Ed’s Daily Notes for December 23rd   Leave a comment

Bloomberg: Russia Crisis Haunts Deutsche Bank’s Smith Seeing China Bust

China’s push to open up its economy is winning praise from Goldman Sachs Group Inc. to Morgan Stanley and Jefferies Group LLC, which predicted last month a “massive” multiyear bull run for stocks.

John-Paul Smith doesn’t share the enthusiasm.

When the Deutsche Bank AG equity strategist looks at the country, he says he detects some of the same signs of a financial meltdown that led him to predict Russia’s 1998 stock market crash months in advance. China’s expansion is being fueled by soaring corporate borrowing, a high-risk model that needs to be replaced by the kind of free-market measures and budget cuts that fed Russia’s growth in the aftermath of the country’s default and subsequent 44 percent monthly tumble in the Micex Index (INDEXCF), Smith said.

“There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,” Smith said in an interview from London on Dec. 12, a day after he issued a report predicting China’s slowdown will lead to a 10 percent decline in emerging-market stocks next year. “If I am wrong on China, I am wrong on everything.”

Smith’s 2013 call for a drop of at least 10 percent in developing-country stocks has proven prescient. The MSCI Emerging-Markets Index has slid 6.1 percent, trailing the 22 percent rally in MSCI’s developed-markets measure. The Shanghai Composite Index, the benchmark equity gauge in the world’s second-biggest economy, has lost 7.9 percent, heading for its third annual decline in four years. The measure rose 0.2 percent at today’s close after falling for nine days.

Before I say anything else, it should be noted that Smith has made wrong calls before.

That said, I think his call here has potential, but not necessarily for the reasons he stated. If the world economy takes a 180 degree turn, China is extremely vulnerable. I won’t say “sell China”, but I will say keep your Chinese holdings limited, and be ready to head for the exit.

Bloomberg: Supplying Apple Is No Guarantee of Share Boost: Chart of the Day

AppleSuppliers

Having Apple Inc. (AAPL) as your largest client is no guarantee of share-price gains for suppliers and assemblers of iPhones and iPads.

The CHART OF THE DAY tracks shares of Apple and the six suppliers most-dependent on the Cupertino, California-based, company according to revenue proportionality compiled by Bloomberg. Apple shares gained 3.5 percent this year through Dec. 18, while Cirrus Logic Inc. (CRUS), Multi-Fineline Electronix Inc. (MFLX), Wintek Corp. (2384), TPK Holding Co. each plunged at least 30 percent. Taipei-based Hon Hai Precision Industry Co., once the sole-assembler of iPhones, fell 2.2 percent. Only Germany’s Dialog Semiconductor Plc (DLG)’s 11.4 percent rise beat Apple’s.

Apple’s sales growth has slowed the past two years amid stiffer competition from Samsung Electronics Co. and a maturing global smartphone market. Hon Hai, which gets almost half its revenue from Apple, isn’t expected to reach Chairman Terry Gou’s 2013 growth target of 15 percent, while TPK, also based in Taiwan, is poised to post a second-consecutive quarterly sales drop amid lower orders for touch-sensors.

“There’s weaker confidence in Apple’s long-term growth story,” said Vincent Chen, an analyst at Yuanta Financial Holding Co. in Taipei. “Apple often gives pricing pressure to suppliers, but now those suppliers aren’t getting the same benefit of strong sales growth that they had before.”

The moral of the story: Don’t assume a company will get rich supplying Apple with parts.

Fox News: Forget Xbox One: 2014 could be Nintendo’s year

Even though the article above leans toward Nintendo as a victor in the game console wars, I wouldn’t be so fast to declare anyone a winner. How many years has the battle between Nintendo, Sony, and Microsoft been running? For Sony and Microsoft, they could lose this war and not miss a beat, with plenty of other areas to make money. And Nintendo does a pretty good job, so they hang on.

Regardless of who wins, I wouldn’t invest based on any thoughts of a potential winner here.

Bloomberg: Obamacare Initiates Self-Destruction Sequence

If you missed this editorial from Meg McArdle last Friday, it is a must-read.

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Posted December 23, 2013 by edmcgon in Market Analysis, News, Politics, Stocks, Technology

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