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2015 Correction "OMG China!"

Black Swan wrote:

I think the issue is that a services PMI of 53 and a manufacturing pmi of 47…

^ The official numbers are: manufacturing 49.7, non-manufacturing 53.4, with non-manufacturing being a larger part of their economy.

Sure, this switch over to a service sector economy will be a bit rough, but they seem to be managing the transition quite well. Not sure what all the drama is about.

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Well, I think the real issue is - as Warren Buffet likes to say - when the tide goes out, we can see who is swimmimg naked.

We know that there’s a lot of lying and making-up-of-sh!t going on in Chinese businesses.  We just don’t know how much, and many people are deciding to take chips off the table before finding out.  And yes, it’s true that lying and making up stuff goes on in developed economies too, the Chinese take it to the level of an art, vis Middle Kingdom Goldman Sachs.

You want a quote?  Haven’t I written enough already???

purealpha wrote:

Black Swan wrote:

I think the issue is that a services PMI of 53 and a manufacturing pmi of 47…

^ The official numbers are: manufacturing 49.7, non-manufacturing 53.4, with non-manufacturing being a larger part of their economy.

Sure, this switch over to a service sector economy will be a bit rough, but they seem to be managing the transition quite well. Not sure what all the drama is about.

I was using the Caixin PMI.  There’s a lot of doubt around the official numbers, with officials themselves having questioned them in the past.  I see your point, though, just not sure I agree with it necessarily.

#FreeCVM #FreeTurd #2007-2017

bchad wrote:

Well, I think the real issue is - as Warren Buffet likes to say - when the tide goes out, we can see who is swimmimg naked.

Right, which is the United States, Japan, and the European Union! laugh

bchad wrote:

We know that there’s a lot of lying and making-up-of-sh!t going on in Chinese businesses.  

How many people saying this 1) have ever even been to China? 2) have done business in China? 3) have proof of a single number being made up? Almost nobody. They just say it cause everyone else in the their country says it, simple as that.

The problem with this thinking, if you think CN numbers are made up, you just speculate endlessly on various other numbers, yet the talking heads doing the speculating have zero knowledge on CN, so their numbers are even more made up. I’ve heard numbers on GDP growth from “probably negative” to “well maybe 0-6%”. Yet nobody has better numbers than the numbers China already gave, and they say 7%. The market could freak out on this into perpetuity, because there is no better answer once you dismiss the best answer. 

Americans are the masters of lying with statistics, we know the USG numbers are totally made up, but I use them in my analyses because there is nothing more authoritative.

purealpha wrote:

How many people saying this 1) have ever even been to China? 2) have done business in China? 3) have proof of a single number being made up? Almost nobody. They just say it cause everyone else in the their country says it, simple as that.

The problem with this thinking, if you think CN numbers are made up, you just speculate endlessly on various other numbers, yet these talking heads have zero knowledge on CN, so it’s even more made up. I’ve heard numbers on GDP growth from “probably negative” to “well maybe 0-6%”. Yet nobody has better numbers than the numbers China already gave, and they say 7%. The market could freak out on this into perpetuity, because there is no better answer once you dismiss the best answer. 

Americans are the masters of lying with statistics, we know the USG numbers are totally made up, but I use the in my analyses because there is nothing more authoritative.

PA, my Dad runs a small business with revenues in the $15-20M range, he has been his whole life.  He has spent about a month in China a year doing business with small factories since th 80’s.  I’ve gone on several of those trips from the 90’s on as well.  Mostly been around Beijing, Guangzhou, HK, Shanghai and the surrounding side country.  I can tell you we’ve seen and heard first hand from the businessmen we deal with there along the years a host of instances of blatant misreporting of numbers and it seems to be their view that that is how business is conducted throughout China.

#FreeCVM #FreeTurd #2007-2017

^ That’s good that you actually have experience! For most people their beliefs are just “somone said…”.

That still leaves the question, what better numbers to use?

Personally I just go with official numbers. I’ve been thru all the financial statements for the large caps. They make sense, nothing sticks out as being totally wrong. Yeah there’s probably stuff fudged, shrug. The banks bad loans say 1.5%. To be safe I double that, do I still feel like buying? I just move forward and make decisions using the information that is available. 

Goldman is over here, they seem to have their ear to the ground, and have proved to have the most accurate forecasts on China. They revised their GDP forecast down to something like 6-7% for the coming years.

Bottom line, I don’t think there is some huge cover up. I think the real game is – force the Chinese into a desperate stimulus package to prop up US/JP/EU economies/markets (for awhile), but make the eventual collapse all the more painful. CN has no reason to want to do that though.

My experience in China was attempts at trickery and bait-and-switch at pretty much every opportunity.  And one can only guess at the opportunities that outsiders don’t even know the Chinese are taking.

It’s not that there isn’t lying going on elsewhere, but the gap between reality and what is said is can be enormous over there.  Remember when China says “there is no homosexuality in China.”  There is no AIDS in China.  Isn’t it amazing how GDP growth tends to come in at exactly what the government said it was going to be, to the decimal place. And remember how China is all open and tolerant of people saying that the government is wrong about stuff, making it oh so easy to get alternative viewpoints from the ground.

But I’m not talking so much about macroeconomic statistics and what the governments say.  It’s more about how companies themselves operate.  When money is flowing freely and markets are buoyed by cheap capital, it’s easy to let little accounting discrepancies slip, and in the next quarter, when you’re expected to have produced Chinese-levels of growth, well, fixing that little thing is just going to make the numbers look bad.  When things suddenly turn from gangbusters to something slower, all of a sudden those things can’t get papered over easily and it’s time to take a big bath.

We have this problem here too, but the fact that we’ve just been through some lean years means that it is harder for companies to get away with it.  Eventually it will become easy and we’ll discover more Enrons and WorldComs over here again.  But China hasn’t had a real recession in decades, so those little discrepancies piling up have had time to get quite large, and that’s what the concern is likely about.

purealpha wrote:

The problem with this thinking, if you think CN numbers are made up, you just speculate endlessly on various other numbers

Yet you have posted (time stamped and everything) that the Shanghai market is driven mostly by speculation and rumor mongering.  So this would seem to agree with what you have endlessly stated in repetitive over and overness.

You want a quote?  Haven’t I written enough already???

bchad wrote:

purealpha wrote:

The problem with this thinking, if you think CN numbers are made up, you just speculate endlessly on various other numbers

Yet you have posted (time stamped and everything) that the Shanghai market is driven mostly by speculation and rumor mongering.  So this would seem to agree with what you have endlessly stated in repetitive over and overness.

Huh? Oh I see what you are thinking. Stocks trade mostly off speculation on policy moves, not speculation on fundamentals. It’s not that they don’t trust the numbers, they don’t care about the numbers.

I say things multiple times, because people continue not to understand. Once there is understanding, there is no reason for me to say it.

you dont have to be in a certain place to get knowledge. Most of what we know is from the studies of others. For example, If I was never taught that Magellan sailed around the world, would I believe that earth was round? Was I there when Magellan did it? nope, but because many said so, and many have done so, I know the world is round. I dont have to fly across the world in order to know that.

now im not saying consensus thought is absolute, I am merely saying that the existentialist idea that we must experience someting in order to attain knowledge is faulty. 

Also the extent of knowlegde also varies, which is better knowledge, me traveling to 100 walmarts, or me reading walmart’s transcripts. One requires me at the physical location an existentialist approach, while the other I can get sitting on my ass in front of a computer. which is better knowledge? the transcript. also takes less work. haha.

purealpha wrote:

^ That’s good that you actually have experience! For most people their beliefs are just “somone said…”.

That still leaves the question, what better numbers to use?

Personally I just go with official numbers. I’ve been thru all the financial statements for the large caps. They make sense, nothing sticks out as being totally wrong. Yeah there’s probably stuff fudged, shrug. The banks bad loans say 1.5%. To be safe I double that, do I still feel like buying? I just move forward and make decisions using the information that is available. 

Goldman is over here, they seem to have their ear to the ground, and have proved to have the most accurate forecasts on China. They revised their GDP forecast down to something like 6-7% for the coming years.

Bottom line, I don’t think there is some huge cover up. I think the real game is – force the Chinese into a desperate stimulus package to prop up US/JP/EU economies/markets (for awhile), but make the eventual collapse all the more painful. CN has no reason to want to do that though.

I love my cheese. I got to have my cheddar.

Neryblop wrote:

you dont have to be in a certain place to get knowledge. Most of what we know is from the studies of others. For example, If I was never taught that Magellan sailed around the world, would I believe that earth was round? Was I there when Magellan did it? nope, but because many said so, and many have done so, I know the world is round. I dont have to fly across the world in order to know that.

now im not saying consensus thought is absolute, I am merely saying that the existentialist idea that we must experience someting in order to attain knowledge is faulty. 

Also the extent of knowlegde also varies, which is better knowledge, me traveling to 100 walmarts, or me reading walmart’s transcripts. One requires me at the physical location an existentialist approach, while the other I can get sitting on my ass in front of a computer. which is better knowledge? the transcript. also takes less work. haha.

purealpha wrote:

^ That’s good that you actually have experience! For most people their beliefs are just “somone said…”.

That still leaves the question, what better numbers to use?

Personally I just go with official numbers. I’ve been thru all the financial statements for the large caps. They make sense, nothing sticks out as being totally wrong. Yeah there’s probably stuff fudged, shrug. The banks bad loans say 1.5%. To be safe I double that, do I still feel like buying? I just move forward and make decisions using the information that is available. 

Goldman is over here, they seem to have their ear to the ground, and have proved to have the most accurate forecasts on China. They revised their GDP forecast down to something like 6-7% for the coming years.

Bottom line, I don’t think there is some huge cover up. I think the real game is – force the Chinese into a desperate stimulus package to prop up US/JP/EU economies/markets (for awhile), but make the eventual collapse all the more painful. CN has no reason to want to do that though.

I actually agree with PA on this.  On the fringe where opinions diverge, qualitative understanding is all important.  If you’ve never been in a walmart you will not understand it to the same degree as someone who has, particularly if you assume they have access to the same books.  There’s no clear replacement for first hand knowledge, this is a huge business school falacy.  Ask any retail analyst about the importance of channel research.  I’ve also heard some incredibly ignorant statements come out of western analysts about China who clearly have never been there and don’t understand the people, logistics, culture and business atmosphere.  They can never get outside their US based percption because they’ve never bothered to get outside their bubble.  I do agree with that.  

There’s no direct replacement for being well travelled.  In the end, you can read about Magellan as a nerd who’s never left a cubicle and say you know about his adventures but you really have no clue what you’re talking about beyond the broad strokes because you’ve never had to survive by relying on yourself in an unmapped environment beyond all contact and support, cutoff from everything you know.  Same as I can watch Band of Brothers but I really don’t know the first thing about the realities of that situation.  Since the big payoffs in investing generally happen around the fringes where opinions diverge, it is typically helpful to have first hand knowledge.  It’s hard to find a major hedge fund manager who hasn’t travelled extensively in China, for good reason.

To put it more simply Nery, using your own analogy about Magellan.  If you were making investment recommendations for the next exploration and trying to assess the feasibility and situation on the ground you’d typically be better off consulting an experienced crewmember with a moderate education than some MBA that doesn’t know port from starboard postulating about the last NY Times oped.

#FreeCVM #FreeTurd #2007-2017

Hey Hamilton, have a holly jolly Christmas.

Black Swan wrote:

On the fringe where opinions diverge, qualitative understanding is all important.  If you’ve never been in a walmart you will not understand it to the same degree as someone who has, particularly if you assume they have access to the same books.  There’s no clear replacement for first hand knowledge, this is a huge business school falacy.  

Warren Buffet was brought up earlier, to quote him “invest in what you know”. 

There are a heck of a lot of investments out there. We can all bring up financial statements and Bloomberg articles and government numbers. But personally I feel I have no advantage vs other investors in most areas (so the people who DO know those areas deeply will take my dumb money). So I stick to areas where I know I have a deeper real world understanding.

from Matt Levine

How’re things in China?

The big parade happened, and if your theory was that China’s government was propping up stocks in anticipation of the parade, then I guess that is a bearish signal? (Or not, I mean, maybe private capital was just waiting until after the parade to come back in; market timing is hard.) Also perhaps bearish is the fact that China’s interventions, and its search for people to blame for the crash, “are damaging China’s credibility as a legitimate investment market.” And that is causing foreign investors to pull back:

“In the first half of the year, there were an enormous amount of investment products being developed to invest in A-shares. That has reversed completely on its head,” said Effie Vasilopoulos, a co-leader of law firm Sidley Austin LLP’s investment funds practice in Asia.

“We are required to use more gentle wording in reports and our opinion should not be too strong,” says one Chinese stock analyst. And here is the story of China Galaxy Securities, a Hong Kong investment bank that issued a research note on its own stock, rating it a buy. I suppose there would be regulatory troubles if it rated itself a sell.

"You want a quote? Haven’t I written enough already???"

RIP

purealpha wrote:

Black Swan wrote:

On the fringe where opinions diverge, qualitative understanding is all important.  If you’ve never been in a walmart you will not understand it to the same degree as someone who has, particularly if you assume they have access to the same books.  There’s no clear replacement for first hand knowledge, this is a huge business school falacy.  

Warren Buffet was brought up earlier, to quote him “invest in what you know”. 

There are a heck of a lot of investments out there. We can all bring up financial statements and Bloomberg articles and government numbers. But personally I feel I have no advantage vs other investors in most areas (so the people who DO know those areas deeply will take my dumb money). So I stick to areas where I know I have a deeper real world understanding.

Yeah, as I was writing this, I was remembering a commercial REIT manager explaining to me the importance of investing within your local geography because when you move beyond that area the asymetry of information and lack of knowledge on local trends and development will get you every time.

#FreeCVM #FreeTurd #2007-2017

igor555 wrote:

from Matt Levine

How’re things in China?

The big parade happened, and if your theory was that China’s government was propping up stocks in anticipation of the parade, then I guess that is a bearish signal? (Or not, I mean, maybe private capital was just waiting until after the parade to come back in; market timing is hard.) Also perhaps bearish is the fact that China’s interventions, and its search for people to blame for the crash, “are damaging China’s credibility as a legitimate investment market.” And that is causing foreign investors to pull back:

“In the first half of the year, there were an enormous amount of investment products being developed to invest in A-shares. That has reversed completely on its head,” said Effie Vasilopoulos, a co-leader of law firm Sidley Austin LLP’s investment funds practice in Asia.

“We are required to use more gentle wording in reports and our opinion should not be too strong,” says one Chinese stock analyst. And here is the story of China Galaxy Securities, a Hong Kong investment bank that issued a research note on its own stock, rating it a buy. I suppose there would be regulatory troubles if it rated itself a sell.

It cracks me up when people say China manipulates markets too much.  Look at a 10 year chart of the S&P and explain to me how the market was priced 36% above peak 2007 levels in May.  Is our economy 36% bigger?  Is the world’s?  Is our growth outlook better now than it was then?  The obvious answer any jr analyst will give you is that it’s monetary policy.  So the Fed and ECB basically drove up markets by more than a third from their prior peak and created a new bubble in US equity markets (that are 3x Chinese markets) because no one wanted to take the pain.  Yet we call them out for propping up prices for a few months and not letting markets move freely.  Then of course there’s the bailout.

Before that, you had Greenspan bragging in his book about pulling the US economy out of the tech bubble by inflating housing prices with low rates (and basically contributing to another bubble and collapse) because we didn’t want to take the pain then either.

In the last two weeks the Euro devalued by 4.5% vs the USD on expectations of ANOTHER round of QE, but people are still talking about the Yuan 2% devaluation after they let their currency FLOAT in the market.

Then the other week when markets were in freefall, everyone was criticizing China for being too hands off and not reacting to the market panic.  It is crazy hearing people talking about Chinese market manipulation these days.

China may be the trigger that drives a collapse, but the western world created this fragile low growth, low rates, high leverage situation through their unwillingness to take the pain in 2008 and 2000 before that.  Furthermore, some of China’s issues stem from trying to keep up with debt fueled western demand volatility, first too hot then too cool.

#FreeCVM #FreeTurd #2007-2017

reading the news is basically alerting you to the problem that a reporter discovered. due diligence will require further analysis of several sources which could include that crewmember, the ceo, sell side analysts, buy side commentary, reading competitor transcripts, etc. my personal opinion though is that the crewmember is prolly the worst source since they have the least visibility to the overall picture, and probably lack the ability to communicate it in a way that is financially relevant.

maybe you have a point with the band of brothers. i guess i can sympathize, cant really empathize though. end of the day though, world is round, us beat germany in ww2. and china has a poor reputation from a us standpoint. and im still sitting at my desk

Black Swan wrote:

I actually agree with PA on this.  On the fringe where opinions diverge, qualitative understanding is all important.  If you’ve never been in a walmart you will not understand it to the same degree as someone who has, particularly if you assume they have access to the same books.  There’s no clear replacement for first hand knowledge, this is a huge business school falacy.  Ask any retail analyst about the importance of channel research.  I’ve also heard some incredibly ignorant statements come out of western analysts about China who clearly have never been there and don’t understand the people, logistics, culture and business atmosphere.  They can never get outside their US based percption because they’ve never bothered to get outside their bubble.  I do agree with that.  

There’s no direct replacement for being well travelled.  In the end, you can read about Magellan as a nerd who’s never left a cubicle and say you know about his adventures but you really have no clue what you’re talking about beyond the broad strokes because you’ve never had to survive by relying on yourself in an unmapped environment beyond all contact and support, cutoff from everything you know.  Same as I can watch Band of Brothers but I really don’t know the first thing about the realities of that situation.  Since the big payoffs in investing generally happen around the fringes where opinions diverge, it is typically helpful to have first hand knowledge.  It’s hard to find a major hedge fund manager who hasn’t travelled extensively in China, for good reason.

To put it more simply Nery, using your own analogy about Magellan.  If you were making investment recommendations for the next exploration and trying to assess the feasibility and situation on the ground you’d typically be better off consulting an experienced crewmember with a moderate education than some MBA that doesn’t know port from starboard postulating about the last NY Times oped.

[/quote]

I love my cheese. I got to have my cheddar.

Predictably the global media is in the process of spinning a 180 turnaround from “OMG China!” to “oh wait, actually it’s no big deal guys”… 

Headlines – 1) there is little impact to the developed world, 2) the CN [manufacturing] slowdown was known all along and should not have been a surprise, 3) everyone is looking at outdated measures of CN growth (manufacturing), 4) the RMB move was not a competitive devaluation, 5) CN is actually growing at a fine pace, a few bumps in the transition but no hard landing, and thus 6) CN stocks are mispriced and a buy, and 7) the FOMC is the outstanding issue.
 
Well duh, and that 180 only took what, 10 days? But now of course they’ll go too far and ignore the real risks. 

ASHR yes

"You want a quote? Haven’t I written enough already???"

RIP

ugh, just returned from my European vacation. I missed some serious volatility in the global markets, good trades were definitely missed!

I just wrapped up reading this entire thread, decent amount of argumentation but truly misses what’s right in front of us.

  1. (Global) Technicals are winning, hands down
  2. Fundamentals do not matter, mixed bag of extreme valuations and oversold mega caps
  3. China’s long-term picture is unchanged but irrelevant due to point 1
  4. This (global) sell off will last longer than anyone here is caring, or willing, to contemplate

Nothing matters right now but the (global) charts and they’re all broken, as an example the S&P500 is below the 50MA on the weekly for more than 4 days for the first time since October 2011.  These types of trend breaking movements do not resolve themselves quickly, I reiterate the CSI 300 is likely to bounce off the 50MA on the weekly chart and i’m going to speculate this won’t happen for another 12-16 months.

Once the chart heals, #2 & #4 will come back to front and center and i’ll be ready to start a long-term trade.

^ Whoh, is this technical analysis, on a CFA forum? surprise

can you post your chart

"You want a quote? Haven’t I written enough already???"

RIP

purealpha wrote:

^ Whoh, is this technical analysis, on a CFA forum? surprise

More of a gut feel from watching trade & price action over the summer… Something “feels” off lately

Weekly $SPX

http://stockcharts.com/h-sc/ui?s=%24SPX&p=W&yr=5&mn=0&dy=0&id=p93953246656

Weekly CSI 300

http://stockcharts.com/h-sc/ui?s=%24SSEC&p=W&yr=5&mn=0&dy=0&id=p71326392245

EDIT: I intended to say the 200MA on the weekly for CSI 300… Just draw a line out about 12 months and you’ll get my rough price target of around 2750.  

Galli wrote:

EDIT: I intended to say the 200MA on the weekly for CSI 300… Just draw a line out about 12 months and you’ll get my rough price target of around 2750.  

Hmm, this is why I don’t trust technical analysis. It totally ignores the massive fundamental changes that have happened in the market since prior index levels. There’s no real reason why prior undervaluations need to apply going forward, unless all the changes that have happened since 2014 reverse. Some think this is just a correction in a larger bull market (basically growing pains as CN allows more sophisticated financial tools and opens to the world).
 
BTW there was some guy on Bloomberg TV doing technical last night. He says we see a bounce to 3400 on the Shanghai Composite, and then retest the lows again (I guess 2800-3000) so that we see “seller exhaustion” (which he says was postponed because of intervention), then that’s the bottom. The 3400 number has some fundamental meaning, in that the gov-directed funds are allowed to sell after crossing that level (if I remember right).

Market behavior can ignore  fundamentals or how the market dynamics have evolved (to the good) in the short term. That will be “realized”in the long-run 

The further the reaction to the upside, the more reaction to the downside.  Seen it over and over again, regardless of the core fundamental premise being right or wrong.  

That guy on Bloomberg sounds like he has the right idea.  Upside bull trap followed by some degree of capitulation.  Although I think the Chinese gov’t hand supporting the market will make it difficult to tell, might just make sense to scale in on dips <3000 and not worry about a percise target.

Right. Prices are attached to fundamentals, but with an elastic like a bungee cord. 

You want a quote?  Haven’t I written enough already???

A bit of a side story – China (we assume?) delivering a beating to the silly currency speculators who were pushing for more depreciation of the offshore RMB (USD/CNH). Being long CNH I’m of course happy to laugh at their misfortune. Why would you go against the largest currency reserve stash on the planet when they told you in plain language they would defend? Better to use that cash on Brazil’s real, I would think.

A 1.35% move at present, which is huge for CNH…

http://bloomberg.com/news/articles/2015-09-10/offshore-yuan-jumps-mo...

if prices are being driven down by technicals. i just buy. the lower it goes the cheaper it gets. technicals = never important.

I love my cheese. I got to have my cheddar.

The market seems to be completely ignoring fundamentals in this environment. I would say technicals are more important than they have ever been in recent years. It’s a price momentum market.

seems like momentum is slowing down then boom

"You want a quote? Haven’t I written enough already???"

RIP

I really liked Damodoran latest bit about how people hype up the Fed way too much.  His bit on valuations was interesting:


3. The reason stock prices are so high is because rates are low
If this bull market has been entirely or mostly driven by the drop in interest rates, the expected return on stocks should have declined in line with the drop in interest rates. In my most recent update on this number at close of trading on August 31, 2015, I estimated an expected return of 8.50%, almost unchanged from the level in 2009 and higher than the expected return in 2007…
 
At least based on my estimates, the primary driver of stock prices has been the extraordinary fountain of cash that companies have been able to return in the last few years, combined with a capacity to grow earnings over the same period. By the same token, if you are concerned about cash flows, it should be with the sustainability of these cash flows, for two reasons. The first is that earnings will be under pressure, given the strength of the dollar and the weakness in China, and this is starting to show up already, with 2015 earnings about 5-10% below 2014 levels.  The second is that companies will not be able to keep returning as much as they are in cash flows; in 2015, the cash returned to stockholders stood at 91% of earnings, a number well above historic norms. In the table below, I check to see how much the index, which was at 1951.13 at the close of trading on September 3, would be affected by an increase in interest rates (increasing the US 10-year T.Bond rate from the 2.27% on September 3, to 5%) as contrasted with a drop in cash flows (with a maximum drop of 25%, coming from a combination of earnings decline and reduced cash payout):
 
http://aswathdamodaran.blogspot.com/2015/09/the-fed-interest-rates-and-s...