It has always struck me as strange that most of the Chinese companies traded on US exchanges (including the largest companies) sport significantly higher growth rates and, more importantly, margins than their industry peers located in the US and elsewhere.
Call it Chinese exceptionalism.
Now there are some reasonable explanations for some of it (market closed to foreign competition, govt preference, super growth part of the cycle, only the best make it to an offshore listing, etc.). Growth rates I can understand (although even some of them are suspect). Margins, however, are a slightly different story. The laws of economics talk about diminishing marginal returns to production, capital, and labor weighing on the economic surplus that can be earned in a competitive market.
In the case of the newer, smaller cap companies operating in traditional industries, it stretches credulity that they can grow as fast and earn as super-sized profits as they say.
All this in the context of Chinese companies having a reputation for being low margin, seat-of-the pants businesses.
Buyer beware. If it is too good to be true, it just might be too good to be true.
Friday, March 19, 2010
Thursday, March 18, 2010
Are we entering a "more normal?"
Man, have I been out of sync with this market.
"Don't fight the tape," and I've been fighting it since July 09.
Followed the good folks at PIMCO and GMO into the "new normal." Consequently stayed away from the cyclicals (big mistake) and also was way too cautious on the Financials.
With the market trudging determinedly higher, investors are slowly, but surely, convincing themselves that we are moving back to normal and are growing in confidence daily. I'm not a card carrying member of that school (yet), but I am worried that my timing could be a tad off (like years!).
The structural problems are real and unsustainable. In the absence of serious change, we know where we are heading. It is only a matter of timing (and that is the hardest part). Another part of my thesis, is that the changed dynamics of the market (new instruments, new vehicles, new players), in conjunction with the the imbalances outstanding, will lead to more compressed market cycles. So, while the historic market cycle has ranged around 5-7 years, we are now likely to experience market cycles of 3-5 years.
"Don't fight the tape," and I've been fighting it since July 09.
Followed the good folks at PIMCO and GMO into the "new normal." Consequently stayed away from the cyclicals (big mistake) and also was way too cautious on the Financials.
With the market trudging determinedly higher, investors are slowly, but surely, convincing themselves that we are moving back to normal and are growing in confidence daily. I'm not a card carrying member of that school (yet), but I am worried that my timing could be a tad off (like years!).
The structural problems are real and unsustainable. In the absence of serious change, we know where we are heading. It is only a matter of timing (and that is the hardest part). Another part of my thesis, is that the changed dynamics of the market (new instruments, new vehicles, new players), in conjunction with the the imbalances outstanding, will lead to more compressed market cycles. So, while the historic market cycle has ranged around 5-7 years, we are now likely to experience market cycles of 3-5 years.
Tuesday, March 16, 2010
Where are we vulnerable
The seas appear to be calming, but the quiet reflects the passing of the storm, and rocks lie just beneath the surface.
So, where are we vulnerable. And, what are we vulnerable to.
Given the amount of debt outstanding, we are vulnerable to a rise in interest rates.
Given the fragility of the recovery, we are vulnerable to a rise in oil prices.
Given the trade imbalances in the global economy, we are vulnerable to a trade war.
Given the level of confidence in China, we are vulnerable to an asset collapse there.
Given the fickle nature of financial markets and the risks outstanding, we are vulnerable to a generalized decline in confidence.
Given a host of structural issues (prospective new wave of defaults, unemployment, monetary/fiscal exit) we are vulnerable to a double dip.
As we found out so painfully in 2008. Confidence is fleeting. We know and can see the vulnerabilities in the system. What we don't know is when the positive will turn to negative.
So, where are we vulnerable. And, what are we vulnerable to.
Given the amount of debt outstanding, we are vulnerable to a rise in interest rates.
Given the fragility of the recovery, we are vulnerable to a rise in oil prices.
Given the trade imbalances in the global economy, we are vulnerable to a trade war.
Given the level of confidence in China, we are vulnerable to an asset collapse there.
Given the fickle nature of financial markets and the risks outstanding, we are vulnerable to a generalized decline in confidence.
Given a host of structural issues (prospective new wave of defaults, unemployment, monetary/fiscal exit) we are vulnerable to a double dip.
As we found out so painfully in 2008. Confidence is fleeting. We know and can see the vulnerabilities in the system. What we don't know is when the positive will turn to negative.
Friday, March 12, 2010
Vacuous mouthpieces
I feel sorry for the likes of anyone who heads-up a confidence game (financial CEOs, central bank chairman, country heads), because they have to compromise their integrity in order to maintain confidence.
When the system/company/country's wellbeing is predicated upon maintaining confidence, then they reason that it is worth compromising their personal integrity (or belief) for the greater good, and the potential of getting through the crisis du jour.
However, after calamity strikes, they are seen to be vacuous mouthpieces.
Even though I think there is some truth to this, I think it is also somewhat unfair. We knew they were compromised, but we chose to turn the other way, because it also served our purposes as well.
When the system/company/country's wellbeing is predicated upon maintaining confidence, then they reason that it is worth compromising their personal integrity (or belief) for the greater good, and the potential of getting through the crisis du jour.
However, after calamity strikes, they are seen to be vacuous mouthpieces.
Even though I think there is some truth to this, I think it is also somewhat unfair. We knew they were compromised, but we chose to turn the other way, because it also served our purposes as well.
The "self" dilemma
We face a dilemma of sorts. Call it a selfish dilemma.
While it may benefit me personally for the government and the Fed to continue stimulating the economy, it is not necessarily in the best long term interests of the country to do so.
Therein lies the dilemma. At a personal level, it makes absolute sense for me to support the government's stimulus efforts. I am a large beneficiary, albeit indirectly, of the bailout. The rise in the markets has increased my company's AUMs, thereby solidifying its financial position, thereby bolstering my employment situation, thereby helping provide food, shelter, and clothing for my family (and indirectly those from whom I purchase those goods).
By stimulating at the scale that they have, authorities are effectively rolling the dice and hoping that it will somehow solve our problems. It might, but most likely it won't.
While it may benefit me personally for the government and the Fed to continue stimulating the economy, it is not necessarily in the best long term interests of the country to do so.
Therein lies the dilemma. At a personal level, it makes absolute sense for me to support the government's stimulus efforts. I am a large beneficiary, albeit indirectly, of the bailout. The rise in the markets has increased my company's AUMs, thereby solidifying its financial position, thereby bolstering my employment situation, thereby helping provide food, shelter, and clothing for my family (and indirectly those from whom I purchase those goods).
By stimulating at the scale that they have, authorities are effectively rolling the dice and hoping that it will somehow solve our problems. It might, but most likely it won't.
Thursday, March 11, 2010
You've got that incessant feeling...
The market has that incessant feel to it.
Incessant, because every day, no matter what, it is going up.
Its incessancy is dragging in the sideliners.
Positive data is convincing folks of its legitimacy.
It is hard to know when this worm will turn.
But it certainly feels as though it is setting itself up for a nice trade on the downside.
Need to be patient and disciplined.
Incessant, because every day, no matter what, it is going up.
Its incessancy is dragging in the sideliners.
Positive data is convincing folks of its legitimacy.
It is hard to know when this worm will turn.
But it certainly feels as though it is setting itself up for a nice trade on the downside.
Need to be patient and disciplined.
Friday, March 5, 2010
Healthcare issues
Here are what I see as the biggest healthcare issues:
(1) High healthcare costs - due to everyone supping at the trough.
(2) Lack of universal coverage - creates insecurity.
(3) Lack of transportability - reduces flexibility.
(4) Doctors paid too much - this is hard because they study for so long and those costs are huge, but the reality is that US doctors are way overpaid relative to doctors in other countries; implication is fewer people entering the profession (now that could be a problem).
(5) Drug companies and medical device companies make too much profit - by allowing medical companies to charge a market rate the US is subsidizing the rest of the world's healthcare costs, but to control domestic expenses the US needs to manage medical company profitability kind of like it does with utilities.
(6) Legal framework increases costs - so many issues and problems here; one nasty by-product is the overprescribing of procedures and medical services (also related to the conflict of interest between the doctors fiduciary duty to their patient and their desire to make money).
(7) Multiple payers creates an administrative mess - not to mention duplicative administrative costs.
(8) US consumers won't accept "no" for an answer - resources are limited and there are constraints in any system.
(9) Too many vested interests supping at the trough - makes the development of good policy unlikely.
There are no easy solutions for the country's problems. Solving one problem leads to a compounding of other problems. The problem with instituting a universal healthcare system is you are creating a massive new entitlement program. If you were to go this route, you would need to manage everyones margins in the system and the only way to do that effectively is through a single payer entity.
(1) High healthcare costs - due to everyone supping at the trough.
(2) Lack of universal coverage - creates insecurity.
(3) Lack of transportability - reduces flexibility.
(4) Doctors paid too much - this is hard because they study for so long and those costs are huge, but the reality is that US doctors are way overpaid relative to doctors in other countries; implication is fewer people entering the profession (now that could be a problem).
(5) Drug companies and medical device companies make too much profit - by allowing medical companies to charge a market rate the US is subsidizing the rest of the world's healthcare costs, but to control domestic expenses the US needs to manage medical company profitability kind of like it does with utilities.
(6) Legal framework increases costs - so many issues and problems here; one nasty by-product is the overprescribing of procedures and medical services (also related to the conflict of interest between the doctors fiduciary duty to their patient and their desire to make money).
(7) Multiple payers creates an administrative mess - not to mention duplicative administrative costs.
(8) US consumers won't accept "no" for an answer - resources are limited and there are constraints in any system.
(9) Too many vested interests supping at the trough - makes the development of good policy unlikely.
There are no easy solutions for the country's problems. Solving one problem leads to a compounding of other problems. The problem with instituting a universal healthcare system is you are creating a massive new entitlement program. If you were to go this route, you would need to manage everyones margins in the system and the only way to do that effectively is through a single payer entity.
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