Posts Tagged ‘Fundamental Analysis’
Why China is Winning the Economic War
During what was called the “cold war” that ended with the fall of the Communist Totalitarian Regimes in Eastern Europe, one of the major fears was a military conflict between Russia or China and the U.S.
It did not happen. The potential of a military conflict has instead evolved into an economic war.
The U.S. was winning hands down for a long time. It used to be that the U.S. was number one in almost every category: education, technology, standard of living, economic and military strength; and as a moral and ethical leader of the world. It was leading the rest of the world into the future with the demonstrative power of democracy and free markets, for example, new technological breakthroughs in many fields: automation, computers, communications, energy, medicine and space travel, amongst others.
In recent years, a number of countries have surpassed the U.S. in specific areas, including consumer incomes, standard of living, and health care. The true economic powerhouse, however, has been China. Some of the statistics, and the speed with which they have changed, have been startling. Over the last ten years Chinas economy has surged past those of Canada, Spain, Brazil, Italy, France, and Germany, and is expected to pass Japan this year, to become the second largest economy in the world, behind the U.S.
Whether it is categories of manufacturing efficiency, high-speed rail-line technology, nuclear power plant construction, clean air energy technology or education, China is making impressive global inroads, even in areas where the U.S. still has significant dominance. Much of it has to do with Chinas massive population, about which the U.S. can do nothing.
For instance, while U.S. Internet companies dominate global headlines, China now has the worlds largest Internet market as measured by the number of users. Yet Internet use has only penetrated 22 percent of the population versus 75 percent in the U.S. Meanwhile, U.S. Internet giants like Google, Yahoo, eBay, Amazon and FaceBook are experiencing problems trying to transport their dominance into the Chinese market. Part of this are obstacles placed in their way by Chinas government, in support of Chinas state-controlled corporations. The result is Chinese Internet companies like Tencent, and Baidu, cannot help but become world leaders.
Here is a statistic of more importance: U.S. universities should graduate about 150,000 engineering students this year, while Chinese universities will likely graduate more than 500,000. Now that may be an unfair comparison since Chinas population is larger by approximately the same ratio. But that is not the issue. The issue is the degree to which China has moved higher education to the top of its priorities, and the fact that 500,000 new engineers a year will probably come up with more high-tech innovations than 150,000 can. Chinas great leap forward has been going through the same phases that the United States experienced in the turn of the last century as it worked toward becoming the worlds dominant economy.
In the midst of all this, it may be that China is starting to eat Americas lunch, never taking its eyes off the goal; while we squabble among ourselves, paying no attention. Thats unfortunate. As Sam Houston said in the U.S. Senate in 1850, “A nation divided against itself cannot stand.” Yet, for the last 15 years the U.S. has divided itself in increasingly bitter time and energy-consuming political arguments: the morals of President Clinton, whether or not war should be waged to remove Saddam Hussein from power in Iraq, whether the country’s current problems are due to the depth of the economic hole dug during the last administration, or ineptness of the current administration in pulling the economy out of the hole.
Meanwhile, China has instead kept its eye on the goal. It not only is making great economic strides, but on the financial side has become the worlds largest creditor nation, even as the U.S. has become the worlds largest debtor nation, with China holding much of its debt. The U.S. needs to interrupt its angry divisiveness and name-calling long enough to recognize the importance of what is going on. Unfortunately, historically speaking; this does not seem to be happening soon.
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Sterling Is Due For A Pounding
A reality knock is on its way for the pound. For the past week or so, sterling has been gliding higher, boosted by the new coalition government’s fiscal discipline and by talk from one Bank of England monetary policy maker that rates should rise. In a world where austerity is becoming the norm, Chancellor George Osborne’s plans to slash public spending even more than expected removed the risk of a credit downgrade.
For investors who have spent the last few months dodging the debt crisis sweeping through the euro zone, this could only be seen as good news. However, as data on Monday indicated, the economic price for reducing the country’s deficit so fast will be high. The economic recovery that showed signs of taking off in the first half of this year has already started to falter, even before the fiscal measures in the emergency budget late last month have been introduced. Although the manufacturing industry may not have contracted quite as much as many feared last month, the much larger and much more important services sector of the economy has proved a lot less resilient. The latest purchasing managers’ index fell much more than expected with business expectations plunging to a 15-month low.
Coming against a background of increased fears about a double-dip recession not only in the euro zone but in the global economy as a whole, the prospects for the U.K. economy are looking decidedly dim. So, although the economy may have achieved growth of 0.6% in the second quarter, that is the best the country is likely to see for some time. “The survey data have continued to cast doubt on the ability of the private sector to weather the fiscal tightening when it begins in earnest soon,” warned Vicky Redwood, U.K. economist with Capital Economics, an independent research group, in London. By taking its fiscal medicine on the chin, the U.K. economy may yet achieve more sustainable growth sooner than its competitors, paving the way for U.K. interest rates to start rising well before their peers do.
But, there is little sign that higher U.K. rates are needed in the near term. On the contrary, pricing power in the service sector appears fairly limited while input prices are running at the lowest level in six months. Given this, there should hardly be any fresh pressure for the Bank of England to start tightening policy when its policy members hold their next meeting on Thursday. Last week, three other members of the policy committee made it clear that they didn’t support any early move. This should ensure that sterling remains at a disadvantage to high yields just now and even if general market sentiment improves that the pound loses some of its recent support.
Even though sterling is still trading firmly over $1.5100, technical analysis suggests that its recent rally is more or less over. See how the pound has glided higher against the dollar and seems to be nearing a certain top as it bounces off the historically strong resistance line that is active for over 20 years.
This is the way the Chart looks:
At Den Dansk Bank, analysts are putting out a sell recommendation for any rise over $1.5304, warning that there is scope for a return all the way back down to $1.3500.
Early Tuesday, financial markets were having a little bit of relief rally with the Nikkei rising 0.8% and the Shanghai Composite gaining 1.1% after the Reserve Bank of Australia left rates unchanged as predicted but proved much less dovish about global growth prospects than expected. A larger-than-expected increase in Australia’s trade surplus also helped to offset some of the recent negative sentiment that has been dominating global markets.
By 0645 GMT, the pound was up at $1.5192 from $1.5135 late on Monday in North America, according to EBS.
The euro was up at $1.2585 from $1.2541 and rose to Y110.50 from Y110.02. The dollar was essentially flat at Y87.77 compared with Y87.75.
The improvement in sentiment may not last long given that a continued decline in the Baltic Dry Index points to a further reduction in global trade, suggesting lower demand from countries such as China. Also, the latest Institute for Supply Management survey for U.S. non-manufacturing is expected to show another decline, reminding investors that the U.S. recovery is stalling.
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Brazil Stocks End Higher On Rising Commodities Prices
Brazilian share prices closed higher yesterday because of the rising global commodities prices. The benchmark Ibovespa stocks index closed 1.4% higher than the previous days close at 64,442 points. Volumes were at the usual level for this season. Volumes were reduced yesterday by Brazil’s participation in World Soccer Cup play in South Africa, with most investors watching the televised game rather than the Ibovespa index.
Brazilian shares, meanwhile, rose in yesterday’s trading together with global commodities prices. Rising metals and oil prices contributed directly to the bottom line of major Brazilian exporters. Locally, the market was positively influenced by Brazilian President Luiz Inacio Lula da Silva’s decision to veto portions of a bill that would have increased long-term costs to the nation’s pension system. They also hailed Finance Minister Guido Mantegas pledge to maintain the governments’ 2010 fiscal goal of a surplus equal to at least 3.3% of gross domestic product. At the end of trading, Raw Materials and Telecommunications sector stocks were among leading gainers. Mining giant Vale rose 1.2%, southern steel maker Gerdau went also higher, rising about 1.8%. The Telecommunications Industry leader Tele Norte Leste rose 2.6%. Despite a rise in global oil prices Brazil’s government-controlled energy giant Petrobras, ended lower, dropping less than 0.2%. Aircraft manufacturer Embraer, rose at least 0.6% Mining utility Cemig advanced up about 2.0% to close at 25.40.
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U.S. Firms Build Up Record Cash Piles
U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.
While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe’s debt troubles lead to a new market freeze. ”Cash is still king,” said Jeff Hand, chief operating officer at Ross Controls, a Troy, Mich., maker of pneumatic valves and other products that is holding more cash as it struggles to recover from a sharp drop in business last year. “We’re coming out of that, but the uncertainty is still there.”
The rising corporate cash balances could represent a longer-term behavioral shift in the wake of the deepest financial crisis in decades. In the darkest days of late 2008, even large companies faced the threat that they wouldn’t be able to do the everyday, short-term borrowing needed to make payrolls and purchase inventory. ”We just went through this liquidity crunch that’s made them realize the value of a dollar in hand,” said John Graham, an economist at the Duke Fuqua School of Business.
Even now, banks continue to pull back on lending. The Fed reported Thursday that net lending by the financial sector–including banks, credit unions and other lenders–was down 5.4% in March from a year earlier. The comfort of having cash on hand, though, comes at a high price companies may not be willing to pay for much longer. They are earning almost no interest on their holdings of cash, making it more difficult for them to achieve the returns shareholders typically expect from them. That will put pressure on companies to pare down the cash holdings eventually. “Stockholders don’t want them to keep sitting on cash at a zero return,” said Paul Kasriel, an economist at Northern Trust. ”They’re going to use it either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks”, he said.
Earlier this week, retailer Target Corp. raised its quarterly dividend to 25 cents a share from 17 cents, saying that the company’s cash holdings were “well above the amount needed for optimal reinvestment in our core business.” When it reported results for its fiscal quarter ended May 1 on Monday, Philadelphia auto-parts and service retailer Pep Boys–Manny, Moe & Jack said it had $87.8 million in cash on its balance sheet, versus $21.3 million a year earlier.
But in a call with analysts Tuesday, Chief Financial Officer Ray Arthur suggested the company would soon be putting the money into capital investments. “I just wouldn’t plan on seeing $80 million or $90 million at the end of every quarter on our balance sheet,” he said. In a recent survey of company chief financial officers that Duke’s Mr. Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9% over the next year, compared with 1.5% when he asked the question in December. They expect employment to grow by 0.7%, compared with the 1.4% drop they expected six months ago.
Cash has piled up at Hooker Furniture Corp., based in Martinsville, Va. The company has seen increasing demand for the upholstered furniture it makes in the U.S., which it has found usually leads demand for the other furniture it imports from China. Hooker is being cautious nonetheless. When it reported results Monday, the company said it had $38.7 million in cash and other highly liquid assets on its balance sheet in its fiscal quarter ended May 2, up from $26.2 million a year earlier. “We’re a fairly conservative company, and keeping our powder dry makes sense to use,” said Hooker Chief Financial Officer E. Larry Ryder. Mr. Ryder says he sees the cash as a sort of insurance fund to make sure he can buy the raw materials and other inventory he will need to meet demand if business picks up. The company has cut its inventories to $38.5 million from $47.1 million over the past year. “We don’t want to tie our cash up to the point that we don’t have the liquidity we need to accumulate inventory when we need it,” said Mr. Ryder.
Companies’ willingness to use their cash will play a major role in the strength of the recovery at a time when consumers need jobs to support their spending and many people are still trying to repair their finances. The Federal Reserve data showed households making some progress in paring down their debt, which fell at a 2.5% annual rate in the first quarter as credit remained tight and more homeowners defaulted on their mortgages. Household net worth– the value of houses, stocks and other investments, minus debts– rose for a fourth straight quarter as markets continued to rebound. At $54.6 trillion, though, it was still $11.3 trillion below its 2007 peak of $65.9 trillion.
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S&P 500 Snaps 2-Day Losing Streak
A wide range of U.S. stocks, including DuPont, Bank of America and Exxon Mobil, climbed Tuesday, indicating increased confidence in the U.S. economy, although continued worries about the European economy kept the gains in check.
The Standard & Poor’s 500 index rose 11.53, or 1.10%, to 1062.00, its first gain in three days. All of the measure’s sectors rose, with materials in the lead while the technology sector lagged.
DuPont led the Dow Jones’ gains with a jump of 1.40, or 4.1%, to 35.49, after the company’s finance chief reiterated DuPont’s earnings forecast for the next few years. Among the Dow’s other top performers, Bank of America climbed 50 cents, or 3.4%, to 15.33. Exxon Mobil advanced 1.94%, or 3.3%, to 61.24, lifted by an increase in crude-oil futures to nearly $72 a barrel.
McDonald’s climbed 1.63, or 2.4%, to 68.38. The fast-food giant’s global same-store sales rose 4.8% in May, exceeding some analysts’ views, although the company said it anticipates foreign-exchange rates, especially a weakening euro, to hurt earnings for the year.
Intel was among the Dow’s few decliners with a drop of 13 cents, or 0.6%, to 20.18, on Nasdaq. Susquehanna Financial Group cut its investment rating on the chip maker’s stock to neutral from positive, citing signs of weakness in the personal-computer market.
The Nasdaq Composite slipped 3.33, or 0.15%, to 2170.57, its lowest close since Feb. 10. Weighing on the measure, Amazon.com slid 3.18, or 2.6%, to 118.83, eBay declined 14 cents, or 0.7%, to 21.69, and Google was off 74 cents, or 0.2%, to 484.78, all on Nasdaq. Bank of America Merrill Lynch cut its 2011 estimates on those stocks and several others in the technology sector, citing the U.S. dollar’s climb, among other factors.
Amazon was also hurt by competitive concerns after Apple Chief Executive Steve Jobs said Monday that iBooks, the e-reading application on its iPad tablet computer and soon coming to the iPhone and iPod Touch, has helped it capture a 22% share of e-book sales–an area previously dominated by Amazon’s Kindle e-reader. Still, Apple (Nasdaq) gave back 1.61, or 0.6%, to 249.33.
The action followed reassuring comments from Federal Reserve Chairman Ben Bernanke that the U.S. economy will continue to recover, although not at a pace strong enough to bring unemployment down quickly. The Fed chief said the U.S. recovery probably began sometime late last summer and that consumer spending and business investments appear to be taking over from the fading government stimulus in lifting the economy.
However, investors remained concerned about Europe’s sovereign-debt issues, especially after Fitch Ratings cautioned that the U.K.’s fiscal challenge is “formidable” and warrants a faster pace of deficit reduction than was outlined in the April 2010 budget issued by the previous Labour government.
Uncertainty over the oil spill in the Gulf of Mexico also continued to weigh on the market.
“Our view has been that we’re going to probably have to suffer the whole summer before the market participants will look at it and say things have settled down over there” in Europe as well as with the oil spill, said Linda Duessel, equity-market strategist at Federated Investors. “All this uncertainty has to be suffered as we make our way though the summer months.”
Goldman Sachs cut its investment ratings on offshore drillers Transocean, Diamond Offshore and Noble with a prediction the six-month deep-water drilling moratorium becomes 12 months. The moratorium affects an estimated 20% of global capacity, the firm wrote, which is likely to keep pricing under pressure. Meanwhile, reports that Diamond was dealing with another oil leak in the Gulf of Mexico only created more uncertainty. Transocean tumbled 2.84, or 5.8%, to 46.33, while Diamond Offshore declined 2.27, or 3.8%, to 56.94, and Noble dropped 39 cents, or 1.4%, to 27.34.
Dollar General rose 60 cents, or 2.1%, to 29.83. The discount retailer’s fiscal first-quarter earnings jumped 64% as shoppers responded positively to new brands of merchandise, such as Hanes underwear, and while the company also improved global sourcing to reduce product costs. Dollar General also boosted its earnings target for the year.
ConAgra Foods rose 44 cents, or 1.8%, to 24.44, after the packaged-foods company said it would sell its operations that make dehydrated and fresh vegetable products to Olam International, a Singapore-based company, for $250 million.
Corning climbed 1.05, or 6.6%, to 17.05. Bernstein upgraded its investment rating on the stock to outperform from market perform, saying Corning’s scratch and shatter-resistant panels for laptops and phones could become Corning’s second-biggest business after LCD panels.
Tellabs (Nasdaq) declined 44 cents, or 6.5%, to 6.37. Morgan Stanley cut its investment rating on the shares of the company, which designs and markets equipment for communications-services providers, to equal weight from overweight. In making the downgrade, the firm said it believes AT&T is planning a “relatively quick transition away” from Tellab’s 8860 multi-service router.
American depositary shares of ABB edged up 46 cents, or 2.8%, to 16.73. Standard & Poor’s Ratings Services upgraded its credit rating on the Swiss engineering giant by one notch, saying the company’s performance is proving to be more resilient to the challenging market conditions than the ratings agency previously expected.
Motorola eked out a gain of 9 cents, or 1.4%, to 6.66. The telecommunications-equipment company raised the maximum debt it will repurchase by $100 million, to $500 million, as it has seen solid response to a pair of tender offers.
Tenet Healthcare fell 31 cents, or 6.1%, to 4.80. CRT Capital Group noted the company’s consideration of a deal with Australian hospital operator Healthscope “has pushed investor trust in management to new lows,” even though Tenet already dropped pursuit of the company. “Our concern at this juncture is that investors now have no clear understanding of management’s future strategy,” and are uncertain about Tenet’s hospitals’ ability to generate meaningful cash flows, the firm added.
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G-D Bless America
By this I mean, of course, none other than the US Dollar. Oh Mighty One!! Bestow your blessings on our fluctuating currency, for ’tis to be majestically and majically going up again against all fundamental odds. It’s been very hard to follow, much less to invest by. As these lines are written the US Dollar Index Futures have been going upwards nicely, breaking their previous daily downwards movement which could hardly be called a trend. The strong upward trend is confirmed today with the gap up that was caused by good world-wide news over the weekend. This trend is not expected to end soon. But, as I always have written when addressing the Dollar, any upwards trend is only a correction of the long-term downwards pattern that has plagues the Dollar since the start of this current Depression. Check out the chart to enlighten you to the short-term facts and the strong possibility that this short-term trend pattern will continue for some time to come.
This is the way the Chart looks:
