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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


On Earnings Season and China

Retz Reeves

It’s high-point in mid-year earnings reporting season. I carried my coffee and Wall Street Journal into my office. Setting the cup on the far side of the desk, I booted up my lap-top and opened the desk drawer.

Aspirin – check – antacid – check. Okay, I was ready.

Since the Frigate Folio invests in international companies, by 9:00 AM I should know all the salient news released over night and start digesting them into my models. Earnings reports don’t normally trigger changes in Frigate positions, but managements typically use this opportunity to update their outlook and communicate changes in strategy – important items to consider given this volatile environment. And it has been a volatile environment – middle-eastern unrest, fluctuating currencies and commodity prices and faltering emerging markets.

I swiveled to view the monitor. Oh, Oh. The screen was blank – no little Icons have popped-up on my desktop. I reboot and check the bottles in my drawer again; both are at least half full. Now the writing across the screen tells me that a system file is missing; it is a fatal error.

“NO, NO, NO!” I yelled at the screen. That didn’t work. “Great, just Great. “ I pulled out my back-up drive. Yes – I have one. I have the dubious distinction of having hard drives crash on me all over the world -once at 30,000 feet when my neighbor spilled coffee all over me and my lap-top. Traveling is so glamorous.

I plugged the drive into the USB port, instructed the computer to restore the system files and opened up the newspapers; it’s going to be a long morning.

CHINA! That’s what called out to me from the pages – and it’s a major concern. Over the past few decades China became a growing part of global GDP as the government supported urbanization and industrialization. Unable to internally source its needs, China imported commodities such as copper and iron-ore driving up prices and creating what has been known as a super cycle. Its growing demand for metals and minerals pulled along the GDP’s of exporting countries and their currencies such as Australia, Canada, Brazil and Indonesia. Eventually, the pendulum swung too far.

I checked my computer screen – a half hour left. I sighed and turned the page.

In a nutshell, China has overinvested and not very efficiently considering the number of reported ghost towns. Overall, China’s GDP’s growth is slowing this year to an estimated 7 1/2% – nice by Western standards but much less than 10% growth in 2010, let alone the 14% achieved in 2007. The impact of the economic slow-down on commodity imports is exacerbated by China’s switch in emphasis from government investment to consumption. With the demand side of the equation faltering, prices of basic commodities have been dropping as well as the currencies of many countries that export them.

Falling exports, commodity prices and currencies can be especially toxic to emerging market countries. Consider 15% of Brazil’s exports go to China. In a different region, Indonesia’s rupiah and stock market have been under pressure as prices for palm oil and coffee have fallen. Indeed, in its July World Economic Outlook update the World Bank dropped growth expectations for Emerging and Developing Economies by .3% to 5% for 2013 and 5.4% for 2014. Still the World Bank upgraded its 2013 projection for Japan and the UK and all in all is estimating that global growth will accelerate from 3.1% in 2013 to 3.8% in 2014. We shall see.

Ah ha! The system files were restored. I just needed to copy my research files from where they were backed-up and start evaluating the mid-year company reports. This is going to be a very interesting reporting season. And I think it is time to buy a new computer.

I wonder if it will be made in China.