Stockscom Report for Sunday Oct 19 2003

Publisher: Colin Alexander     Editor: Ken Wilson

Subscriptions and Administration: Pierre Fichaud (toll-free: 866-487-9711)

 

• Mr. Bush goes to Bangkok
• Equity markets continue their ambiguity

 

Market Synopsis

 

Today in Bangkok President Bush met the second most powerful man on earth and the one most likely to succeed him. His name is Hu Jintao, the Chinese President and whereas before China was regarded with some disdain as a distant purveyor of cheap electronics and home to peasant farmers wearing funny hats, today's China is a big moving target on the American protectionists' radar screen.

 

It is no surprise that China has been growing for years. Ever since Deng Xiapeng led Chinese reforms overturning the backward Marxism of Mao Tse-Tung's system starting in 1976, the next big economic boom was expected to be heard coming from China. However, the evolution within a communist state was less than smooth at times and development was slower perhaps than expected. Much has changed with the ascension of China into the WTO in 2001.

 

The China of 2003 is vastly different. While world growth is barely above stagnant, China is responsible for an even greater proportion of world growth these days and though there are certainly large amounts of exports from China to the US, in fact imports from mostly other Asian countries account for a faster growing portion of the trade total. In the first three quarters of this year, China's trade surplus amounted to only US$9.1 billion, down US$10.9 billion year-on-year. As suggested by this statistic, expectations are that 2004 will see China post a trade deficit with its trading partners.

 

So where is this growth coming from? China is seeing manufacturing growth for refrigerators, air conditioners, cars grow by 20 percent to 50 percent this year compared with 2002. Their voracious appetite for metals such as copper, nickel, platinum and others is increasing by 25% y-o-y in some cases, fueling the production of telecom equipment, industrial machinery, transportation equipment and chemicals. According to the National Bureau of Statistics, the output of automobiles surged 69.7% in September from a year earlier to 191,300 vehicles, while output of all kinds of vehicles rose year-on-year 36.8% to 427,600. Or, if we were to look at the cell phone market, there are 36 Chinese manufacturers of cell phones and the domestic market represents 50% of their sales. The market for mobile phones continues to grow in China with the number of users reaching 250 million through August of this year. In comparison, the total number of phone subscribers either land line or mobile, numbers 472 million meaning that fully 53% of all phones are mobile. Overall, for the first nine months of 2003, industrial output grew a y-o-y 16.5% to 2.89 trillion yuan (US$349.1 billion).

 

Another means to express the magnitude of Chinese manufacturing is to look at steel. The United States is an $11 trillion economy. China's measures about $1 trillion. But the steel industry in China is bigger than the U.S. and Japan combined. And they still have to import stainless steel and nickel!

 

On Friday, the Chinese National Bureau of Statistics announced that the Chinese economy grew by an impressive 9.1% in the third quarter and that the final cost to GDP from SARS was 0.8%. The World Bank is already on record that they expect China to be the top performer in the world for 2003 with GDP growth around 8%. So far in 2003, overall GDP checks in at 8.5% and it is worth noting that inflation at 0.7% for the first nine months, is far lower than one would expect given this growth rate.

 

The Chinese have the incurred the wrath of American protectionists for being able to produce goods cheaply that displace American products. While there is no secret that Chinese labor costs are a small fraction of those paid to American workers, the protectionists have taken aim at the currency rate as an unfair trading advantage. Republican lawmakers are leading the charge to impose tariffs on Chinese goods assuming that they can prove that China manipulates its currency. The Yuan is currently pegged at roughly 8.3 to the US$ - ironically the peg was initiated in order to stabilize the region following the Asian currency crisis in 1997.

 

For the first 6 months of the year the trade surplus with the US amounted to $23.5 billion. This amount was added to the Chinese foreign exchange reserves, which reached $384 billion by the end of September, an increase of 48% from last year. And this money is invested to a large degree in US Treasuries, which necessitates the large-scale purchase of US$. Moreover, what the protectionists don't discuss is how buying US Treasuries supports the US$ and prevents interest rates from galloping higher. The risk with these misguided politicians is that if the Yuan were allowed to float freely and appreciated in value, it could potentially have the undesirable effect of encouraging Chinese investors to park their money in some other investment vehicle rather than the US Treasuries and once left unsupported, the US Treasuries would require higher interest rates to attract buyers. With an economic recovery as fragile as this, higher interest rates are the least desirable alternative.

 

So our man in Washington went to the APEC conference and in a private meeting with Hu, managed to coerce (beg?) the Chinese leader into agreeing to a joint committee that would look at exchange rate policy and how the Yuan might be floated. Truth be told, the Chinese will move to float the Yuan when they're suitably prepared and neither the US nor any other country will dictate to the Chinese any sort of timetable for implementation. The fact is that the US has been and continues to be the proverbial 800-pound economic gorilla, but China will soon be its 1600-pound cousin.

 

 

This week brought out more good news indicative of a recovery both in manufacturing and jobs plus the beginning of earnings season saw upbeat forecasts from the likes of IBM, which intends to hire 10,000 new employees in 2004 and Intel, which surprised investors with a strong earnings report. But despite the lower number of first time claims for unemployment and an industrial production report that was far better than in the recent past, stocks refused to go much higher. The large swings down on Friday suggest that the markets are nearing tops and that one should be cautious about putting new money in. With the rise in stock indexes that we've seen, it would not be unexpected to see a substantial retracement at this point.

 

New Buy Recommendations:

 

None.

 

New Short Sales

None.

 

Stock Positions to Sell/Exit:

 

New stops have been added to the list while others have been modified. Those that have blanks, are being carried unstopped for now. Please see our complete list of stops in the table below.

 

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

Stocks marked # are eligible as Canadian content in Canadian RSP funds. Otherwise there is a 30 percent restriction on foreign stocks held in these accounts.

Date of Entry	Name	Symbol	Entry Price	Current Price	Stop	Action Rating
09/29/03	AES	AES	7.50	8.03		H
10/06/03	Align Tech	ALGN	13.46	15.21		H
08/25/03	Bema Gold	BGO #	2.15	2.93		B
09/29/03	China Unicom	CHU	8.18	9.17		H
10/06/03	Citrix	CTXS	24.31	25.76	23.17 *	H
05/12/03	Cott Corp	COT #	20.02	26.50	22.98	H
10/06/03	CP Ships	TEU #	21.49	22.27		B
10/06/03	Digital River	DRIV	29.88	31.65	28.97 *	H
09/08/03	Sapient	SAPE	3.72	5.14	4.00	H
04/28/03	TransCanada Pipe	TRP #	15.85	19.67	17.40	B

 

* Stop on a closing basis