Saturday, December 3, 2011

Higher bond prices and lower yields will continue to put pressure on one of my favorite sectors, life insurance, as the marginal returns on cash flow disappoint relative to expectations.

The euro is weakening on rumors of a Spain downgrade.

The correlation between the S&P and 'Three Peaks and a Domed House' remains intact.

I still see a hard landing as a possible outcome for China.

"It's about people. People who lie. And people that are faced with the agony of telling the truth.... The closer they get the more frightening it becomes.... Soon you will know."

-- The China Syndrome (trailer)

Jim Cramer is optimistic on China, believing that policy introduced on Thursday will be growth-inflating. He believes that this is "the beginning of a loosening of Chinese interest rates, if we are to believe that the long-awaited interest rate cut is here, then there are plenty of stocks to own [in China]."

I respectfully disagree.

Last night, the official November China Manufacturing PMI fell to 49.0 from 50.4. This means that the manufacturing sector is now declining for the first time since early 2009. New orders were weak, and backlogs are deteriorating in the face of tightening moves months ago and in light of Europe's economic weakness. (U.K. manufacturing fell to 47.6 in November, the lowest read since June 2009 and the swiftest drop in over two and a half years. New orders were down for the sixth consecutive month. The final Markit Eurozone manufacturing PMI also marked contraction, falling for the fourth consecutive month in a row at 46.4 vs. 47.1 in the prior month.)

Wednesday's 50-basis-point cut in reserve requirements was widely interpreted as China will experience a soft, not hard, landing.

I am less convinced, and I still see a hard landing as a possible outcome.

First, from a microeconomic and macroeconomic standpoint Chinese reporting is opaque. I don't even know if we should believe China's economic reports. (Herb Greenberg has consistently reported how opaque and, at times, how fraudulent individual companies' reporting is.) We shouldn't be surprised that the accuracy of the government reports might be flawed. Importantly, the transparency and health of China's banks, the principal mechanism for the transmission of credit, remain vague and difficult to gauge -- as do the legendary empty cities of unoccupied apartments and homes in China.

Second, 20% of China's exports are to Europe. There is no policy in China that is capable of controlling the deepening recession in that region. We already are witnessing a fast deterioration in trade into the eurozone, as evidenced by the 40% drop in China to Europe shipping rates since Labor Day.

Third, given falling exports to Europe (above), China's catalyst for growth falls increasingly on its consumer. But, unique to emerging markets, China's domestic personal consumption expenditures as a percentage of GDP is falling hard as savings soars. Presently, personal consumption in China is 34% of GDP; 10 years ago it was over 40%. By contrast, consumption at Brazil is over 50% of GDP and in our country it is 71%.