by Addison Wiggin & Ian Mathias
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China goes contrarian, picks up Greek ports
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Chris Mayer attempts to end the “China: Boom or Bubble” debate… for now
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Dan Amoss identifies a short selling opportunity, born from the “cash for clunkers” debacle
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Plus, a powerful chart: Was the Fed entirely responsible for the 2009 bear market rally?
An investment quiz to begin today’s 5 Min. Forecast. Two-part question:
1) Which country has more money to spend than any other?
2) Which nation currently represents the least-attractive investment environment? In other words, where is the one place a true contrarian would love — where no one wants to invest?
The answers lie in our favorite headline of the day: China has agreed to invest billions in Greece’s port system.
After some lousy pre-crash investments in Blackstone, Morgan Stanley and Visa, Chinese state money is finally wising up. Today, China announced 14 separate deals with the Greek government, tourism industry, telecoms, shipping companies and shipbuilders — all designed to give the Chinese virtual control of Piraeus, a mega-port outside of Athens.
Coupled with previous deals, China will now have a huge presence in the vital shipping channel between the Mediterranean and the Balkans. And they’ll likely be getting it all on the cheap… just this morning, Fitch became the last ratings agency to downgrade Greek debt to “junk” levels, leaving Greece with very few — if any — bargaining chips for negotiations with the Chinese.
Vice Premier Zhang Dejiang is in Greece as we write striking the deal, which is estimated to be worth billions. Greeks need cash so badly, there’re rumors floating around that a hefty chunk of the national railway is up for sale, too.
“Given China’s consumption of raw materials, the spending binge is not likely to stop,” writes Rich Lee, the latest addition to our squad of analysts (he’ll be helping Rob Parenteau devise investment strategies for The Richebacher Letter).
“Beijing has already secured access to raw materials, metals and crude oil. The next step will be in the areas of real estate and commodity deposits — massive oil fields in Africa, or property laden with copper in Chile and Turkey. One thing is for sure: The Chinese will continue to target components closely tied to the economy.”
But — the ultimate question — will Chinese consumption, both domestic and international, eventually collapse under its own heft? Japan went on a similar global shopping spree in the ’80s… and soon after fell into a bear market that’s still raging today.
“Bubbles are a part of the weather patterns of markets,” writes Chris Mayer. “They appear every so often, like cloudy days. So what about China? In the big cities, apartment prices have doubled or tripled in the last three-five years. Bank lending is up fourfold since 2008, and the government stimulus package means a lot of temporary activity in construction.
“I put the bubble question to nearly everyone we met when we visited China last month: money managers, economists, entrepreneurs, etc. It’s the pressing question everyone wants to know. And I’ve talked about the issue in my weekly e-mails to Capital & Crisis and Special Situations subscribers, so I don’t want to rehash it all here. I could write the whole issue on this question.
“The bottom line: There is surely a property bubble in China, though smaller and less leveraged than the U.S. vintage. But it doesn’t change the long-term picture of what’s happening in China. As one hedge fund manager put it to me, ‘China is many mini-economies.’ He is sure there is a bubble too, but I note he’s still investing in basic areas like food and water, which are less connected to the property market.”
For specific investment advice, we’ve got quite an opportunity coming up. Addison, Chris, the hedge fund manager Chris just mentioned and another of our favorite Chinese contacts will be gathering for a conference call this Thursday after the market closes. They will tackle the “China: Boom, Bubble or Bust” debate head-on, and you’ll have a chance to sign up. For more info, check out this short video presentation:
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At least half a dozen specific investment ideas will be hashed out on the call, including some of the best opportunities Chris discovered while in China last month. If you want in on this call, you have to let us know… right here. As we mentioned yesterday, space is very limited.
Greece isn’t just offering its national treasures up to China. Prime Minister Papandreou took a trip to Libya earlier this month to court its $40 billion sovereign wealth fund. Evidently, everything from energy to tourism to fish farming projects are on the table. He’s been in talks with Qatari and Abu Dhabi investors, too.
And Uncle Sam? Heh… he’s a little short on cash these days.
Perhaps we spent too much money buying and destroying perfectly good “clunker” cars. Amazingly, despite all the economic indicators to the contrary, the market for used cars in America is booming. Last week, the Manheim Used Vehicle Value Index hit 121, an all-time high.
“We can trace the strength in the Manheim Index back to the ‘cash for clunkers’ giveaway,” writes Dan Amoss. “The government’s destruction of the used car supply has boosted prices temporarily. But the other factor in used car pricing — demand — will remain weak as the U.S. population of registered autos stagnates or shrinks.
“Upticks in the Manheim Index can boost reported earnings for car rental companies. Strength in used vehicle prices will boost one-time gains from selling depreciated cars out of the fleet. This happens because a rental company buys a new car, books depreciation charges against it as it is rented out, and then sells it (hopefully) above its book value a few years later.
“But this effect is only temporary; it will reverse once the index turns back down. Its effect on earnings should be viewed as a ‘one-time’ item.
“If rental car companies want to maintain earnings power, they must reinvest the sale proceeds from old cars into a new car. This negates the fantasy that car rental companies ever generate consistent free cash flow. They can generate free cash flow when they’re aggressively shrinking fleets, but in that scenario, these stocks would deserve very, very low earnings multiples.”
Sounds like a solid short selling opportunity. You can get Dan’s favorite rental car short play for just $1, right here. This will be the last week we’re offering trials of Strategic Short Report at such a crazy-low price… so don’t miss out.
Now that the U.S. government is (mostly) done manipulating the housing market, home builders are feeling low. Their confidence index fell from 21 to 17 in the last few weeks, the National Association of Home Builders reports. That’s well below the 2005 high of 72, and not too far from crisis lows — a whopping score of 8.
And now that the Fed is (mostly) done manipulating the stock market, traders are fleeing stocks. (Geesh, do we detect a trend?)
“There is a clear relationship,” writes James Turk of goldmoney.com, “between the rise in the S&P 500 Index from its March 2009 low and the Federal Reserve’s purchase of U.S. government debt instruments, which it calls ‘quantitative easing’ (QE). Another term for it is money ‘printing.’
“The Fed is simply turning U.S. government debt into more dollar currency, which of course debases the dollar. It also explains the correlation in the above chart.
“Note how the S&P Index started climbing with the commencement of QE. The S&P dropped early this year when the Fed announced QE would end. Interestingly, the stock market soon rallied thereafter, probably because few believed that the Fed would really take away the ‘punch bowl.’ But it did, and the S&P has been in a downtrend ever since…
“Now that the Fed has stopped printing, the S&P 500 Index not only stopped rising, but began falling to reflect the true state of underlying economic conditions. Consequently, I expect that there will be new calls in Congress for another stimulus package, but more immediately, it seems likely that the Federal Reserve will recommence its purchases of U.S. government paper. Quantitative easing, I expect, is about to get a second chance at reviving the moribund U.S. economy.”
After opening up about 1% yesterday, major U.S. indexes ended the day with small losses. History looks like it might repeat today, with the Dow and S&P quickly shooting up 1% this morning on no particular news.
Gold, meanwhile, is steady. It’s been hovering around $1,225 all week.
Quick follow-up to yesterday’s big “discovery” of precious metals in Afghanistan. As Byron King mentioned, this “news” was actually years old and The New York Times’ decision to announce it with such “breaking news” urgency was likely government PR/BS… a resurrection of an old story to help abate growing public war fatigue.
Today, we note the headline in the NYT World section:
“Setbacks Cloud U.S. Plans to Get out of Afghanistan”
Funny how that works, eh?
“After a brutal 2009, we see the work stabilizing, with a chance of it increasing,” a reader writes us from the electronics industry, continuing our front-lines reports on the U.S. employment situation.
“But we are only looking to hire part-time people and at $10 an hour (through Craigslist). I am getting great callbacks and seeing very apparently qualified people willing to take basically anything. After losing money with my company last year, I am going to be very careful about expenses.”
“I can confirm that there is, indeed, a pickup in volume,” another reader in the environmental industry writes in. “We are an environmental laboratory in SoCal, and our samples come from the consultants who work with the businesses that need assistance to comply with the varied local, state and federal regulations. We have hired at least 10 temp employees on a base of about 150. Our firm has recently purchased a second satellite facility. Baby steps to be sure, but a far cry from the cutting of permanent employees we went through in 2009.
“Regards, and keep up the good work!”
“Now and in the future, those with valuable job skills will prosper and do well,” another reader forecasts. “Those without skills in demand will be forced to adapt, re-educate themselves or end up relying on social welfare or competing with low-skilled immigrants for low-paying work.
“I am not trying to put down the average Joe. This is just the reality that I observe. It doesn't matter if you have a college degree or not. What matters is that you have a skill that is in demand that can't easily be outsourced to a lower-wage location. I am afraid that for many older workers, reshaping their skills will be a difficult challenge. For younger people, the sooner that they start focusing on making sure that they are getting valuable skills, not just an overpriced university diploma, the better off they will be in the future.
“Keep up the good work on The 5 Min. Forecast e-letters. They are one of my important sources of investing and economic news.”
The 5: Will do… thanks.
“Maybe there's work in oil cleanup,” our last reader quips. Heh, indeed.
Cheers,
Ian Mathias
The 5 Min. Forecast
P.S. Time is running out to get in on our China conference call. It’s a two-step process: You let us know you’re interested, we’ll respond with an invitation.
So… if we don’t hear from you, you’re guaranteed to miss out. Sign up here.