Monday, August 3, 2009

China Purchasing Managers Index Leads the Way; India Expands as Well

First a quick note - as predicted in our weekly missive; we did indeed push through S&P 1000 and chatter among traders is the excitment over "car sales" (why the surprise is beyond me). Some of these things are so predictable... again, I will repeat in the old type of market this would be setting us up for a reversal - we broke through a key level, complacency is now high, everyone is bullish, bears dispirited - blah blah. I have no idea yet how the new market works since I am still adapting to the age of the microchip.


As with everything governmental let us take these figures below with large degrees of salt. While directionally I am sure the Chinese figures are correct, the exact number is anyone's guess. The premarket exuberance today appears to be related to the Chinese Purchasing Managers Index which expanded yet again... yet another figure that I am astounded people are constantly "surprised" by - maybe we are just keeping track of the world too close here at Fund My Mutual Fund, hence it is hard to be surprised by things we've been discussing for months. Why the "shock and awe" of the Chinese PMI considering the massive amount of loan growth we've discussed ad nauseum is beyond me. But for the 4th time in as many months we surge premarket on the "surprise" - Groundhog Day anyone? [Jun 10, 2009: Chinese Economic Reports Supplant US Reports in Importance]

This must be at least the 10th time in the past 3 months the market has gapped up overnight based on a Chinese economic report. Yesterday we touched on car sales [Chinese Car Sales Jump 47% Year over Year on Subsidies], but today the happiness across the globe comes from a positive property report. The problem with all these "gaps" is you have to be invested overnight to take advantage of them.

For decades when the American market led, the rest of the world would follow. If the US had a strong day, many emerging markets would "gap up" and follow. The great irony is how the shoes have reversed so quickly - each time China jumps overnight; now America gaps up. Sort of like an oligarch dominated, emerging market. Imagine that.

I guess go forward we need to focus more on all the Chinese economic reports... as the US economic reports are so 20th century.

The key in the report below; and the one from India as well (with a similar story) is how the loan growth is stoking internal Chinese demand. However, the export market is still lagging. Perhaps a "Cash for Chinese Goods" program in the US will fix that?

Via Bloomberg
  • China’s manufacturing expanded in July as record lending and a 4 trillion yuan ($585 billion) stimulus package stoked a recovery in the world’s fastest- growing major economy. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June.
Again let me stop here and say (a) I believe this report is about 4 years old - i.e. very little historical context and (b) how one accurately measures economic activity mere days after the month ends in an economy so dispersed as China is beyond me. But I could say that 3 years ago or 3 years from now - in the market we take our gospel from government reports and run with it. I am sure pushing these loans through a python is creating economic activity. Down the road we must ask, to what end? (well technically we don't need to ask it - the market isn't)
  • Chinese manufacturing “continues to accelerate and, importantly, orders growth is being driven by the domestic economy,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. Overseas demand “remained lackluster,” he said.
  • China’s credit boom has countered a collapse in trade....
  • Output and new-order indexes climbed in the CLSA study, which also showed inflation pressures building as measures of input and output prices jumped.
  • The explosion in credit is stoking concern that the recovery may come at a cost of bad loans, bubbles in stocks and property and resurgent inflation.
Interesting tidbit
  • China’s economic rebound, driven by $1 trillion of new bank loans in the first half, may help the nation to overtake the U.S. as the world’s largest manufacturer by 2015, according to forecaster IHS Global Insight.

While India gets about 2% of the coverage of China, they also showed expansion (for the 4th month) - similarly, government supported. (somewhere Keynes is clapping)
  • India’s manufacturing output rose for a fourth month in July as higher government spending and lower interest rates boosted domestic demand, a key gauge showed. Markit Economics’ Purchasing Managers’ index stood at 55.3 in July, unchanged from June, according to a report released today. It was the fourth monthly reading above 50, which indicates factory production increased.
  • The domestic market remained the main driver of economic growth in July, though demand from abroad did pick up slightly, according to the report.
Now when you actually have your fiscal house in relative order you can take steps like these below and not sacrifice generations of grandchildren.
  • The government has lowered the tax burden on individual incomes and reduced taxes for companies hit by shrinking profits due to a slump in exports.

And as long as we're over in that part of the world - let's throw in Australia
  • Australian manufacturing contracted in July at the slowest pace since September, adding to signs that government spending and the lowest borrowing costs in half a century are stoking demand.
  • The performance of manufacturing index rose 6.1 points from June to 44.5, the highest level in 10 months, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today. A reading below 50 signals manufacturing is shrinking.
  • Manufacturing, which accounts for 10 percent of the economy, shrank for a 13th consecutive month in July, the report showed.
Australia's manufacturing makes for slightly less of a % of GDP versus the US; they are still shrinking but holding the tail of the tiger that is China.
  • “The easing in the rate of decline in manufacturing activity is encouraging,” said Heather Ridout, chief executive officer of the Australian Industry Group. “Looking beyond the monthly figures, the big question is whether these improvements will be sustained once these stimulatory forces have abated.”
Indeed, that is the question.

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