Wednesday, December 26, 2012

Lump of Coal For Christmas?

Twas the day after Christmas when all through the world, investors awoke to news that China's economy continues to improve:
China's stronger manufacturing and real estate sectors indicate a recovery, but there are some concerns on whether this is sustainable.

China Beige Book, an independent data roundup by CBB International, notes that the fourth quarter once again raises hope of a recovering manufacturing sector in China with far fewer manufacturers reporting declining production volumes.

"This is not surprising, but is a strong evidence of stabilization," the report said.

China's economy is an important bellwether and its slowdown for most of this year was a cause of concern. Its recent recovery is being watched closely as market participants try to analyze how the new administration will navigate the country through the rebalancing of its economy. One cause of concern, the China Beige Book highlights, is the rise in inventory at manufacturing and mining firms.

The stockpiling "calls into question on just how sustainable this expansion is," the report said.

Still, there were more positive signs in the economy. China's manufacturing base built on its recovery this quarter, with half of the firms reporting higher sales revenue and nearly as many volume gains. But the numbers were weaker than the first half of the year.

Once again, there was much more of an increase in domestic orders versus that of exports. Most of the export order book continued to come in from Asia and was down to the U.S. and Europe. The holiday season helped food manufacturers post both stronger volumes and revenues in the fourth quarter.

Retail spending increased modestly in the last quarter over the third quarter. In an interesting turn, luxury goods and furniture retailers reported a sharp pickup in revenues, the report said. Another notable feature of the quarter was the slowdown in sales of automotive products made by Japanese companies. The country's anti-Japanese sentiment affected sales, the report said.

Major regional differences in retail growth continue, with big overall gains in the Guangdong, Beijing, Northeast and Central regions, while Shanghai and the Southwest slowed.

Meanwhile, 56% of businesses surveyed reported spending more in the latest quarter, primarily in capital improvements. Firms in the recovering mining sector led the spending table, followed by retailers.

But what seems to be the highlight is the slow clawing back of China's mining companies. Though coal producers underperformed, metals and construction companies have begun to come back from their painful slump, the report said. Overall, 49% of mining companies saw revenues rise, a seven-percentage-point gain.

Real estate perked up this quarter, with 56% of the companies reporting higher revenues compared to 50% of the companies in the previous quarter, the report said. Residential and commercial developers improved on rebounding sales and rental prices.
A pickup in China's economy is one the the themes I'm playing for 2013. You can invest directly via the Chinese ETF (FXI) or focus on the acronym I'm focusing, 'CCS', which stands for coal, copper, steel, all sectors that stand to gain the most as China leads the world in 2013.

In fact, Barry Sergeant of New Zealand's New Age wrote an article a few weeks ago, Global economy fancies ‘Dr Copper’ with China’s rise:
The price of copper, among the biggest base metals in terms of global usage, has long been watched as a lead indicator on the health of the global economy.

Over the past five years, the orange metal has traded as low as $1.50 (R13.3) per pound but rose to as much as $4.50 per pound less than two years ago.

Prices over the past year have however fallen to as low as $3.30 a pound and are now about $3.60 a pound.

The Bank Credit Analyst (BCA), an independent research group based in Canada, says: “Copper prices are trading in a tight range, which cannot last forever. The combination of an improving global backdrop and a Chinese demand catalyst could soon result in an upside breakout.”

China ranks as the world’s biggest consumer of a number of commodities, including copper, which is used to conduct heat and electricity, as a constituent of various alloys and as a construction material.

According to BCA Research “evidence continues to accumulate that the Chinese economy is on a recovery path that is bullish for copper. The November preliminary HSBC PMI release for China showed the first expansion in 13 months”.

Going further into the detail, copper-specific, end-use indicators corroborate such views. Output of freezers, electrical meters, air conditioners, power-generating equipment and power cables all appear to have stabilised, says BCA Research.

“Together, these account for over 50% of copper consumption in China. Meanwhile, bearish sentiment and net speculative short positions are bullish indicators from a contrarian perspective.”

BCA Research says that the risks to its view on copper prices include a dollar spike, higher uncertainty in Chinese policy or a relapse in Europe, “but we assign these outcomes low odds of occurring”.
Let me take a moment to plug BCA Research, my first employer. Didn't particularly like the working conditions but that is one place where I learned a hell of a lot on macro, markets and writing succinct investment newsletters. Till this day, I miss those Friday afternoon "square-offs" between senior editors. It was always the highlight of my week, especially when they vigorously disagreed with each other.

BCA recently announced the hiring of Tony McGough as Chief Strategist, Global Real Estate Strategy.
Mr. McGough joins BCA after four years at DTZ, where he was previously Global Head of Forecasting and Strategy Research. His previous work experience and extensive academic background make him the ideal candidate to lead the BCA Global Real Estate Strategy, scheduled for launch in Q1 2013.

BCA's CEO, Bashar AL-Rehany, adds: “With his vast knowledge of global real estate markets, the addition of Tony to our research team underscores our commitment to providing the most comprehensive independent investment research available in the marketplace."

In addition to DTZ, Tony's past career includes employment at JLL, PruPIM, CB Hillier Parker and the Bank of England, as well as six years as a Senior Lecturer and Director of MSc Real Estate courses at Cass Business School, City University London.

Tony is a member of the European Real Estate Society, the Society of Property Researchers and the Investment Property Forum. He is presently on the Board of Editors of the Journal of Property Research, is a Visiting Professor at The University of Ulster and a Visiting Fellow at the University of Reading. Tony has a BSc (Hons) Economics, from the University of Bath, and a MSc Economics from Birkbeck, University of London.

Tony will be based in BCA's London, UK office.
The folks at BCA are obviously reading my blog and understand that alternatives is where they need to focus their research. They should contact me if they want more ideas on products, including a weekly pensions newsletter which can cover alternatives and much more.

As far as 2013, I don't expect anywhere near the drama we saw in 2012. The power elite will soon unite at Davos for their annual brouhaha where they rub elbows, pat each other on the back and tell the world all about what ills the global economy and that while they sympathize with the plight of the 99.999999%, they cannot stop inequalities threatening our democracies.

Importantly, the biggest crisis threatening the global economy right now is a jobs and leadership crisis. It's not just politicians but corporate leaders and the financial elite that are to blame for the lack of meaningful job growth and job insecurity that millions are now struggling with in Europe, the US and elsewhere. 

For investors, nothing has fundamentally changed going into the new year. The power elite will continue doing whatever it takes to reflate risk assets and fight the scourge of debt deflation with all their might. If they succeed, inflation expectations will rise significantly, placing pressure on interest rates and long bonds.

A former colleague of mine at BCA Research, Francois Trahan, Vice Chairman and Chief Investment Strategist  at Wolfe Trahan & Co. and founder and CEO of Trahan Capital Management, keeps reminding me that in a world of zero rates, "inflation has become the new Fed Funds rate." So pay attention to inflation trends, especially if China's growth keeps surprising to the upside in the first half of 2013.

As far as sectors, I'm still long US financials, technology and energy but my focus remains on coal, copper and steel ('CCS' sectors). It will be volatile but these sectors have tremendous upside. Here are some companies I track and trade in CCS sectors: Alpha Natural Resources (ANR), Arch Coal (ACI), Cliff Natural Resources (CLF), Peabody Energy (BTU), Freeport-McMoran (FCX), ArcelorMittal (MT), Nucor (NUE), Walter Energy (WLT), Teck Resources (TCK),  and US Steel (X). I'm also tracking some specialized metal and rare earth companies like Allegheny Technologies (ATI) and Molycorp (MCP).

China's growth should also boost agribusiness stocks in 2013. Names like Archer Daniels Midland (ADM), Potash (POT),  and Mosaic (MOS) are on my watch list.

As far as financials, I still like big US banks and think Bank of America (BAC) has more upside even though it was the Dow's best performer in 2012. Once they announce a hike in dividends, the stock will surge higher. Investors should also pay attention to insurance companies like American International Group (AIG) and Canadian insurers like Manulife (MFC) and Sun Life Financial (SLF).

In energy, there are many companies on my radar that span oil, nat gas, oil services and alternative energy. Here are some companies I'll be tracking in 2013: Baker Hughes (BHI), Chesapeake Energy (CHK), Haliburton (HAL), ConocoPhillips (COP), Transocean (RIG), Schlumberger (SLB), First Solar (FSLR) and Trina Solar (TSL).

In tech, I just finished up a comment on another RIM job, so you know Research in Motion (RIMM) is on my watch list. After getting whacked on Friday, stock is bouncing up nicely today on strong volume for a holiday week, so pay attention as another nice trading opportunity is presenting itself going into the introduction of BlackBerry 10 in late January.

By the way, the latest leak from the BlackBerry space is the leak of a single image of the full-QWERTY N-Series model, which is likely to be named the BlackBerry X10. For those who aren't BlackBerry veterans, RIM's keyboards are widely regarded as the best in the industry, making tapping out a quick email much less tedious (and less autocorrect-filled) than using a touch screen.

Apart from RIM, there are other tech names and sectors worth tracking closely in 2013, including internet, networking, data storage, software, social media, semis, and more. Here are just a few companies I'm tracking closely: Apple (AAPL), Baidu (BIDU), Cisco (CSCO), Ciena (CIEN), JDS Unipahse (JDSU), Finisar (FNSR), Facebook (FB), EMC Corp. (EMC), NetApp (NTAP), Nokia (NOK), Microsoft (MSFT), Applied Material (AMAT), Advanced Micro Devices (AMD), Marvell Technology (MRVL), Intel (INTC), Nvidia (NVDA), Netflix (NFLX), Oracle (ORLC), Seagate Technologies (STX), Qualcomm (QCOM), Groupon (GRPN), and Zynga (ZNGA).

Some of these names are a lot more speculative and riskier than others but they're all on my watch list.Will be interesting to see if Apple shares recover from their latest slide and if Facebook can keep up its momentum.

But if you ask me which sectors I like the most for 2013, will keep referring back to coal, copper and steel ('CCS'). So don't worry if you got a lump of coal for Christmas. It will be volatile but you may be luckier than you think.

Below, Bloomberg's Paul Allen reports that China's insatiable appetite for energy has given Australia's economy a boost, but is also causing a division among country folk. Australian farmers are being offered big money by Chinese miners desperate to get at the coal under the crops but not everyone is happy.

And Russ Koesterich, chief investment strategist for BlackRock Inc., talks about the outlook U.S lawmakers to reach a budget agreement and market performance. Koesterich speaks with Stephanie Ruhle and Sara Eisen on Bloomberg Television's "Market Makers."

I've already warned my readers to ignore the fiscal cliffhanger and to be weary of all these financial prognosticators using "sophisticated models" in their futile search for the 'Holy Grail' of investing. I like emerging markets too but still think the United States is going to lead the world in the next decade.