Living halfway around the world, it's hard for most of us to
really know what's happening in China. But more and more, what
happens in that country affects the globaleconomy and stock markets
-- and eventually your portfolio.
We do know the Chinese economy has been through a stunning
multi-decade boom, which has catapulted it past countries such as
Japan and Germany. We also know one other salient fact: Chinese
political leadership continues to stick with a "command and
control" policy, which has, at least until now, been more effective
than many would have suspected. Yet increasingly, that heavy-handed
top-down control is showing signs of deepening trouble -- if media
reports are to be believed.
Some well-known investors, most notably short seller Jim Chanos,
have been insisting for quite some time that the Chinese economy is
in trouble. Yet the monthly data provided by the government point
to continued growth and only hint at small signs of slowing growth.
Then again, Chinese government statistics are more propaganda than
However, in recent weeks and months, the global financial press,
which has a direct presence in China, has been making a repeated
case that China is in far more trouble than many suspect. The
Economist, for example, has written about how an untold number of
newly-built apartment buildings are sitting vacant -- with zero
interest from consumers. [Watch this Australian newsmagazine's
report on China's "ghost cities"
-- you'll be shocked if you haven't seen this before.] More
recently, The New York Times published
, which explains how the country keeps producing goods even in the
absence of demand.
If this report is correct, then it shouldn't come as a surprise.
The Soviet Union showed us decades ago that the entire premise of a
"command and control" economy has one central flaw: Government can
dictate what companies should be producing, but it can't force
consumers to buy them. And without the natural push and pull
mechanisms built into supply chains, manufacturers have no way of
quickly responding to changes in demand.
Paralysis -- at precisely the wrong time
China is gearing up for its once-every-five-years rotation of
political leadership. According to various media reports, there is
a pitched battle between the old guard (which wants to continue the
current command and control policies), and the new guard (which
argues for a more traditional capitalist approach). It's not clear
which side will come to dominate the next era in the politburo, but
it is clear that the government is ill-inclined to make any moves
while the politics heat up.
Sure, China is adding stimulus to certain areas of the economy,
but any moves to boost production would be coming right at a time
when unsold goods are already in abundance. "Let's make more"
hardly seems the wise policy move. China, in its efforts to steer a
soft landing, may be unwittingly steering a course for ahard
landing as it pulls the wrong economic levers.
There is no other stock in my
$100,000 Real-Money Portfolio
that is as vulnerable to China than copper and gold miner
. When I recommended this stock
four months ago
, I noted that global copper demand appears set to exceed supply by
2013, even in a period very weak global economic growth. According
to various forecasts, that still appears to be the case.
Trouble is, we simply have no idea what is happening in China.
We don't know how much the economy is slowing, and more to the
point, we don't know the size of China's copper stockpiles. And if
China stumbles, then what does thatmean for copper prices? Well,
they can surely go lower, as this five-year chart shows.
My head tells me that copper producers are poised to benefit
from constrained long-term supply. My heart tells me that China is
becoming a wildcard that few still seem to recognize. In such a
state, I'm going with my heart.
I recommended this stock at $37 and it is now $36. I simply want
to avoid the prospect of larger losses. The fact that this stock
was below $32 in late July tells me where this stock might return
in coming weeks. Why that number? Because that's where this stock
stood before investors developed a sense that the Federal Reserve
another round of stimulus
to the economy -- which is always good forcommodity stocks in the
How much of the recent gain already reflects the Bernanke boost?
It's hard to say, but it's worth noting thatthe Fed chairman is set
to speak on Friday, Aug. 31, in Jackson Hole, Wyo., and any signs
that he won't take action at the next Fed meeting could cause
commodity stocks to reverse course.
Risks to Consider:
As an upside risk, if the Chinese economy doesn't slow as much
as I fear and if Bernanke indeed gives the economy another round of
juice, then this stock could easily move into the $40s. But that
feels more like gambling than investing.
Action to Take -->
As such, I will sell my 200-share stake in Freeport-McMoran 48
hours after you read this.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of FCX in one or more if its "real money" portfolios.
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