Gotta disagree, I'm a big Jimmy Rodgers fan and you know Jimmy has actually done a huge recalculation on China 6 or 8 months ago he said he would not sell his Chinese stocks even though he though they could go down 30-40 percent as stocks elsewhere around the world would decline 50 percent or more and then stay down for several years.
He liked the long term china story so long he would stay in them. This month he is has evolved his outlook and said that if they went up another 30 - 40% then he would be forced to sell them as Chinese stocks would be a true full blown bubble and valuations had just gotten unsustainably high.
I also agree with Rodgers that the Global Agricultural pricing story of much higher agricultural prices over the next several years is spot on. We will see Wheat Corn, beans, livestock, and other agricultural and soft commodities going several hundred percent higher from here. I absolutely believe that and any one who thinks we've got multi year deflation coming in the agricultural sectors is as wrong as not believing in Metals, and The Energy complex back in 1999 and 2000. Check out Rodgers new Agricultural exchange traded funds Pass the good word on these. I feel very strongly about this.
Next topic.... PetroChina
PetroChina is a poster child of this, it had a Market Capitalization of 230 billion last year and it has surged ahead to pass 1 Trillion!!!!! dollars (first time in human history a stock has had a 1 Trillion dollar market cap) ( Read the seeking alpha excerpt at bottom)
XOM is half of that and has 8 times the revenues of Petro China.
XOM and GE two biggest US market cap stocks together are less than PetroChina. The top for China is very near, the big blow up is at hand. The currency markets are going to see some cross rate moves that will break the global derivatives markets as they will be too great a rate of change. Flordia had an 8 times increase in vacant home occupancy in 2 years.
One of America's pre eminent export industries Hollywood on the west coast and Broadway are on a very mistimed writer's strike. The Recession is here, and economic downturns are occasionally necessary to reduce speculative and unproductive economic activity. It gets the system back where the companies and individuals who are the best of breed and most efficient and capable of adding value to their productive output, are the ones who are left doing it. The Marginal producers and those who came in during the flush time are weeded out.
John
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First PetroChina was almost the largest company in the world [Petrochina 12% away from being the largest company in the World] and then "on paper" with its Shanghai valuation at least it became the largest company in the world by a factor of 2 [Petrochina the $1 Trillion Dollar Company - is this the top?] Perhaps, at least for now - that was the top. Even before last week's sell off, Chinese stocks had been weakening (the week before while everyone was focused on China, I was focusing investments in India, which was doing far better).
seekingalpha.com
fundmymutualfund.com
Chinese Big Caps Struggling Since Petrochina Shanghai Debut
posted on: November 13, 2007 | about stocks: PTR / CHL / EDU / CTRP / WX
Sometimes, in retro
spect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from
The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]
The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]
The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]
And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]
What is consistent is the speculative frenzy, and I have been amazed to watch it move from one sector to another (I left out the 'teflon stocks' in high tech in the list above - the same 'horseman' which go up week after week with no break). Unlike in the late 90s when this speculation was contained to one sector and persistent month after month, we seem to have rolling speculation now - as capital flies from one area to the next.
Whether this is due to hedge funds, retail investors, or simply too much capital chasing too little equity in this world (which I've written entire entries on - thank you Uncle Ben and Uncle Al) - the locust-type nature of a feeding frenzy and then moving on to the next sexy sector for a few weeks, is relentless. I actually like many of these sectors in the long run, but it is very hard to be a "buy at a reasonable multiple" type of investor the way capital flies in and drives prices to levels that make little sense.
You try to make sense of valuations on 'out years' [2010] but then realize you are simply trying to rationalize things that make no sense. And again, I repeat, I like these sectors so am not a basher. Just a basher of the behavior of the markets short term.
The sector that is of interest of late is the Chinese big cap. I have mostly avoided these names because I was thinking a few months ago - $200 billion market cap names surely cannot put in moves of 50-60-70% in a short period of time; the paper wealth creation alone would not be possible.
Well I certainly was wrong. I can understand this action on small cap, low float issues, but when companies are tacking on $200 billion in market cap in a quarter [How to Make 75% in a Quarter], this really is amazing to watch. I've marveled at Petrochina (PTR) the most because I have found it confounding that somehow, a global commodity is somehow worth more if it comes from a company in China than from a company in Saudi Arabia, Venezuela, or the USA. Somehow because a company is based in China, the value of their output is worth more - when the value of their reserves is set in a worldwide market. Strange. But these are strange times. [Shanghai the Mystical Land of Premium Valuations.
First PetroChina was almost the largest company in the world [Petrochina 12% away from being the largest company in the World] and then "on paper" with its Shanghai valuation at least it became the largest company in the world by a factor of 2 [Petrochina the $1 Trillion Dollar Company - is this the top?] Perhaps, at least for now - that was the top. Even before last week's sell off, Chinese stocks had been weakening (the week before while everyone was focused on China, I was focusing investments in India, which was doing far better).
Eventually, with these large caps the law of large numbers eventually hits. It happened to Microsoft (MSFT), it happened to Cisco (CSCO), it happened to Yahoo (YHOO), it happened to Ebay (EBAY), it will happen to Google (GOOG) and Apple (AAPL) (although I'd argue these companies are branching themselves off to new areas so their growth rates can continue at 'above average' for longer than people give them credit).
I listed a slew of tech companies above, but it is irrelevant to sector. Large size makes it harder to grow. And part of the multiple (a large part) awarded to any stock is based on future growth rate. Take China Mobile (CHL). It will add more in one quarter than most cell phone companies worldwide have in total. Impressive. But it is off an increasingly larger base, and hence the growth rate must eventually slow.
This company already has just under a third of all Chinese as its customers. The raw numbers are enormous. And yes it could "in theory" add another 800M customers. But how many more times can it double? And at what point does growth slow? The low hanging fruit is now gone - the urban coastal areas. Next come the rural customers. Two issues - more expensive buildout over a vast geography to get to them and further, they don't have the same income to pay for cell phones... hence lower incremental revenue gains.
And of course China Mobile won't have the market to themselves, already China Unicom (CHU) - a much weaker competitor - has 30% of the installed Chinese base of customers - and there are rumblings that China will allow competition from hard line phone companies. All potential risks. This is not to say China Mobile won't have years of growth ahead - it will, the question is at what pace? And can that pace match or exceed the past? (keeping in mind PE multiple is in large part based on future growth expectations) The simple law of large numbers says no and thus far no company has been able to defeat the law of large numbers.
Now I do assume numbers work the same in Shanghai as they do in the USA.... even if valuations don't.This is why large companies don't double from $500M market cap to $1 trillion (unless you're Petrochina of course and have a listing in the land of mystical valuations) - the growth is just not there after a certain level so the PE multiple contracts.So let's see how the "Big 3" mega cap Chinese stocks (trading as ADRs in the US) have done since Petrochina's Shanghai debut:
Petrochina $257 ->$202
China Mobile $99 ->$85
China Life Insurance $97 -> $83
Again it's been a tough market overall, but even in the week preceding the IPO, Chinese large caps had stalled and were weakening - so perhaps this $1 trillion valuation was one of those 'moments in time', which signaled to investors - whoa, let's think about this for a minute. Ironically all three names have settled nicely just above their 50 day moving averages, so for those seeking a decent entry point to begin a position this might be a good place to begin.
However, keep in mind while growth rates are absolutely stellar on an absolute basis, growth rates going forward will become more and more affected by the law of large numbers. This is why I am staking my Chinese claims in the smaller (albeit expensive) companies such as New Oriental Education (EDU), Ctrip.com (CTRP) and WuXi PharmTech (WX), whose longer term growth rates should be more sustainable at ultra high growth levels.
Disclosure: Long New Oriental Education, Ctrip.com, WuXi PharmaTech in fund; long WuXi PharmaTech in personal |
