Tag Archives: China

The oil of the 21st century

What do these cars have in common?

McLaren 720s, Fiat 500, Mini Cooper

Probably more than you think.

For one, they were all designed by the renowned designer Frank Stephenson, who has also worked for the likes of Ferrari, Ford, BMW, and Maserati.

But maybe more surprisingly, they share quite a bit under the hood too. That’s because, despite belonging to different brands and market segments, all three of these cars are likely facing production delays due to a global shortage semiconductor chips.

Semiconductors are present in almost all electronics and have been used in cars’ internal computers for decades. What is different today is that the chips going into cars are crucial components for advanced features like touch screens, navigation systems, driver-assist features and more. Concurrently, the adoption of electric vehicles is starting to accelerate meaningfully, driving further chip demand in the sector.

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Can Nuclear Power Make a Comeback?

Here’s a link to an “Economist” article that discusses the ambitions of the Chinese nuclear power sector:

LINK: Nuclear power in China

Nuclear power has been an industria non grata since the Fukushima disaster that occured five and a half years ago.

The world has changed, but it still strikes me as odd how soon we have forgotten the promise of the nuclear power sector just ten years ago.

For instance, here is a chart of the uranium prices over the past 15 years:

uranium

And here is a chart of a uranium miner ETF (URA US) since its inception:

ura

Moreover, given the forecasted growth of electric car use, it is also time to have a grown up discussion about how the electricity that powers the vehicles of the future will be generated.

The Financial Times addresses this topic nicely in the following article:

Link: Electricity demand from electric cars

Economics is about choice, and the choices we make now are poised to have a considerable impact on our future.

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Chinese Pension Funds to Begin Buying Chinese Stocks

Last week I wrote a post that discussed the Chinese government’s signaling to local investors (LINK) through lower margin rates.

Yesterday, China announced that their pension funds would begin purchasing Chinese equities this year:

LINK: CHINESE PENSION FUNDS TO BEGIN BUYING CHINESE STOCKS

Typically, pension funds and other large institutional investors don’t signal what they intend to buy so as to avoid front running (buying before a large buyer enters a position, and selling after the price has been driven higher), but it seems as if this is just what the Chinese government would like to encourage.

In the Western World we’re used to the adage: “don’t fight the FED”. I would venture to suggest that one should be very cautious if they are considering betting against the Chinese as well. read more

A Not So Invisible Hand: The Chinese Government & Margin Trading

One of my takeaways from listening to the panel on investing in China at the JP Morgan conference earlier this month is the role the Chinese government plays in ‘signaling’.

For example, one of the panelists pointed out that when the government deemed that last year’s stock rally was overdone, they began to restrict margin lending. Around the same time, restrictions on buying property were lowered. Savvy investors would have prospered by a timely move out of stocks back into real estate.

Today, according to the Wall Street Journal, “China Securities Finance Corp., a state lender tasked with providing funds to brokerages for margin finance, which allows investors to borrow cash for stock purchases, resumed offering several short-dated loans and cut the interest rate it charges on a longer-dated one.”

Could the Chinese government be suggesting that another stock market rally is in order?

LINK

Shanghai Composite Index 3yr Chart:
shcomp mar20 read more

Juggernaut: China Mobile Shopping

In our last post, I discussed technical analysis and trend lines in the form of moving averages (Is today the day the market finds direction?).

Today I would like to steer your attention to the sorts of economic and societal trends that we try to identify and make a part of our investment decision making process.

One of the foremost among these is the burgeoning consumer culture in China, and its most dynamic embodiment: mobile shopping.

Here’s an article from cnbc.com that discusses just how much more advanced and widespread Chinese mobile shopping habits are than in the US:

LINK

The numbers involved are hard to conceptualize, but the importance of this theme is paramount. If China can take a new technology and within a relatively small amount of time outpace the developed world in terms of adoption and innovation, then what will be the next industries to face the same fate?

The past year’s rise and fall in Chinese stocks has tended towards many market commentators belittling Chinese ‘speculators’, but this is done at their own peril.

As investors, we must always look at opportunity cost and by definition make choices between things that are not fully comparable. Lets examine the Swiss food products powerhouse Nestle versus Chinese mobile company Tencent. It doesn’t take much effort to devise which company offers better relative value. Nestle is an old economy consumer staples stock that trades at 21x forward price to earnings. This is a fairly expensive multiple for a business that saw its sales decline 3% last year. Its Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) have a respectable 18% margin, and it does pay a 3% dividend which makes European pension fund managers desperate for income giddy with delight.

Now let’s take a look at Tencent. Its shares trade at a 38x forward price to earnings multiple, which is just under twice that of Nestle. However, Tencent’s sales growth was 31% last year, and its EBITDA margin was 38%. It doesn’t pay a dividend because it is reinvesting its earnings to generate future growth.

Here’s a look at their charts:

Nestle (in USD)
Nestle

Tencent (in USD)
tencent

If you had a 10 year investment horizon and could withstand short term volatility, which of these companies and industries would you be putting your money on? read more

Genies and Asset Prices

In this link, Tyler Cowan of George Mason University is asked the following question:

You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know?

LINK: MARGINAL INVESTOR

This simple question is actually quite an interesting thought experiment. Cowan states that he would look for “a price with some persistence, and which contains lots of information about other prices too.” He settles on the Shanghai Composite Index. It makes sense that an economist would provide this answer. China is poised to become the world’s largest economy and surely the performance of its major stock index should be a revealing indicator of many other asset prices as well.

Barry Ritholtz of Ritholtz Wealth Management addresses this question and argues that it is fundamentally inadequate.

LINK: BARRY RITHOLTZ.

He claims that discovering only one asset price is a flawed proposition, and that it cannot tell you where to definitively “park your money”.

Ritholtz is right. Asset prices are completely relative, and as wealth managers our mission should be to use comprehensive strategies that account for the fact that we cannot guess the future when managing client portfolios.

But sometimes you can ask and answer a question just for fun. So here I go: I would like to know the name and price of the stock with the largest weighting on the Shanghai Composite. Does that count? read more

Pessimism -vs- Optimism… And a Brief Comparison of Hysterical Oil Prophecies

When I began my career as an institutional equity trader in Canada fourteen years ago, commodity prices where just about to make one of the most fantastic runs in market history. China was rising – and it was hungry. Hungry for the copper that would be needed for millions of miles of power lines. Hungry for the uranium that would power their new power stations. Hungry for the nickel and iron that would create the stainless steel needed for millions of cars and household appliances. Most of all, China was hungry for the lifeblood of modern industry and economic growth: oil.

But there was a big problem on the horizon. According to an army of experts, global oil production had – with an extremely high degree of certainty – reached its peak, just as the dragon of Chinese industry had acquired an unquenchable thirst for oil. The implications were exciting, and frightening. They were exciting, because if you had oil you were bound to become unfathomably rich, and frightening, because if you did not, you would invariably become subservient to those that did.

It was on the back of this dual hypothesis of waning supply and exponential demand that the price of oil made a spectacular run from around $25/barrel in 2002 to almost $150/barrel in 2007.

Now let us take a look at the present day. The price of oil has fallen to around $30/barrel based on what analysts would have you believe is limitless global supply. Moreover, Chinese economic growth has supposedly reached its peak and is thus doomed to terminal decline, which would also derail global economic growth. Surely oil will fall further and a price $10/barrel is not out of the question…

And is one sense, these analysts are right: there is theoretically an inexhaustible supply of oil – just not at $30/barrel and surely not at $10/barrel. This is because it is not economical for the majority of energy companies to produce oil at the prevailing prices.

However, for the vast majority of the world that are not oil producers, lower oil and energy prices are a gift equivalent to a global tax break, and in effect this makes every business not related to oil cheaper to run. This is a good thing, because it encourages commercial activity, which leads to economic expansion.

So let us now compare some assumptions from 2007 to those that we are now hearing in 2016:

2007
– Chinese economic growth will continue to grow at a elevated pace leading to an inexhaustible demand for oil
– Oil supply is in terminal decline

The economic implication is increasing constant demand + low supply = higher prices

But this did not happen…

2016
– The pace of Chinese economic growth is in terminal decline
– Oil will stay in a constant state of oversupply

The economic implication is decreasing constant demand + high supply = lower prices

If markets were wrong in 2007, why should we be so sure that they are right at the current time, especially if they are using inverse, albeit similar logic?

There are those that argue that green energy changes the game and will ultimately reduce our current reliance on oil. They may well be right. However, they would have to concede that it would require a tremendous wave of capital investment in green energy infrastructure to significantly usurp the use of oil over the next 10 years. This would imply that capital would flow from traditional energy producers (hydrocarbons) to green energy generation. However in order to build green energy capacity, you would need to use existing sources of energy. And guess what? Lower systematic investment in oil production accompanied by a sustained period of demand for oil can only lead to… higher oil prices!

I am not calling the bottom on oil. Just trying to dampen some of the hysteria.

Why peak oil predictions haven’t come true

Why pessimists sound so smart read more