prompts less accidents and people have more time for other things. Hence less driving might lead to a higher quality of life.

Back to the cities

Another study shows that the population of rural and small-town America contracted over the past two years (drivebycuriosity). An analysis of US Census Bureau data by the Department of Agriculture also found that people in their 20s and 30s were migrating away from the rural areas and were moving to large cities.

I reckon that the high energy costs are - at least parlty - the cause that people are returning to the cities. In the 80s and 90s -  as gas was cheap -  it was affordable to move into the suburbs and to commute to working places, shops and leisure spots far away. Now the high gas costs are punishing the population in the suburbs and the rural areas. 

In a time of high gas prices it pays to return to a metropolis like New York City, where the commuting ways are much shorter and public transportation systems (buses & subways) are relatively cheap.

If high oil prices lead to denser cities (to avoid commuting costs) they could be a remedy for the suburban sprawl, that transforms greenland into vast concrete areas.

Both trends, less driving and the return to the cities, could ease the negative effect of high oil prices on the wallets and could mitigate the headwind for the global economic growth in medium-term.