Kass: Bear With China
This column originally appeared on Real Money Pro on Sept. 5.
Last night, China's August Nonmanufacturing Index chimed in at a below-consensus 52.0 vs. the prior month's 53.1. This is the lowest print in several years and, importantly, suggests that third-quarter 2012 real GDP consensus forecasts (and China's official target) of 7.5% growth is unattainable.
It now appears that China's third-quarter real GDP growth might be 6.5% or lower.Although the Chinese stock market is in bear market territory, to date, China's economic disappearing act has had little influence on the world's markets. The rapidity of the decline in economic activity, however, is probably now at the tipping point for the world's non-Asian stock markets. Looking forward, China's leadership change next month should be met with more monetary easing. It might be too late.
As China Goes, so Goes the U.S.?While China remains the growth driver of the world's economy, that region's economic engine is starting to falter. The Chinese stock market has already entered into a bear mode. Surprisingly, few have discussed how Chinese stocks are currently valued as an outgrowth of this Chinese bear market. Let's enter this discussion now, for it provides a possible guidepost of the potential risks to U.S. stocks. Though this observation is admittedly too simplistic -- I fully understand and have written why one should buy American over other areas of the world -- the current valuation metrics for Chinese companies are quite cheap, with forward P/E multiples of only 7.8, an average dividend yield 3.9% and with a lowly price-to-book of 1.3x. By contrast, the S&P 500 trades at 14x earnings, has an average dividend yield of 1.9% and it's price-to-book value is 2.1x. There is a lot of distance/daylight between the valuation of Chinese stocks and U.S. stocks. My question is this: If China is indeed the growth driver of the world's economic community, doesn't this highlight how cheap stocks can get when growth is in question?
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 + 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