Will China contagion infect the U.s.?

Standard

china pic2

BIGGER NEWS THAN GREECE OR PUERTO RICO

The Chinese stock bubble popping, their economy slowing and China using less resources…that’s a pretty big deal. These things will impact economies, markets and companies.

HOW IMPORTANT IS THE CHINA BUBBLE?

It’s actually a lot less of an impact on U.S. investors than the media lets on. First of all, the major bubble is in “A” shares which American investors can’t even directly own. Those indexes have dropped over 40 percent.

As a comparison, the largest China ETF (exchange-traded fund), the one most U.S. investors would have, has only dropped about 20 percent. The fund is called iShares China Large-Cap (symbol: FXI). It dropped but only half as bad.

This stock run-up, and drop, was mainly caused by heavy margin buying. Chinese investors are accumulating shares with debt, encouraged by their government to do so. The government was still encouraging it during the plummet.

Leveraging like that can be very dangerous. Especially in an over-valued market. The price and euphoria reminds me a lot of the Tech Boom…and Bust. Even the P/E ratio is similar, a little over forty. This is very high for any major index. The higher this climb, the more over-valued the shares, the harder the drop will be.

CHINA IS BEGINNING TO EXPERIENCE AN ACTUAL “NEW NORMAL”

Bill Gross should be happy now. There is a dynamic economy experiencing his vaunted new normal. It’s just not the U.S. like he predicted. It’s China having the slow-down. The government even conceded, in their estimates, that the economy will “only” grow at 7.5% a year for the near future. This is lower than their previous double-digit GDP growth.

MORE AMERICAN COMPANIES EXPERIENCING REVENUE DECLINES

Besides the weakness in commodities like copper, which China is the largest user of, there are many drops in multi-national company sales. Not all of it’s caused by the overseas slowdown but it must be impacting revenue somewhat.

There could be opportunities in natural resources, China and other Chinese “plays” like Australia. I haven’t fully looked into these yet but, if the drop continues, it could make those investments more attractive. And I certainly wouldn’t bet against this giant economy for the long-term.

Advertisements

does greece matter?

Standard

Greece flag

GETTING RID OF GREECE ANXIETY…

I recently wrote an article about the importance, or lack of importance, of Greece to the U.S. economy. First off, Greece is a wonderful country, having contributed a lot to modern life. Things like democracy, Western philosophy. Big things. But one stat I included in the article sums up their impact on the U.S.:

* Annual U.S. trade with Greece is about one day’s worth of China/U.S. trade

Total annual imports and exports between Greece and America are about $1.821 billion. Total annual trade! Total U.S./China trade for the same year, 2014, was $590 billion. Almost 324 times more trade activity with China!

So forget that anxiety being fed to us by the media. The worse it gets over in the Euro zone the better our economy and market looks to investors. And, since the markets are ultimately a popularity contest, their problems could boost our strength.

The bigger issue could be China’s current problems. I’ll leave that for another post.