Traders, keep your eye on China – Here’s why…
Chinese Milestone
Reached
One of the things we’ve been trying to convince
investors about is the growing importance of analyzing China in one’s global
investment outlook. China just reached a milestone in this regard that
investors should be aware of.
Since 1998 the US’s share of exports from
Emerging Markets has fallen from around 22% to just under 15% today. During
that same period China’s share of exports from other Emerging Markets has risen
from around 7% to just OVER 15% today. In other words, for the first time ever,
Emerging Markets now export more to China than they do from the US. China is
now the biggest demand engine of growth for Emerging Markets, not the US.
Thus while the global economy is still extremely
dependent upon US consumers, Chinese demand is growing in importance in its own
right. It is still true that more than 21% of Chinese exports go the US, making
both global and Chinese exports quite vulnerable to any slowdown in US
consumption. However the importance of Chinese demand and even consumption is
growing globally and investors should take notice and spend more time and effort
analyzing China than ever before to get a realistic global picture.
In the last year and half China has done a very
good job of fine-tuning its economy by slowing down areas that were overheating
while stimulating investment in bottleneck-prone sectors such that the economic
expansion continued to remain brisk overall. Many predicted recession in China,
and many others a severe soft-landing. China has had virtually no landing as
growth continued extremely strong overall. Capital spending slowed
significantly in response to restraints in metals, basic industries and real
estate, while at the same time increasing in energy, transportation, and
mining. Chinese inflation has come down markedly during this transition and
rotation, while manufactured goods sectors continue to show Deflation. With
core inflation dropping, policy tightening is now being reduced. Money supply
is starting to turn back up, and so has import growth. Capital spending overall
has dropped sharply while private consumption’s contribution to GDP growth has
exploded from 20% to nearly 50% in the last two years. Yet China is planning
to lift personal income tax thresholds to promote consumption even further.
Some in the press have highlighted the energy
shortages in China. Yet power-outages have dropped substantially now and
despite an arcane gasoline pricing policy, Chinese growth seems little
ill-affected by oil price run-ups to date. Chinese fuel prices are adjusted by
the government monthly within a band of world prices, and so when oil prices
jump up sharply on a monthly basis it leads to artificially low prices for a
month and hoarding and high demand for lower-than-market prices. Gas lines have
developed. Yet coal accounts for 70% of China’s energy needs and coal prices
have been relatively steady, while oil only accounts for around 23% of Chinese
energy needs. So far energy price run-ups have done little to dampen
re-accelerating growth in China.
Japan and South Korea are examples of countries
that have broken out in price and which are very heavily exposed to Chinese
demand, and we’ve highlighted the breakout in the Nikkei above 12,000 and its
importance. Emerging Markets have led the global bull market in stocks this
year and Chinese continued strong economic growth is a big reason why. Chinese
deflation in manufactured goods prices is also an important component in keeping
global inflation rates in check and global bond prices high, despite massive
monetary infusion from global central banks. The bottom-line that investors
should keep in mind is that if you want to understand and locate the fastest
growing sectors and regions in the world to buy now and in the future, keep your
eye on China!
We suggest some allocation to the breakouts in
Latin America, EM’s in general, Japan, Korea, Eastern Europe, Canada, in
machinery, and in South Africa. Global health care has broken out this week and
looks set to at least outperform in a more defensive environment. Watch FXTID
index. We still like gold versus the Euro and Yen.
Nonetheless we also continue to suggest some
short-hedging and less than NORMAL allocation. Markets are thin and treacherous
here.
Our model portfolio followed in
TradingMarkets.com with specific entry/exit/ops levels from 1999 through May of
2003 was up 41% in 1999, 82% in 2000, 16.5% in 2001, 7.58% in 2002, and we
stopped specific recommendations up around 5% in May 2003 (strict following of
our US only methodologies should have had portfolios up 17% for the year 2003) —
all on worst drawdown of under 7%. This did not include our foreign stock
recommendations that had spectacular performance in 2003.
This week in our Top RS/EPS New Highs list
published on TradingMarkets.com, we had readings of 137, 50, 90, and 99 with 52
breakouts of 4+ week ranges, no valid trades and close calls in
(
BHS |
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PowerRating),
(
CVNS |
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PowerRating),
and
(
CMX |
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PowerRating). This week, our bottom RS/EPS New Lows recorded readings of 10,
15, 5, and 3 with 2 breakdowns of 4+ week ranges, no valid trades and no close
calls. One valid signal remains in place in
(
VLO |
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PowerRating) on the long side. We’re
still not getting a lot of trading signals in valid breakouts, and though the
environment is improving slightly on the short side, it’s CLEARLY not a high
odds environment on either side of the aisle.
For those not familiar with our long/short
strategies, we suggest you review my book
The
Hedge Fund Edge, my course "The Science of Trading,"
my
video seminar, where I discuss many new techniques, and my latest
educational product,
the
interactive training module. Basically, we have rigorous criteria for
potential long stocks that we call "up-fuel," as well as rigorous criteria for
potential short stocks that we call "down-fuel." Each day we review the list of
new highs on our "Top RS and EPS New High List" published on TradingMarkets.com
for breakouts of four-week or longer flags, or of valid cup-and-handles of more
than four weeks. Buy trades are taken only on valid breakouts of stocks that
also meet our up-fuel criteria. Shorts are similarly taken only in stocks
meeting our down-fuel criteria that have valid breakdowns of four-plus-week
flags or cup and handles on the downside. In the U.S. market, continue to only
buy or short stocks in leading or lagging industries according to our group and
sub-group new high and low lists. We continue to buy new long signals and sell
short new short signals until our portfolio is 100% long and 100% short (less
aggressive investors stop at 50% long and 50% short). In early March of 2000, we
took half-profits on nearly all positions and lightened up considerably as a sea
of change in the new-economy/old-economy theme appeared to be upon us. We’ve
been effectively defensive ever since, and did not get to a fully allocated long
exposure even during the 2003 rally.
The question is now whether the Fed will raise rates or pause later this month
at the next FOMC meeting. Further is a pause merely temporary (most likely
scenario I suspect).
Mark
Mark Boucher has been ranked #1 by Nelson’s
World’s Best Money Managers for his 5-year compounded annual rate of return of
26.6%.
Boucher began trading at age 16. His trading
helped finance his education at the University of California at Berkeley, where
he graduated with honors in Economics. Upon graduation, he founded Investment
Research Associates to finance research on stock, bond, and currency trading
systems. Boucher joined forces with Fortunet, Inc. in 1986, where he developed
models for hedging and trading bonds, currencies, futures, and stocks. In 1989,
the results of this research were published in the Fortunet Trading Course.
While with Fortunet, Boucher also applied this research to designing
institutional products, such as a hedging model on over $1 billion of debt
exposure for the treasurer of Mead, a Fortune 500 company.