7.6 C
New York
Thursday, March 28, 2024

Thursday Thoughts – Where Do We Go From Here?

SPY DAILYWell, we had our little sell-off, now what?

As I noted yesterday, my concerns run a little deeper than a little profit-taking off a week-long BS, low-volume rally.  On the whole, it’s just a little pullback that makes for healthy consolidation if we can get back on track but, as I noted yesterday – the tracks ahead do not look all that safe either.  As David Fry notes:

The market is also rumor prone with volume still light. Most rumors Wednesday revolved around the eurozone where euro flight to offshore havens was much discussed. Further more investors are beginning to recognize the previous eurozone fix wasn’t much of a fix at all. Rather it just bought some time. The focus remains on Italy where Italian debt needs to be sold, not just this week, but repeatedly. Investors are worried about collateral being put up for loans. Pay attention to this is the watchword.

We were thrilled to take the bearish money and run on yesterday’s little dip.  We’re still speculatively short into the long weekend but essentially cashed out of short-term positions into the Holiday with our virtual White Christmas Portfolio now officially close, miles ahead of our original goal. 

Cash is an excellent position to be in as we wait for clarity, both from EU bond auctions (Italy was so-so this morning but Hungary’s was so bad they cancelled it!) as well as US Corporate Earnings, which are far from a sure thing next month.  In fact, this morning we noted in Member Chat that credit-ratings firms are growing less optimistic about U.S. corporate borrowers, downgrading more companies as they forecast defaults will rise.

A two-year rise in U.S. companies’ creditworthiness may be drawing to a close as Europe’s sovereign-debt crisis roils capital markets around the world, reducing the ability of riskier borrowers to raise money from investors to finance their operations. Moody’s cut more grades than it raised in the second half of the year as yields on speculative-grade debt reached a two-year high in October.

Like many misguided Nations, our Corporate Masters have met the Great Recession by pursuing austerity measures that have done a great job of improving their current bottom line but have actually made things worse by worsening the conditions for the American Workforce  – leaving the companies without any long-term growth prospects in a stagnant economy.  

On the complete opposite end of the scale, our Chinese Masters have spent the past two decades driving growth at all costs but, after 20 years of 8-10% annual growth – they are no longer the low-cost labor solution and are losing their edge to their poorer neighbors.  In fact, perhaps one of the things China worries about in North Korea is that the WILL normalize relations with the West and bring another Nation’s worth of low-cost labor to compete for Western Dollars.  

In 2011, the government promised in its new Five-Year Plan to encourage more domestic consumption. Those who think this transition will happen argue that if Beijing says it will happen, Beijing will find some way to make sure it does. But will that hold true for consumption? While an investment-led growth model provides easy opportunities to pull levers (as long as the investment is done by a discrete set of state-connected companies), true domestic consumption puts you at the mercy of 1.4 billion consumers. 

In the WSJ, Joe Sternberg asks a question I have been asking for years (we stay far away from most China ADRs):   

How "real" are Chinese companies? Many Western investors this year have become newly alert to fraud risks at Chinese companies listed in Canada, the U.S. or Europe. What began as a Securities and Exchange Commission fulmination against an obscure bit of financial engineering—the reverse takeover—has grown into a spate of delistings, shareholder lawsuits and regulatory investigations amid auditor resignations, charges of accounting irregularities, and a short-selling frenzy.

Ponder for a moment what this means. Why are China’s most entrepreneurial companies listing overseas at all? Why can’t they access sufficient capital at home? And what does it mean for China’s economic development that these companies find it so difficult to operate above-board? Can a sustainable economy be built on the back of a regulatory system that encourages—perhaps forces—firms to fudge their books?

Another big question for 2012 is "Will China avoid a hard landing?" but I’m a little more concerned that the real question should be "Does the Emperor actually have ANY clothes at all?"  We’ve already seen how well avoiding the hard landing went for the US and Europe – despite our "leaders" and "top economists" assuring us they could soft-land this puppy.  Now the 787/A380 that is China is coming in for a landing and, by all accounts – it’s a very short runway.  

Let’s continue to be very careful out there!  

 

136 COMMENTS

Subscribe
Notify of
136 Comments
Inline Feedbacks
View all comments

Stay Connected

157,450FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

136
0
Would love your thoughts, please comment.x
()
x