Tuesday, May 22, 2012

What Happened?

I returned from China on Friday. Our trip went well. It was very interesting get my feet on the ground in China, to observe the current state of the economy (not just in Beijing - but in secondary cities). Many pundents have proclaimed that China's economy is going to have a "hard landing". Well, I'm not sure about that. What I can tell you is that China's economy has definitely slowed. The pace of building is much less than 1 year ago. In Xian, we saw nearly 100 ( not a typo ) apartment buildings that were half completed, and had no sign of recent construction activity. There were some buildings that were completed but seemed only partly occupied. The pace of infrastructure building was also subdued as compared to a year ago. The central government has recently asked local governments to submit infrastructure projects for fast track approval. Policy makers have also lowered interest rates to spur demand. China's current benchmark interest rate is around 6.5%. All that being said, after two weeks of observation, I think real estate prices have further to fall ( they've been falling for 4 months ) but the underlying economy is still fairly brisk. I'd expect commodities to rally a little over the next 6 months, as demand perks up in China. But don't run out and load up on commodities, they are simply going from expensive to more expensive ( oil not included ).

What happened while I was gone? The S&P is down 8% from the May 1st highs. That's a full blown correction, that, we needed. Also, there were several "blow-ups" over the past 3 weeks, that whacked several companies, taking them way down from April//May highs. These blow-ups could provide some buying opportunities -  subject to further research.

JP Morgan - down 20+% from $46 to $34 on their $2 billion "trading loss"
JC Penney - down 35+% from $42 to $26 on a very bad quarterly earnings report.
Cisco - down 20+% from $21 to $16 on a soft quarter ( and soft outlook )
Lowe's - down 20+% from $32 to $25 on soft quarter and some market share loss to Home Depot

These are very large, well known, companies that collectively have had $20+ billion of market cap wiped out. It's clear the market is jittery of any company that doesn't report stellar results. The market is not willing to look-out over the valley. This kind of market environment(it's the volatility that's good, not the price of the market - it's still pricey) is a value investors dream. Many of these companies will continue to prosper over the long-run and these set-backs shouldn't bother investors with a long-term orientation.

Bank stocks have also come down during this correction. I've added to BAC, yesterday, at $6.85.
It's not a bad time to put new money to work, but at a measured pace - this sell-off could continue for a while.

Disclosure: I own Cisco and Bank of America (BAC)

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