Kass: The China Syndrome
This commentary originally appeared on Real Money Pro on Dec. 2 at 7:50 a.m. EST.
"It's about people. People who lie. And people that are faced with the agony of telling the truth.... The closer they get the more frightening it becomes.... Soon you will know."
-- The China Syndrome (trailer)
Call me the Anti-Cramer on the subject of China, as this is one area in which my view is not necessarily aligned with Jim's.Jim Cramer is optimistic on China, believing that policy introduced on Thursday will be growth-inflating. He also believes that this is "the beginning of a loosening of Chinese interest rates, if we are to believe that the long-awaited interest rate cut is here, then there are plenty of stocks to own [in China]." I respectfully disagree. Last night, the official November China Manufacturing PMI fell to 49.0 from 50.4. This means that the manufacturing sector is now declining for the first time since early 2009. New orders were weak, and backlogs are deteriorating in the face of tightening moves months ago and in light of Europe's economic weakness. (U.K. manufacturing fell to 47.6 in November, the lowest read since June 2009 and the swiftest drop in over two and a half years. New orders were down for the sixth consecutive month. The final Markit Eurozone manufacturing PMI also marked contraction, falling for the fourth consecutive month in a row at 46.4 vs. 47.1 in the prior month.) Wednesday's 50-basis-point cut in reserve requirements was widely interpreted as China will experience a soft, not hard, landing. I am less convinced, and I still see a hard landing as a possible outcome. First, from a microeconomic and macroeconomic standpoint Chinese reporting is opaque. I don't even know if we should believe China's economic reports. (Herb Greenberg has consistently reported how opaque and, at times, how fraudulent individual companies' reporting is.) We shouldn't be surprised that the accuracy of the government reports might be flawed. Importantly, the transparency and health of China's banks, the principal mechanism for the transmission of credit, remain vague and difficult to gauge -- as do the legendary empty cities of unoccupied apartments and homes in China. Second, 20% of China's exports are to Europe. There is no policy in China that is capable of controlling the deepening recession in that region (which, as I reported above, is going from bad to worse). We already are witnessing a fast deterioration in trade into the eurozone, as evidenced by the 40% drop in China to Europe shipping rates since Labor Day. Third, given falling exports to Europe (above), China's catalyst for growth falls increasingly on its consumer. But, unique to emerging markets, China's domestic personal consumption expenditures as a percentage of GDP falling hard as savings soars. Presently, personal consumption in China is 34% of GDP; 10 years ago it was over 40%. By contrast, consumption at Brazil is over 50% of GDP, and in our country it is 71%. Fourth, the intermediate-term (five-year) chart on China Manufacturing (hat tip to Rich Farr at Boenning & Scattergood) puts the recent weakness into perspective. The trend is not China's friend.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV