The Chinese economy is in an obvious deepening swoon and the median company on the Shanghai exchange had a PE ratio of 60X before the recent break. But no matter. Not only does everything financial race the skyscrapers to the sky in the land of red capitalism, but valuation upside is apparently whatever the comrades in Beijing want it to be. Says Goldman’s chief stock tout for China,“It’s not in a bubble yet.”. Why? Because “China’s government has a lot of tools to support the market.”
A week ago we warned of the odd build up in inventories in GM's parking lots in China. It appears those warning were spot on as WSJ reports, China’s new car sales recorded the first year-over-year decline in more than two years in June, as slowing economic growth and falling stock markets hit the world’s largest auto market. “2015 will be an off-year for the Chinese car market,” said Dong Yang, a vice president for the auto manufacturers’ association, and we note auto dealers are seeing orders cancelled at a frenetic pace as it appears stock margin calls are draining the liquidity car-buyers once had.
"With the drastic fall in share prices recently, social stability is clearly at stake," Credit Suisse says. With the bubble now finished it is only a matter of time before all the 'nouveau riche' farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution.
Despite broad and deep price cuts introduced earlier in the year, GM's sales in China were roughly flat in June continuing the streak of weakness since March (when GM changed its reporting to retail sales from wholesale delivery). This is the weakest start to a year for China auto sales since 2012 and GM's share price is now back notably below its 2012 IPO price. Judging by the massive volume of cars 'parked' in GM's Shenyang Liaoning lots, it is clear that automakers learned nothing from the last "if we build it, they will come" channel-stuffing inventory surging dysphoria that, among other things, led to their last bankruptcy... if only Chinese buyers would take up the credit terms like Americans.
Judging by the smiling Phil LeBeau who earlier opined of an 8.9% plunge in For F-Series sales that "I don't know if I'd Call that a slowdown," you would think the US Auto industry was killing it. Apart from the fact that all but the most luxurious brands missed expectations, we sum up the month of June's results by nothing the credit-spewed spike in May is now over and domestic car sales are continuing to trend lower. This is the biggest MoM drop since Sept 2014. As Ward's notes, they have now missed expectations for 6 of th elast 7 months...
This wasn't supposed to happen...
What to expect next week.
"Of the subprime vehicle loans bundled into securities, 73 percent now exceed five years, up from 64 percent during the first three months of 2014. 'Because cars depreciate quickly, a borrower is typically upside down or underwater toward the end of a long loan term.' 'The risk is that you extend a loan that a borrower cannot afford over its term schedule. Inching out to 75 and 84 months, I don’t think that has been tested yet.'"
"China, the world’s largest car market by sales, has been the main engine of profitability for the likes of BMW, Daimler’s Mercedes-Benz car division and Audi in recent years, helping paper over structural weakness in Europe. But according to one Chinese dealer representative: “the cash cow is dying”.
Last week the government reported personal income and spending for April. After months of blaming non-existent consumer spending on cold weather, shockingly occurring during the Winter, the captured mainstream media pundits, Ivy League educated Wall Street economist lackeys, and Keynesian loving money printers at the Fed have run out of propaganda to explain why Americans are not spending money they don’t have. The corporate mainstream media is now visibly angry with the American people for not doing what the Ivy League propagated Keynesian academic models say they should be doing. An economy built upon the consumption of iGadgets, Cheetos, meat lovers stuffed crust pizza, and slave labor produced Chinese baubles, along with the production of enough arms to blow up the world ten times over, and the doling out of trillions to the non-productive class, is doomed to fail.
Welcome to the new normal... The "if we build it (and offer credit to anyone who can fog a mirror), they will come" economy. While LeBeau and his cronies are cock-a-hoop over auto sales (no matter how those sales are achieved), it seems the carmakers are way ahead as the value of cars on the sidelines (inventories) has never, ever, been greater than now.
It has been a mostly quiet overnight session with Europe solidly green on another bout of Greek hope even as Bundesbank's Weidmann warned that Greek insolvency risks are rising and Greece reporting that its unemployment rose once more from 26.1% to 26.6% in Q1, in which we got two more rate cuts by New Zealand (which sent the Kiwi crashing the most since 2011) and South Korea (the Won initially dipped only to rebound) but China stole the stage with its latest report on retail sales, industrial production, and fixed investment all of which showed a modest bounce from multi-year lows suggesting the PBOC's attempts to shock the economy into growth may be starting to work (which is bad news for the market).
Why has the dollar jumped in recent weeks? Global conspriacy and lies? Are thousands of investors and participants being deluded?
"The elderly dependency ratio is in the early stages of a relentless rise that doesn't hit an interim peak until around 2036, over two decades from now." The "structural shift" in the dynamics that drove the economy and financial markets in the 80's and 90's will not likely exist again for quite some time. Of course, if this was not the case, would we still be needing massive Central Bank interventions to support global economies and markets? Meh? What could possibly go wrong? [sarcasm alert]