Interesting article in the WSJ today about growing inflationary pressures in China. Inflation has been accelerating in the country, rising above 5% despite the government's efforts to slow price increases. The one-year lending rate now stands around 5.8% and the government has repeatedly increased the reserve requirements for banks in an effort to slow growth. Stoking inflation is rising commodity prices, which the country imports in large quantities, and an effort to raise wages to spur domestic consumption. The minimum wage in Beijing increased 21% last month after a 20% increase in June. The government is also resorting to price controls in order to offset rising prices however, this action hurts producers exposed to rising costs.
My takeaway is that pressure continues to build to allow the yuan to increase relative to the dollar, which will eventually be loosened. The government worries about "hot money" rushing into the country in anticipation of a rising yuan, but the longer they delay the more pressure is likely to build. The question becomes whether this ends happily with Chinese inflation abating while the economy continues to grow, or badly with hot money over-heating the economy before a spectacular crash that likely takes down the world economy. In my opinion, they would be smarter to start chipping away at the obvious imbalance now before it overwhelms their ability to cope with it.
Under my sagflation theme, I argue that price bubbles are likely to occur due to the U.S. government's aggressive monetary policies. Since the Chinese are keeping the yuan artificially low relative to the dollar, they are in essence importing our expansionary monetary policies. It is a little scary to think an entire country the size of China could become a bubble, but I believe that is likely what will happen over the next year. How to play this bubble is going to be challenging since the Chinese government could allow the yuan to rise, increase interest rates, or some other centrally controlled effort to tamp down prices. So far, I'm betting the government lets the good times roll any way possible, which means encouraging domestic consumption and trying to actively manage prices through controls. These policies should make my investments in CHOP and EDS perform well, but when to get off the train will be a critical decision.
Showing posts with label CHOP. Show all posts
Showing posts with label CHOP. Show all posts
Thursday, January 6, 2011
Thursday, December 30, 2010
December Performance - Up 8.5%
For December the balance increased 8.5%, after all fees and dividends received. The performance exceeded the increase in the SP 500, which increased 6.5%. By the end of the month I moved to a more conservative portfolio with almost 30% in cash. For the quarter the value of my IRA increased 13.4% relative to the 10.3% increase in the SP 500.
The largest position remains the inverse 20+ year Treasury ETF (ticker TBT) at 14%. Commodities also account for a significant portion of the portfolio, with the agricultural market basket (ticker DBA) at over 11% and palladium (ticker PALL) growing to 6%. The geographic positions each account for over 4%, with Matthews China Fund (ticker MCHFX) at 9%, Chile (ticker ECH) at just under 5%, and Hong Kong (ticker EWH) at just over 4%. For individual stocks the largest position is Citigroup (ticker C) at just over 4%. The weightings highlight an on-going belief that debt costs likely continue to rise in the U.S., benefiting banks, and commodities and inexpensive manufacturing likely outperform the market, in general.
Every position but two increased during the month, highlighting the breadth of the market rally during the month. GT Solar (ticker SOLR) bounced back after a weak November, increasing 33% up until I sold the position on December 22. American Axle and Manufacturing (ticker AXL) and MKSI Instruments (ticker MKSI) both increased almost 20%.
My positions focused on China underperformed during the month, which I believe is largely due to concerns about a rising interest rate environment. While a short-term concern, I remain confident these positions should perform well due to healthy trends in the Chinese economy and increasing pressure to allow further appreciation in the yuan relative to the dollar.
After such a strong run in December and spotty U.S. economic indicators (notably housing and unemployment causing concern), I expect somewhat of a pullback in the market in the first half of January. I plan to use this anticipated pullback to re-enter positions at more attractive prices.
The largest position remains the inverse 20+ year Treasury ETF (ticker TBT) at 14%. Commodities also account for a significant portion of the portfolio, with the agricultural market basket (ticker DBA) at over 11% and palladium (ticker PALL) growing to 6%. The geographic positions each account for over 4%, with Matthews China Fund (ticker MCHFX) at 9%, Chile (ticker ECH) at just under 5%, and Hong Kong (ticker EWH) at just over 4%. For individual stocks the largest position is Citigroup (ticker C) at just over 4%. The weightings highlight an on-going belief that debt costs likely continue to rise in the U.S., benefiting banks, and commodities and inexpensive manufacturing likely outperform the market, in general.
Every position but two increased during the month, highlighting the breadth of the market rally during the month. GT Solar (ticker SOLR) bounced back after a weak November, increasing 33% up until I sold the position on December 22. American Axle and Manufacturing (ticker AXL) and MKSI Instruments (ticker MKSI) both increased almost 20%.
My positions focused on China underperformed during the month, which I believe is largely due to concerns about a rising interest rate environment. While a short-term concern, I remain confident these positions should perform well due to healthy trends in the Chinese economy and increasing pressure to allow further appreciation in the yuan relative to the dollar.
After such a strong run in December and spotty U.S. economic indicators (notably housing and unemployment causing concern), I expect somewhat of a pullback in the market in the first half of January. I plan to use this anticipated pullback to re-enter positions at more attractive prices.
| 31-Dec | Dec. | ||
| Name | Ticker | % Portfolio | Chg |
| RF MICRO DEVICES INC | RFMD | 0.0% | 11.3% |
| KULICKE and SOFFA INDS INC | KLIC | 0.0% | 12.1% |
| HUNTSMAN CORP | HUN | 0.0% | 1.3% |
| FREEPORT MCMORAN COPPER and GOLD INC. | FCX | 0.0% | 15.9% |
| GT SOLAR INTL INC COM | SOLR | 0.0% | 33.3% |
| DUOYUAN GLOBAL WATER INC SPONS ADR | DGW | 1.4% | 2.1% |
| JEFFERIES GROUP INC NEW | JEF | 2.9% | 10.3% |
| CA INC COM | CA | 1.8% | 6.8% |
| LYONDELLBASELL INDUSTRIES N V COM CLASS A | LYB | 2.6% | 17.8% |
| CHINA GERUI ADVANCED MATERIALS | CHOP | 3.5% | 5.4% |
| PERKINELMER INC | PKI | 1.9% | 10.8% |
| AMERICAN AXLE and MFTING | AXL | 0.0% | 19.5% |
| CITIGROUP | C | 4.3% | 7.7% |
| EXCEED COMPANY | EDS | 3.1% | (7.8)% |
| MKS INSTRUMENTS | MKSI | 2.8% | 20.3% |
| MULTI SECTOR COMMODITY TR PWR DB AGR | DBA | 9.7% | 11.2% |
| ETFS PALLADIUM TR SH BEN INT | PALL | 6.0% | 14.5% |
| PROSHARES ULTRASHRT LEH BROS 20+ YR TREAS | TBT | 13.9% | 6.5% |
| ISHARES INC MCSI CHILE INVESTABLE MKT INDEX | ECH | 4.5% | 3.9% |
| ISHARES INC MSCI HONG KONG INDEX FD | EWH | 4.3% | 0.2% |
| MATTHEWS CHINA FUND | MCHFX | 9.0% | (2.1)% |
Tuesday, November 30, 2010
November Performance - Up 1.5%
Performance Overview
In November my IRA account balance increased 1.5%, which is after all expenses and fees. The S P 500 was essentially flat. November was a wild ride as the portfolio raced up about 5% in the first half of the month before settling back.
During the month I entered a few more positions, reducing the percentage of cash in the account to about 10%. Domestic equities account for 38%, international equities 23%, commodities 15%, and inverse bond 14%. Within the equity positions, hardware is now the largest position followed by industrial materials. This weighting, coupled with the commodities positions, continues to highlight my opinion that deeper in the economy's supply chain, where I believe inflation is building, is a better place to position investments. In addition, it highlights a large weighting towards international with a large portion of revenue for domestic companies coming from overseas, specifically China and Asia. This weighting reflects my view that inflation, in the form of asset prices, likely continues to grow in this region for the foreseeable future. It also reflects my view that the yuan likely appreciates against the dollar as the Chinese government is forced to loosen the exchange rate in order to lessen inflationary pressures.
The largest drivers of growth in the account came from American Axle and Mfting (ticker: AXL), Kulicke and Soffa (ticker: KLIC), Huntsman (ticker: HUN) and ETFS Palladium (ticker: PALL). Each are positions greater than 4% and were up 11%, 11%, 12% and 8%, respectively. The reasons for the increases in AXL and KLIC, in my view, include relatively low expectations coupled with a brightening fundamental outlook. For AXL it appears as though car and truck sales have stabilized and 2011 should provide modest growth within the U.S. and international markets remain bullish. For KLIC the business is quite volatile but the U.S. economy continues to improve and the secular driver of the adoption of more copper components should drive business in 2011. For PALL the improving U.S. economy and robust growth in Asia is driving demand for Palladium.
The worst performances came from GT Solar (ticker: SOLR), MKS Instruments (ticker: MKSI), and China Gerui Adv Materials (ticker: CHOP), which were down 19%, 6% and 4% respectively. GT Solar has suffered from estimate cuts as analysts have fretted over supply growth outpacing demand, especially as government subsidies for solar likely come under pressure. I don't argue against the possible weakening of fundamentals as supply increases, however I believe the demand may prove more robust than expected and a weakening dollar should help the company. SOLR is trading under 6x the lowered consensus EPS estimate for C2011, suggesting a healthy risk/reward. MKSI is trading under 8x the consensus calendar C11EPS estimate, and thus my belief that the economy is improving should prove this valuation conservative. I do expect CHOP to begin to move upward, at the latest, when either production comes on-line mid-2011 or investors' risk appetite increases.
Proshares Ultrashort 20+ Yr Treasuries (ticker: TBT) has moved sideways during the quarter. An interesting tug-of-war is occurring in which Fed Treasury purchases, European contagion fears, and political unrest on the Korean peninsula are raising prices. Alternatively, healthy holiday demand trends thus far by U.S. consumers and rising inflationary concerns in Asia and in the U.S. are pushing prices down. I see the forces pushing the prices up and yields down as temporary in nature, and therefore I expect TBT to perform quite well during 2011.
Summary
The following is a summary of my positions and their performance during November:
In November my IRA account balance increased 1.5%, which is after all expenses and fees. The S P 500 was essentially flat. November was a wild ride as the portfolio raced up about 5% in the first half of the month before settling back.
During the month I entered a few more positions, reducing the percentage of cash in the account to about 10%. Domestic equities account for 38%, international equities 23%, commodities 15%, and inverse bond 14%. Within the equity positions, hardware is now the largest position followed by industrial materials. This weighting, coupled with the commodities positions, continues to highlight my opinion that deeper in the economy's supply chain, where I believe inflation is building, is a better place to position investments. In addition, it highlights a large weighting towards international with a large portion of revenue for domestic companies coming from overseas, specifically China and Asia. This weighting reflects my view that inflation, in the form of asset prices, likely continues to grow in this region for the foreseeable future. It also reflects my view that the yuan likely appreciates against the dollar as the Chinese government is forced to loosen the exchange rate in order to lessen inflationary pressures.
The largest drivers of growth in the account came from American Axle and Mfting (ticker: AXL), Kulicke and Soffa (ticker: KLIC), Huntsman (ticker: HUN) and ETFS Palladium (ticker: PALL). Each are positions greater than 4% and were up 11%, 11%, 12% and 8%, respectively. The reasons for the increases in AXL and KLIC, in my view, include relatively low expectations coupled with a brightening fundamental outlook. For AXL it appears as though car and truck sales have stabilized and 2011 should provide modest growth within the U.S. and international markets remain bullish. For KLIC the business is quite volatile but the U.S. economy continues to improve and the secular driver of the adoption of more copper components should drive business in 2011. For PALL the improving U.S. economy and robust growth in Asia is driving demand for Palladium.
The worst performances came from GT Solar (ticker: SOLR), MKS Instruments (ticker: MKSI), and China Gerui Adv Materials (ticker: CHOP), which were down 19%, 6% and 4% respectively. GT Solar has suffered from estimate cuts as analysts have fretted over supply growth outpacing demand, especially as government subsidies for solar likely come under pressure. I don't argue against the possible weakening of fundamentals as supply increases, however I believe the demand may prove more robust than expected and a weakening dollar should help the company. SOLR is trading under 6x the lowered consensus EPS estimate for C2011, suggesting a healthy risk/reward. MKSI is trading under 8x the consensus calendar C11EPS estimate, and thus my belief that the economy is improving should prove this valuation conservative. I do expect CHOP to begin to move upward, at the latest, when either production comes on-line mid-2011 or investors' risk appetite increases.
Proshares Ultrashort 20+ Yr Treasuries (ticker: TBT) has moved sideways during the quarter. An interesting tug-of-war is occurring in which Fed Treasury purchases, European contagion fears, and political unrest on the Korean peninsula are raising prices. Alternatively, healthy holiday demand trends thus far by U.S. consumers and rising inflationary concerns in Asia and in the U.S. are pushing prices down. I see the forces pushing the prices up and yields down as temporary in nature, and therefore I expect TBT to perform quite well during 2011.
Summary
The following is a summary of my positions and their performance during November:
| Name | Ticker | % Portfolio | Chg |
| RF MICRO DEVICES INC | RFMD | 2.1% | (3.8)% |
| KULICKE and SOFFA INDS INC | KLIC | 4.4% | 10.8% |
| HUNTSMAN CORP | HUN | 4.8% | 11.7% |
| FREEPORT MCMORAN COPPER and GOLD INC. | FCX | 4.1% | 6.9% |
| GT SOLAR INTL INC COM | SOLR | 3.4% | (18.9)% |
| DUOYUAN GLOBAL WATER INC SPONS ADR | DGW | 1.5% | 0.0% |
| JEFFERIES GROUP INC NEW | JEF | 2.9% | 0.9% |
| CA INC COM | CA | 1.9% | (1.3)% |
| LYONDELLBASELL INDUSTRIES N V COM CLASS A | LYB | 2.4% | 8.7% |
| CHINA GERUI ADVANCED MATERIALS | CHOP | 3.6% | (4.3)% |
| PERKINELMER INC | PKI | 1.9% | (0.6)% |
| AMERICAN AXLE and MFTING | AXL | 6.6% | 10.9% |
| MKS INSTRUMENTS | MKSI | 2.5% | (5.9)% |
| MULTI SECTOR COMMODITY TR PWR DB AGR | DBA | 9.5% | (2.1)% |
| ETFS PALLADIUM TR SH BEN INT | PALL | 5.6% | 8.1% |
| PROSHARES ULTRASHRT LEH BROS 20+ YR TREAS | TBT | 14.3% | 2.3% |
| ISHARES INC MCSI CHILE INVESTABLE MKT INDEX | ECH | 4.7% | 1.0% |
| ISHARES INC MSCI HONG KONG INDEX FD | EWH | 4.6% | 0.9% |
| MATTHEWS CHINA FUND | MCHFX | 10.0% | 0.5% |
Thursday, November 18, 2010
China Gerui Adv Materials (ticker CHOP) - Doubling Capacity Next Year
Bought 4% position in China Gerui Adv Materials (CHOP $5.83).
Reasons for Buying
Plans to double capacity by the end of 2011, with the majority of capex completed. Capacity coming on-line mid-2011, providing a growth driver since there is a shortage for cold-rolled steel in China and the company is running at capacity. Until more capacity comes on-line the company has adopted a cost-plus model, protecting gross margins and offering revenue growth from rising steel costs (limited upside growth over next few quarters). Chinese consumer ultimate end-market for product, especially the growing middle class.
CHOP trading at 5x the consensus C11 EPS estimate of $1.13, despite net cash on the balance sheet, healthy cash flow, mid-teens ROI, and growth potential next year. On an EV-to-TTM EBITDA, trading at 3.5x. At this level I am comfortable that the market is more focused on the risks than the returns.
Analysts almost all at Buy/ Strong Buy. Management providing investor conference on December 9, offering a potential catalyst at management details 2011 growth plans.
Concerns
Some delays in construction due to flooding in North China, raising some concern about execution. Exposure to risks in declining commodity prices, foreign exchange, and tightening Chinese monetary policy slowing growth.
Company Description
China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. The Company produces high-end, high-precision, ultra-thin, high- strength, cold-rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The Company sells its products to domestic Chinese customers in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.
Reasons for Buying
Plans to double capacity by the end of 2011, with the majority of capex completed. Capacity coming on-line mid-2011, providing a growth driver since there is a shortage for cold-rolled steel in China and the company is running at capacity. Until more capacity comes on-line the company has adopted a cost-plus model, protecting gross margins and offering revenue growth from rising steel costs (limited upside growth over next few quarters). Chinese consumer ultimate end-market for product, especially the growing middle class.
CHOP trading at 5x the consensus C11 EPS estimate of $1.13, despite net cash on the balance sheet, healthy cash flow, mid-teens ROI, and growth potential next year. On an EV-to-TTM EBITDA, trading at 3.5x. At this level I am comfortable that the market is more focused on the risks than the returns.
Analysts almost all at Buy/ Strong Buy. Management providing investor conference on December 9, offering a potential catalyst at management details 2011 growth plans.
Concerns
Some delays in construction due to flooding in North China, raising some concern about execution. Exposure to risks in declining commodity prices, foreign exchange, and tightening Chinese monetary policy slowing growth.
Company Description
China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. The Company produces high-end, high-precision, ultra-thin, high- strength, cold-rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The Company sells its products to domestic Chinese customers in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.
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