Showing posts with label Market News.. Show all posts
Showing posts with label Market News.. Show all posts

Oct 1, 2019

News | Market News: China's Future Is Defined and Strengthened by Its Past

By James Early

James Early is a columnist for Investopedia. The views expressed herein are his alone and do not necessarily reflect the views of Investopedia.
Since 2012, I've been a frequent visitor to the People's Republic of China. With 52 red stamps on my passport to prove it, I'm still mystified by the incongruities that jump out at me as a Westerner.
I’ve come to accept that plenty of contradictions about China will never make sense to the Western mindset. Yet China, whose Communist Party government turns 70 today, marches on, contradictions and all.
The same China that’s famous for its human rights violations is the China that lifted more than 800 million people out of poverty as per capita GDP rose from $89 in 1960 to roughly $10,000 today. The China where rural kids burn trash to keep warm is the same China that minted two billionaires per week in 2017, and where life expectancy rose from 43.7 years in 1960 to nearly 80 years today.
However you see China, these days, you must see China. It cannot be ignored, especially by investors.
Let’s see how China’s economy as we know it happened, from its rocky early decades through to present, and on to where it’s going.

1949: Inflation Fighter Mao

Ideology tends to birth major leaders, but so, too, does inflation. Chiang Kai-Shek’s Nationalist government had turned to the printing press to finance the 1937 war with Japan and the 1946 civil war against Mao Zedong’s communists. According to data from the libertarian think-tank Foundation for Economic Education, in 1937, 3.6 billion yuan were in circulation. By 1948, 5.1 quadrillion (the next number after a trillion) were -- and that’s after a 3,000,000-to-1 reverse split. This, plus Nationalist corruption, helped turned popular support Mao’s way.

1958-1962: Great Leap Forward

Mao wasn’t an economist. Nor was he an agriculturalist. During the Great Leap Forward, as many as 45 million people died from Mao’s failed attempt to convert small family farms to communes while simultaneously getting them into steel production. Chinese living standards, as measured by purchasing power parity, fell 20% from 1958-1962, according to data from Angus Maddison cited by the Congressional Research Service.

1966-1976: Cultural Revolution

He buried 460 scholars alive. We have buried 46,000 scholars alive. You [intellectuals] revile us for being Qin Shi Huangs. You are wrong. We have surpassed Qin Shi Huang a hundredfold.
-Mao Zedong, 1958
Mao wasn’t much for intellectuals, which both he and Qin Shi Huang, who became China’s first emperor 2,000 year ago by standardizing currency, script, and units of measure, saw as threats to power. Mao’s campaign to eradicate both cultural relics (and the traditionalism they beget) and academic intellectualism caused industrial production to drop by 14% in 1967.

1979: Deng Opens the Door

Black cat.. White cat... color doesn’t matter as long as it catches mice. A contradiction between socialism and the market economy does not exist.
-Deng Xiaoping, 1962, 1985
Deng began China’s real economic miracle with his 1979 Open Door Policy. Critics point out the irony of communist China’s “miracle” coming from its taste of capitalism. But China fans will say that China’s results stem from effective hybridization of two systems.
For example, a hallmark of hybridization has been state-owned enterprises (SOEs), which initially dominated China’s economy, then were reduced, only to be strengthened again under Xi Jinping. Democratic nations say sovereign help in the form of reduced competition, preferential financing, or subsidies gives China’s firms an unfair boost. China says that’s the point.
Thanks in part to these boosts, the Middle Kingdom is becoming middle class. Consulting firm McKinsey notes that 76% of China’s urban population will be considered middle class by 2022 (defined as earning between $9,000 and $34,000 per year, which affords a decent life in China). In 2000, just 4% made this cut.
However we see it, from 1978-2018, China’s real (i.e., adjusted for inflation) GDP increased by 9.5% annually--enough to double every 8 years. And while real GDP is slowing, from 14.2% growth in 2007 to an IMF-estimated 5.5% growth in by 2024, even slow numbers by China’s standards are breakneck by the rest of the world’s.

2013-Present: Xi Jinping era

President-for-life Xi Jinping has maintained China’s hallowed above-6% GDP growth (generally assumed to be stretched by analysts), but at the cost of debt:
Building of ghost cities and roads to nowhere has eased, select companies are now being allowed to default, and Western economists are finally coming to understand that a state-controlled economy can absorb bad debt in ways that a market economy can’t – though some still suspect China’s banks of having up to 10 times more bad loans than they report.

Trade War

Originally prompted by President Trump’s dissatisfaction with the U.S.' $540 billion annual exports to China in 2018, relative to China’s $120 billion in exports to the U.S., the trade war has expanded to address a range of issues from IP theft to state subsidies. Xi likely doesn’t mind buying more soybeans or whether canoe paddles are taxed at 12.5% or 25%; China’s soul searching is around whether U.S. demands around state subsidies and IP transfers are at fundamental odds with how its socialist model works.

The Future: Does China Own it? 

Try sending a Chinese person an email. Try using your credit card in China anywhere other than a hotel. Try paying with cash at a big-city restaurant. Not impossible. But hard.
Email has been replaced by WeChat. So have credit cards and cash, for that matter. “China speed” partly arises because a country building from scratch can leapfrog legacy technologies (taken an Amtrak lately?), partly because China’s populace is pragmatic and fast-adopting (already, 83% of China’s payments are mobile), and partly because the government sees betting heavily on technology as a way to get ahead while demonstrating the superiority of the Chinese model.


China’s authoritarian system and ownership of the country’s three main telecom companies have allowed it greatly to expand 5G wireless coverage which is at least 20 times faster than 4G, enabling better connectivity among all sorts of devices from driverless cars to smart appliances. Whereas the U.S., where 5G is developed privately and beholden to both federal and state regulators, has been left to play catch-up.

Artificial Intelligence (A.I.)

The Chinese government recently outspent the U.S. government 200-to-1 in artificial intelligence, in keeping with China’s plan to become the world leader in AI by 2030 (the U.S., meanwhile, has reduced science funding). Americans shudder to think of China’s Big Brother-style network scoring people via surveillance cameras, social media, and financial records. But values aside, China, with abundant data and few restrictions on how that data is used, at least has the petri dish for refining certain AI faster than the democratic world.

Technological Self-Sufficiency

McKinsey notes that despite being second in the world for research and development spending, China still imports six times more intellectual property than it exports. China still relies heavily on foreign technology in semiconductors and healthcare, for example, and technology transfer writ large, whether by theft (estimates of China’s annual IP theft from the U.S. run as high as $600 billion), policy (China traditionally forced foreign firms into technology-sharing partnerships as a condition of market access – a requirement that the U.S. and others claim violates the World Trade Organization rules China agreed to in 2001), or purchase, has been a pillar of the post-Deng Chinese model.
Made in China 2025 is China’s attempt to climb the manufacturing ladder to self-sufficiency in key technologies. The debate around the program is a microcosm of the debate around the overall Chinese model: China says it’s simply trying to modernize. The U.S. gripes that the tools of that modernization include heavy state subsidies and aggressive technology transfer, adding that China’s blurred lines between company and state make use of acquired technology to advance powers and values not aligned with the U.S. likely.
Made in China 2025 Industries
  1. Information technology
  2. Machine tools and robots
  3. Aerospace
  4. Ocean engineering and high-tech ships
  5. High-tech rail
  6. Electric cars
  7. Electric power equipment
  8. Farming machines
  9. Advanced materials
  10. Medicine and medical devices


A strange thing about China’s birthday is that I’ve seen anti-communist Chinese celebrating it. Westerners separate people, governments, and histories, but the Chinese mindset tends to identify “China” as a fusion of the current government, thousands of years of history, and the Chinese people today.
As their China turns 70, the people’s biggest concern for the moment is not the trade war, Hong Kong, or their country’s role on the geopolitical stage. It’s pork prices, which have spiked from the African swine flu. Pork is oddly integral to Chinese society, and the creation of China’s strategic pork reserves in 2007 was the government’s effort to ensure that its people – who can go without freedom but not without pork – feel their priorities are cared for in ways that don’t necessarily make sense to the Western mindset. Leadership’s acknowledgement that “China” is a fusion of people and traditions together that, as much if not more so than the government, have made China what it is today. Popular opinion may be that as long as the government itself doesn’t lose this sight, China may celebrate its 140th birthday.

Sep 30, 2019

Market News: What to Expect in the Markets This Week

By Caleb Silver

What to Expect This Week:

The third quarter of 2019 comes to a close on Monday (where did the year go?).
Earnings season will kick off in a couple of weeks, except for a few companies that report off-cycle, such as Pepsi (PEP), Constellation Brands (STZ), and Bed Bath and Beyond (BBY), which all report next week. They all have their fingers on the pulse of the global consumer, so their forecasts will be important to listen to.
The theme of the second quarter earnings was the impact of the trade war and global uncertainty balanced by the strength of the U.S. consumer. We'll see if that narrative holds up, and more importantly, if companies are taking down forecasts going into the final quarter of the year.
Late Sunday, a reading of private manufacturing in China came in better than expected. The Caixin/Markit Purchasing Managers Index posted its best reading in 19 months. This Tuesday is the Republic of China's 70th anniversary and the stage will be set for President Xi to proclaim China's rise since he became president, and present his future vision. Note that the U.S. and Chinese trade representatives are planning to meet on Oct. 10.
We'll get U.S. manufacturing reports for September on Tuesday. That has also been trending lower until last month, when a rise in new orders and output growth boosted the U.S. Purchasing Managers Index off of 10-year lows. Export growth, however continued to weaken, which has been the pervasive theme since late 2017.

U.K. GDP and Brexit

We'll get the final second quarter GDP results for the United Kingdom on Monday and the forecast is for a 0.5% drop. That would be the first negative quarter of growth for the U.K. since 2009. But, let's be honest... all anyone cares about is if, how, and when Brexit will be resolved. Now that Parliament is back in session after a high court judge ruled that PM Boris Johnson's attempt to prorogue it was unlawful, the clock is ticking towards the Oct. 31 Brexit deadline.
 The potential outcomes are:
  • The UK asks for and is granted a delay by the EU, pushing the Oct. 31 deadline out and delaying Brexit
  • The U.K. asks for and is refused a delay, or doesn't ask for a delay, and the U.K. has to Hard Brexit out of the EU on Oct. 31
  • Members of the U.K. Parliament and PM Johnson miraculously agree on a plan that the EU blesses, and the U.K. exits the EU with a deal on Oct. 31
  • None of the above, and Parliament holds a "no confidence" vote on PM Johnson, and everything is thrown up in the air
  • Greenland buys the U.K. (I kid... it's Friday)

U.S. Jobs Report (Friday)

Friday brings the September nonfarm payrolls report. The U.S. jobs market is tight. Unemployment is low and we've seen some real wage increases that have helped boost consumer confidence. There are signs, however, that both are starting to show weakness.
 As mentioned earlier, consumer confidence in the U.S. weakened in the past month—the second in a row. It's still relatively strong, but the trade war and other political uncertainties are starting to wear down the consumer.

Sep 26, 2019

Market News: Comeback Stocks: Why Snap's Snapback Is Real

By Mark Kolakowski

Social media company Snap Inc. (SNAP) was a red-hot IPO, but its shares peaked on its second day of trading, March 3, 2017. From there to an intraday trading bottom on Dec. 21, 2018, Snap plummeted 83.6%. Since then, the stock has vaulted upward by a spectacular 255% through the close on Sept. 25, 2019.
Michael Morris, an analyst with Guggenheim Securities, calls Snap "well positioned to outperform our Internet and Media coverage universe through year end and provide an investor return of nearly 30% through the next 12 months," as he wrote in a report released on Sept. 24 and quoted in Barron's. His price target is $22, or 28.6% above the Sept. 25 close.

The Road Down

In 2018, owners of Apple iOS devices disliked a redesign of the app, curtailing usage, as reported by Barron's. Daily user growth had stagnated or declined during the final three quarters of 2018, The Wall Street Journal reports. Adding to the negatives surrounding the company, several top executives left in 2018.
Snap has turned in earnings reports that have beaten consensus estimates in each of the last four quarters, but by posting smaller than expected losses rather than larger than expected profits.

Key Takeaways

  • Snap's share price plummeted from its March 2017 IPO to Dec. 2018.
  • Active users stagnated or fell through most of 2018.
  • A redesign for Apple devices was poorly received.
  • Now usage and advertising are on an upswing.
  • A redesign for Android devices has gotten good reviews.
  • Gaming and e-commerce applications are growing.

'Unique Value Proposition'

Snap offers a "unique value proposition for advertisers [that] should drive momentum through 2020 and beyond," argues Michael Morris of Guggenheim. Usage already has been boosted by a new design for Android devices. In particular, he notes that Snap users in the 18 to 34 age bracket are spending increased amount of time on the app, including with functions other than messaging.
Morris sees "long-term revenue potential at Snap as the most under-appreciated in our universe which should support a sustained premium valuation multiple." He believes that continued improvements to Snap's platform will increase advertising, producing revenue growth beyond current expectations. He also sees Snap becoming a major player in gaming as well as e-commerce, with an increasingly global footprint.

Growing Usage

Snap's monthly active user base is over 500 million, compared to 335 million for Twitter Inc. (TWTR) and 2.4 billion for Facebook Inc. (FB), per Barron's. Snap's daily active user base expanded by 4 million in 1Q 2019 and 13 million in 2Q 2019, raising the daily figure to 203 million, according to another Barron's report.
Meanwhile, the intense regulatory and political scrutiny focused on Facebook may be encouraging some advertisers to choose Snap instead, Barron's observes. Shyam Patil, an analyst with Susquehanna Financial Group, indicates that better self-service technology, a reorganization that has helped advertisers understand how to use Snap, and “lower-cost inventory” are the positives for Snap, per yet another Barron's article. However, he has a neutral rating on the stock.

Challenges Ahead

A cautionary view is voiced by Youssef Squali, an analyst with SunTrust Robinson Humphrey. He acknowledges positives for Snap such as growth in active users and user engagement, driven by desirable updates and increased content. However, spending on product development, marketing and hiring “could further pressure margins," he warned, as quoted by Barron's. He rates Snap a hold.
Meanwhile, Snap is not expected to turn a profit before 2023, and the next economic downturn, which many observers think is long overdue, is bound to send its ad revenue tumbling, pushing that key date yet farther into the future. “We would be cautious regarding cash-flow-negative companies” as a result, warns Mark Kelley, an analyst with Nomura Instinet, per Barron's.

Earnings Outlook

The 3Q 2019 earnings report from Snap is expected to be released late in October, per Yahoo Finance. The consensus estimate calls for EPS that is a loss of 5 cents, versus per share losses of 12 cents in the same period of 2018, 10 cents in 1Q 2019, and 6 cents in 2Q 2019.
With respect to revenues, the 3Q 2019 consensus forecast is $434 million, a year-over-year (YOY) jump of 45.9%, and an increase of 11.9% from 2Q 2019.
Among the 36 analysts covering Snap, just 6, or 17%, rate it a buy or a strong buy. Their average price target is $16.57, or 3.2% below the close on Sept. 25.

Sep 17, 2019

News: Goldman Says These 9 Stocks Can Lead Even As Recession Signals Grow

By Mark Kolakowski

Even as the S&P 500 Index (SPX) hovers near its all-time high, a recent report from Goldman Sachs finds that stocks in three areas still have significant potential for additional gains: services-providing companies, dividend-paying stocks, and domestic-focused firms. Among the 50 stocks in Goldman's basket of stocks with a high percentage of sales derived within the U.S. are: Anthem Inc. (ANTM), AllState Corp. (ALL), Charter Communications Inc. (CHTR), Norfolk Southern Corp. (NSC), Republic Services Inc. (RSG), and Arista Networks Inc. (ANET).
Additionally, Goldman also recommends that investors focus on aerospace and defense stocks with the lowest exposure to China. They note that these have the lowest reported sales to the Asia Pacific region, the closest proxy they can find across most company reports for sales to China: Northrop Grumman Corp. (NOC), TransDigm Group Inc. (TDG), and Huntington Ingalls Industries (HII).

Significance for Investors

"Our economists expect that a U.S. recession is unlikely during the next two years," Goldman says in a recent edition of their U.S. Weekly Kickstart report. "They highlight the lack of economic imbalances and believe that elevated consumer spending and a smaller drag from inventory accumulation should boost economic growth through the end of 2019 and 2020," the report adds.
"During the past 10 years, Aerospace & Defense has been least sensitive to U.S. and global economic growth across Industrials subsectors," the report observes. "High defense spending should continue to boost the top-line of Aerospace & Defense companies," it adds. Moreover, Goldman's recommendation of these stocks is bolstered by this finding: "Outside of recessions, Aerospace & Defense has outpaced the S&P 500 by a median of 250 bp during the 6-month period when the ISM [Manufacturing Index] fell from 50 to its trough." The ISM recently dipped below 50.
Analyst Rajeev Lalwani at Morgan Stanley has an overweight, or buy, rating on Northrop Grumman, per Barron's. His price target is $418, or 12.5% above the close on Sept. 16. Shares of Grumman have risen about 9% since Lalwani's report was released. He projects accelerating growth in the company's profit margins and sales, leading to positive earning surprises. “Northrop is the best way to play the long-term strategic priorities of the U.S. government,” he wrote in a report, as quoted by Barron's.
Meanwhile, investing in stocks with high sales exposure to the U.S. market is a way to hedge against a continued worsening of the U.S.-China trade conflict. Goldman indicates that the median stock in the S&P 500 derives 71% of sales in the U.S., while the median stock in its domestic sales basket gets 100%. Of the six stocks from this basket highlighted Arista has 72% U.S. sales and all the others are at 100%.

Looking Ahead

An ISM Manufacturing Index reading below 50 normally indicates that the U.S. manufacturing sector is contracting. However, Goldman believes that manufacturing is stabilizing, and expects that continued U.S. economic expansion will support the sector, thus they remain overweight in industrials.
Moreover, Goldman finds that the ISM index has been a poor predictor of upcoming recessions, given that, since the 1990s, recessions have followed an ISM reading below 50 only 30% of the time. Much of the reason for the diminished value of the ISM index as an economic leading indicator comes from the fact that manufacturing is now only 10% of U.S. GDP, down from 20% in the 1970s and 1980s.

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