Kass: Bearing Down on China
This column originally appeared on Real Money Pro at 7:26 a.m. EDT on Sept. 20.
NEW YORK (Real Money) -- For the eleventh straight month, the HSBC September China Manufacturing Index came in below 50. The reading of 47.8 was essentially flat with the prior month of July. This is the longest sub-50 streak in the index's eight-year history.
I have repeatedly warned on these pages as well as this week and last week on "Fast Money" that the general consensus expectations for China's GDP growth is far too optimistic and that the region's growth trajectory faces challenges that even aggressive monetary easing may not be successful in swiftly turning.
The Chinese government is targeting third-quarter GDP growth of 7.5%. My view is that the number will be closer to 6%, reflecting an oversupply of residential investment in China, inventory overhang and broad weakness in the country's trading partners (leading to export weakness). As mentioned in my column on Monday, China is an important part of my thesis that a global slowdown in manufacturing activity is threatening U.S. corporate profit growth. Last night, the Markit economic research group estimate of the purchasing managers' index for the eurozone fell to 45.9 in September from 46.3 in August. Risk assets (Asian markets and S&P futures) sold off on the release of this data last night. China bulls point to the recently introduced 1-trillion-yuan fiscal stimulus package and the hopes for more central bank reserve and interest-rate cuts. But just as the U.S. faces structural headwinds that might render more liquidity injections and ever-lower interest rates unable to change the trajectory of domestic economic growth, China faces its own set of challenges, as it makes the transition from an export and infrastructure-led economy to one that is consumer-based. I remain cautious and net short as a result of the growing economic weakness in Europe and China (and nearly every other region in the world), an estimated sluggish 3.5% current nominal GDP growth in the U.S. (which portends weak top-line corporate growth) and renewed signs of limited business pricing flexibility (at a point in time where profit margins are at a near-57-year high) that lead me to view consensus 2012-2013 earnings expectations are far too high. In closing, I would like to point out an excellent interview in Barron's in which Strategas' Jason Trennert examines many of these influences that lead him to believe that 2013 S&P earnings will come in around $93 a share, well below the consensus expectations.
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