Monday Market Movement – China Raises Red Flags

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Manufacturing and services slow after rebound in July

China’s PMI fell clearly into contraction in July, from 50.2 (barely expanding) in June to 49 in July and, without Construction, it would have been much worse and Construction is about to blow up too.  Data from China’s top 100 property developers showed the housing market continued to slump last month as well.

A recent flareup in the southern manufacturing hub of Shenzhen impacted factory operations there, raising concerns about disruptions to global supply chains.  

The slowdown was led by production and new orders, signaling disruptions to supply and unstable domestic demand recovery,” said Liu Peiqian, chief China economist at NatWest Group Plc. “Covid-related policies continue to dampen the momentum of recovery and more easing policies are needed to stabilize the domestic demand in coming months.”

Consider how many millions of people are losing jobs looking at China’s Employment Index:

China Unemployment Aug 1 2022

The Caixin manufacturing PMI, based on a survey of mainly smaller and privately-owned businesses, also showed a weakening in sentiment. The index dropped to 50.4 last month from June’s 51.7, missing the median estimate of 51.5 but staying above the 50 dividing line, Caixin and S&P Global said in a statement Monday

Less people working means less people spending and both of those mean less demand for Yuan which then lowers its value and that then exacerbates Inflation which is how Governments get their hands tied as stimulus leads to more inflation but so will doing nothing.  This is why inflation is so hard to fight.  On the bright side, less Chinese activity has pulled oil back down to $97.27 this morning and Nat Gas is down to $7.80 so Yay!, I guess…

China’s GDP growth is now tracking 4%, which is miles below the 5.5% target the Government conceded to last quarter and that means we have to call even the 4% growth number into question as Chinese data tends to be exaggerated to hit targets.  The housing market continues to weigh on China’s outlook. Sales at China’s top 100 developers fell 39.7% from a year earlier. 

China’s banks face mortgage losses of $350 billion in a worst-case scenario as confidence plunges in the nation’s property market and authorities struggle to contain deepening turmoil.  A spiraling crisis of stalled projects has dented the confidence of hundreds of thousands of homebuyers, triggering a mortgage boycott across more than 90 cities and warnings of broader systemic risks. 

China's bank loans to the property sector ballooned over the years Much as the US did in 2006/7, Chinese lenders pushed Consumers into homes they could not afford to make up for flattening Commercial Loan Growth.  Now, $2.9Tn Yuan of loans went bad in Q1, 7.6% of all mortgages.  Bailouts won’t be simple either with China’s debt to GDP at 260% – up from 150% in 2009 so, over the past 13 years, 11.5% of China’s annual 7% growth has been funded by debt.

Not that the US is better – just to point out how F’d we all are at this point.  

Property investments, which drive demand for goods and services that account for about 20% of China’s Gross Domestic Product, plunged 9.4% in June:

China Housing Slump

This then leads to poor bank earnings, which puts stress on China’s entire market so we’ll be keeping a close eye on those results this month as they begin to come in. 

We’ll also have plenty of other earnings reports to watch as well:

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Data-wise, we have our own ISM and PMI Manufacturing Reports along with Construction Spending – which is busy for a Monday.  Just a few Fed speakers this week, Motor Vehicle Sales and Job Openings tomorrow, PMI Composite and ISM Services along with Factory Orders on Wednesday, and Consumer Credit on Friday – nothing really more important than the earnings reports on the data front.

Market Calendar

 

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good morning

Good Morning.

Phil/COST and ADBE Thoughts: When you have a sec. please let me know your thoughts. Thank you!

Phil – what do you think of Caterpillar at sub 200 levels? I had it on my list, but I think just missed it completely when it fell into the 170s, but sub 200 still seems good?

Tully, Interesting you ask in respect of these two stocks. ADBE and COST
for me they both in the middle of a range. Could go up or down. For a BCS not attactive for me.
Both stocks have only a yield of nothing and .66% PE are over 40.
My question what is the attraction?

Yodi/Cost & ADBE: COST is only interesting because of subscription model, margins are so thin…. Just curious. I think they trade too rich, but never sold off with the market. ADBE seems like a more reasonable valuation, still on the high side, but have less of an opinion on this. Thank you for the response.

Tully ADBE was down to 360 and COST down to 416 but thanks for responding

I sold my car this weekend. Sold it to Carmax; they offered double of what Carvana was offering, and driving to the Carmax lot 30 min away in NJ and Ubering back was no hassle. This does beg the question – how can their pricing models be so different? Either Carvana is buying for significantly cheaper, or Carmax should not be making money. But the financials suggest Carmax is profitable, and Carvana is a money drain.

Some used cars are still crazily prized. Walking around the Carmax lot, I came across a 2014 Civic with 75K miles for $19K; a new civic goes for just a few $$ more! Very strange. The BMWs and the Audis didn’t have such a premium.

I sold my 2009 BMW 135i with 135k miles and a minor oil leak, though otherwise in outstanding condition, for $9250 on Saturday. Carmax and Carvana were offering $5400.

Not doing a new car for us at the moment. We have a Kia Niro EV (which is fantastic) that we bought last year. My BMW was just sitting there rotting since I’ve been WFH since March 2020. My wife was due to go in to labor with our second child yesterday but still waiting for his arrival. The 2 door coupe seemed like it was ready to go all things considered…

CAT earnings are tomorrow morning and they have closed lower 7 out of the last 8 reports. Maybe wait another day ?

Cars/rn273 I have sold cars to both Carvana and Carmax. My thought is Carmax makes purchases with the local market in mind. I have always received a bid from a dealer when looking to trade in, but Carmax always seems to do 1k better or more.
Carvana is in trouble and is looking for deals….

COWN/Phil Waiting to sell cov calls on my 500sh as suggested. Now it’s made it past $30 ($35), should I sell Dec $40s for ~$4 (instead of Jan $22.5s for $6)?
Thx!

SPWR earnings tomorrow. Stock of the decade!!