Insolvency Stalks China's Banks

By ALAN ABELSON | MORE ARTICLES BY AUTHOR

Are China's banks threatened with insolvency? Yes, warns a seasoned global-market watcher.

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Kicking the can down the road. That graphic phrase has captured the fancy of legions of Street sages as a euphemism for deliberately delaying until tomorrow (or many tomorrows on end) what desperately needs to be done today. It's almost exclusively used to describe the proclivity of our civil servants, the president and Congress particularly, to postpone some painful action as far into the future as they, well, can.

Catchy on first hearing, promiscuous use of the phrase has worn it down into a cliché and badly dulled its vividness. Which has not deterred in the slightest those aforementioned sages from uttering it with just as much relish as if they had invented it, which many no doubt think they have.

Of late, the accusation of kicking the can down the road has been expanded to include Ben Bernanke and his troupe, chastising them for continuing their quantitative easing and all the evils it supposedly is inflicting on the economy from debasement of the dollar to providing tinder for an inflationary flare-up. We don't think what the Fed's chairman has been doing is actually kicking the can down the road and so we don't think it's cricket to kick his can for doing it.

Instead, he and his predecessor can unarguably be blamed for their contribution to the catastrophe of the recent past rather than what Mr. Bernanke is purportedly wreaking on the future. Apparently both suffer from a visual impairment, poor chaps, that prevent them from recognizing a bubble when it's expanding right in front of their noses. To make matters worse, after it bursts, they witlessly seek to repair the damage by creating an even bigger bubble, which, of course, they're similarly blind to.

What seems to further enrage their already enraged critics is the aplomb with which Mr. Greenspan and Mr. Bernanke respond to the wretched aftermath of their unfortunate inability to take preemptive action. For example, Albert Edwards of Société Générale in his latest commentary confesses: "Very little surprises me anymore in this business. But even I was surprised by Ben Bernanke's comment on CBS's 60 minutes that he has '100% confidence' that he can act quickly to stop inflation getting out of control."

If there's one thing Ben Bernanke should be 100% confident of, Albert snarls, "it is his own fallibility. Remember, this is the man who was not only adamant that U.S. house prices would not decline, but refuted the very notion there was even a house-price bubble in the first place!"

Albert sighs that he realizes "these guys have to pretend that they know what they are doing, but you would have thought that, having been at the epicenter of the biggest economic and financial crash since the 1930s, he would show a little humility and uncertainty. Apparently not."

Come on, Albert, self-doubt and humility have never been prominent in the lexicon of Washington or Wall Street. And Mr. Bernanke is merely being faithful to that venerable tradition.

THE STOCK MARKET IS CERTAINLY UNPERTURBED by the Fed's determined efforts to keep rates prone. Nor is it bothered by Bernanke & Co's remorseless exertions to pump liquidity into the financial system, hoping, we suppose, some of it spills over into the economy. The same, alas, can't be said for the bond market, which has been taking its lumps of late, as equity fever prompts investors to shave their fixed-income holdings and scramble into stocks.

As we've observed perhaps ad nauseam, the bullish ranks of investors, big, small and in-between, are swelling mightily. Bloomberg reports that a tally of 11 leading strategists who rubbed their crystal balls shows all are bullish for 2011, expecting a gain in the S&P 500 ranging up to 25%-plus (Deutsche Bank) and averaging just shy of 11%. The roster includes some of the same stalwarts as this week's cover story, whose average guesstimate for next year is 10%.

This kind of unanimity is not unique, especially in an investment climate like the present one, which is decidedly hot and seemingly growing more so with every passing session. But to repeat last week's headline on these scribblings, when everyone's bullish -- that's bearish.

HARALD MALMGREN is a savvy gent who runs the Malmgren Global fund, which renders advice to financial institutions, those huge bundles of capital known as sovereign-wealth funds, a number of central banks and governments the world over. Back on Aug. 30, we ran a piece in this space discussing an article by him and a colleague on high-frequency trading, titled "The Marginalizing of the Individual Investor," that was spot on as a critical analysis of the baleful effects of that sordid practice.

So we were delighted a few days ago to find in our electronic mailbox an epistle from Harald updating his views on the global economic and financial scene (more than a little bleak, not to keep you in suspense). For the U.S., he avers, the unrelenting deleveraging of household debt, the rise in the cost of fuel and food, the stagnation of income and the negative wealth effect of a continued decline in home values strongly suggest discretionary spending, which so many economic seers are counting on to spark a quickening of this slowpoke recovery, is more than likely to "disappoint" in 2011.

Nor is he particularly sanguine about the Old World. He points out governments in the euro zone face the rather daunting necessity next year of borrowing close to a trillion euros, including refinancing sovereign obligations and issuing new debt to cover deficits. The European Central Bank itself has been weighing a request for more capital to cover possible weakness in its holdings of euro sovereign debt, and he calculates that the bank is already leveraged by more than 300 times the size of its underlying capital of slightly less than � billion. That makes our Fed, which is leveraged something like eight times, look like the epitome of prudence.

We found especially interesting Harald's take on China. He notes that while investors everywhere have been uneasily eyeing the rise of the inflation dragon in that nation and have anticipated that Beijing would hike interest rates to contain the beast, it hasn't. And the reason why it hasn't, he posits, is that profit margins for many Sino businesses are razor thin, and an abrupt rate boost would mean appreciably higher debt-service costs, really putting the kibosh on profits.

Despite all the global focus on inflation, Harald contends, the big challenge confronting China can be found in the nonperforming loan portfolios of its banks and kindred financial institutions. That enormous pile of deadbeat loans is the legacy of late 2008-2009, when exports dried up and the spooked rulers of the command economy ordered the banks to seriously step up their lending -- no ifs, ands or buts. The banks dutifully complied with an awesome $1 trillion in fresh lending.

Much of that huge mountain of loans has fallen into the nonperforming category, which translates from the polite banking parlance into delinquency, big time. To avoid a financial meltdown, Harald expects, Beijing will raise capital-adequacy requirements substantially during the first few months of 2011, conceivably in incremental steps to cushion the pain. Since he anticipates Chinese banks will have trouble raising capital, he expects a large-scale shrinkage in lending.

Chinese banks, he emphasizes, aren't suffering from insufficient liquidity. Rather, he warns, the danger to the country's banking system is insolvency. In the current lineup of problem banks around the world, he would rank Chinese banks as the most troubled, with European banks next, followed by U.S. banks and Japanese banks probably holding down fourth place.

That's one list on which we are more than happy to find this blessed land of ours isn't No. 1.

THE ECONOMY INCONTESTABLY has been showing more signs of life, and that, of course, has helped juice the market. On this score, last week even brought ostensibly good news on housing starts. To wit: Single-family housing starts in November posted a seasonally adjusted gain 7% over the revised October total.

But, as Mark Hanson, who knows just about everything there is to know about housing, points out, on a seasonally unadjusted basis -- which frequently is much closer to the way things really are -- November starts were actually down 6.1% from October, 4.3% from November 2009 and some 35.4% from April.

Far from signaling a sustainable turnaround, he envisages building permits and single-family housing starts double dipping, as the industry simply can't get hold of any stability in pricing power.

He grants that starts obviously are closer to the bottom than ever before because "the number can't go to zero." But, he insists, there's nothing to suggest starts have to increase much, either, even were lagging household formation to suddenly shoot up. It's an open question, Mark believes, whether home builders will be able to construct houses cheaper than they can sell them, given the formidable overhang in supply and pressure on prices from foreclosures and short sales

And he concludes, somewhat grimly, after five years of declines and bottom calling, the home-builder stocks remain suitable strictly for an occasional trade. 

 

The Seven-Year Switch

By MICHAEL SANTOLI | MORE ARTICLES BY AUTHOR

The year 2004 has served as a useful, if imperfect, touchstone for investors. Some parallels are eerie, some mere coincidence. What it means for 2011.

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When it comes to conjuring what the future will hold through 2011, leave it to an old history major to first recount some relevant themes of the recent past.

With the stock market tickling new highs as an oft-anxious, largely range-bound year sets, we still can say, "This year, the stock market's gains have been capped by sluggish job growth, limited wage gains and concerns about a slowing economy.

"On the upside, however, stocks were bolstered by corporate-earnings growth…[well] above what analysts had forecast a year ago. Due to the one-two punch of low interest rates and heavy government spending, money flowed freely this year. As always, much of it found its way into the riskiest investments, some of which posted the year's best returns."

This was true of the year now ending -- just as it was true in December 2004, when this recap appeared in Barron's market-outlook cover article ("A Bullish Toast to 2005," Dec. 13, 2004).

The year 2004 has served as a useful, if imperfect, touchstone here for at least a year. Some parallels are eerie, some are mere diverting coincidence. As 2004 opened, the Standard & Poor's 500 index had rallied ferociously off a March bear-market low and sat at 1112; this year it began at 1115, having surged even further from its March 2009 bear-market trough.

In '04, it knocked around a narrow path until a late-year rally carried it above 1200 to 1211. This year the ride was similar, if more dramatic, rallying into April and then dropping quickly by 17%, before the late-year rally carried it back above 1200, to a current 1243.

In both years, the consensus entering the year was that Treasury yields should rise and the market would remain volatile. In both years, the 10-year Treasury yield, while jumpy, hardly budged from start to finish, and market volatility plummeted all year, reflecting the numbing effects of heavy liquidity.

Then, as now, the market was up respectably, yet finished at a valuation lower than where it started, with corporate earnings advancing far more than share prices did, even as profit growth was about to decelerate sharply.

Yes, of course, historical analogies go only so far. Hold the e-mails inveighing that in '04, Humpty Dumpty was still on the wall, the credit bubble was still being inflated, that we are now in an economy detached from precedent.

There's no denying the economic hole this time was much deeper, the fabric of the financial markets was torn far more violently, and the observable risks to the global economy today are certainly more daunting.

Yet markets have rhythms tied to the interplay of psychology and the business cycle. And while they are only a rough guide for what to expect, what they aren't is irrelevant. Investors forget that it's better to have the problems exposed and absorbed than to be unaware they're there, fuses burning.

The stock market capitalizes not the absolute level of strength in the domestic economy, nor the mood of the median household, but rather a private profit stream of mostly large, substantially global companies. With the S&P 500 at 1200 six years ago, analysts were looking for $72 in S&P earnings the next year; now, at just above 1200, the consensus is near $95. That still isn't outright cheap, given the contingency of such forecasts and the world's instability, but it certainly isn't a challenge to further upside should the world decline its plentiful invitations to end.

And the psychology on Wall Street now is pretty close to where it was a few years ago―mostly bullish, with a growing collective belief that things have turned for the better, after months of mass frustration over the unsatisfying pace of economic recovery. This is probably a short-term challenge for further market progress.

As this week's cover story sets out, professional market handicappers are collectively quite optimistic about the coming year in stocks, looking on average for handy double-digit gains. In '04, this club was bullish, but not expecting much more than mid-single-digit percentage gains.

The weekly American Association of Individual Investors poll has registered above-average (and lately borderline extreme) levels of bullish opinion for 15 straight weeks. The last streak of such duration was -- guess when -- from August to December 2004.

Without prolonging the suspense, the first part of 2005 was flat to down into April, and then recovered, suffered the scripted autumn pullback before surging into year end for a modest annual gain, giving way to what would be a quite strong 2006.

This would fit with history, too, if something like this course played out next year. Oppenheimer strategist Brian Belski, noting the growing bullishness among Wall Street strategists, points out that a third year of double-digit gains -- implicit in the consensus forecast -- would be an anomaly. Since World War II, there have been 10 back-to-back double-digit advances. Only twice (1951 and 1994) did the streak run to a third year, and the average return in the third year was 1.7%.

BACK TO TODAY: After closing eyes and ears to any signs of possible economic improvement or policy progress for the middle part of this year, as Europe's debt disease and domestic double-dip paranoia were paramount in investors' minds since the election, the standard bullish talking points are on the lips of most market players.

The Fed is pumping money in, which is good if the economy needs it and better (for markets) if it doesn't. Profits are poised to keep growing, the economy has some traction, lower taxes are a boon. And if one more pundit "informs" us that the year after a midterm election is "always" positive, and is the strongest year in a presidential cycle, it might be time for self-defined contrarians to stage a ceremonial burning of the Stock Trader's Almanac in front of the New York Stock Exchange.

This cozy consensus is more a short-term tactical risk to the market than a run-for-help signal, and it ought to be upset by the headlines or a sudden selloff before too long. This would perhaps puncture some prevailing optimism and set the next investment theme on firmer footing.

Against this near-term bullishness remains a heavy and only slowly thawing aversion to risk among the public, and an abiding demand for catastrophic financial-risk insurance. This, along with the fact that the market sits at a level first reached almost 12 years ago, continues to argue that those with a five-year-plus time horizon enjoy tailwinds to their returns.

We are at the point in the market cycle where massive profit recoveries and the reversal of dramatic oversold conditions following a terrible bear market give way to variations on the "greater fool" theory of owning something because someone else is apt to come along and pay more for it.

And so the bullish voices are insisting that nervous stock-avoiders will react to a firm market, tax goodies and signs of economic momentum by slowly reallocating toward stocks. Could be, though this never seems the dramatic swing factor in equity prices that it's made out to be. Consider that the market is up 83% from its March '09 low, and most of the time Main Street was pulling money out.

But one form of "greater fool" investing that appears far more likely to tilt 2011 further to the upside than the baseline case for moderate gains, after a pullback or sideways stretch, is a burgeoning revival of financial engineering: leveraged buyouts, debt-financed buybacks, aggressive growth-seeking mergers and the like, most all equity-friendly.

This would also represent a re-run of the mid-2000s (and the mid-'90s, and the mid-'80s, for that matter). One would hope this action would be carried out with some important lessons learned and a new-found sobriety. Hope for it, but don't bet that way. 

 

Flagging Winds From China

By BILL ALPERT | MORE ARTICLES BY AUTHOR

American Superconductor's recent rapid growth from wind turbines relies heavily on a single Chinese customer, whose inventories seem to be rising.

 

Greg Yurek kept American Superconductor aloft through two decades as a public company, searching for a profitable market for its high-power wire. The company rode the dot-com surge to a $75 share price, then back down to $3.50 as it amassed $400 million in losses and one of the Nasdaq's highest short interests.

Four years ago, the superconductor specialists bought an Austrian firm called Windtec that designs wind-turbine generators. Now, sales are growing at a 70% annual clip, to an expected $450 million for the fiscal year ending March 2011. AMSC supplies China's leading wind-turbine maker in that nation's construction of a great wall of wind power. The stock now trades at $33.48 (ticker: AMSC), valuing the Devens, Mass.-based business at $1.5 billion—equal to some 50 times trailing 12 months' earnings and 23 times cash flow.

Yurek's persistence has been rewarded. "It's growth, growth, growth," says the chief executive, who co-founded AMSC in 1987. "Our revenues are going to continue to grow, going forward. I don't see any slowdown."

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Rolf Sjogren/Getty Images

American Superconductor's revenues are rising at a 70% clip, mostly due to the success of its Austrian wind-power acquisition, Windtec.

But the optimism in Yurek's outlook, and in AMSC's high valuation, may be giving insufficient weight to signs that China's boom in wind power is slowing. Wind farms stand idle because the power grid doesn't yet reach them. An industry of well-capitalized wind-turbine makers has arisen with the collective capacity to more than satisfy their nation's needs; in consequence, prices are dropping while receivables and inventories pile up on manufacturers' balance sheets. These worrisome trends are all visible in an initial offering prospectus just filed on the Shanghai exchange by Sinovel Wind Group, the turbine maker that has accounted for almost 80% of AMSC revenues.

More, More, More

AMSC's big client, Sinovel, has been producing more turbines than it sells, causing inventories to rise. Small turbines dominate sales.

As shown on the left side of the nearby graph, Sinovel's production has steadily outstripped its sales. Sooner or later, Sinovel will have to rationalize its levels of production and inventory—and in turn, its voracious purchases from AMSC. That risk isn't priced into AMSC shares.

Wind power contributed 97% of the $367 million in revenue that AMSC reported for the 12 months ended September, with earnings of $29 million, or 64 cents a share. AMSC bought Windtec in early 2007 for an initial $12 million in stock and an earn-out that lifted the total cost to $51 million. AMSC Windtec licenses "build your own wind turbine" designs to manufacturers. When those customers start up their factories, they purchase the electronic control systems for each wind turbine from AMSC.

Customers who have licensed Windtec's designs include Korea's Hyundai Heavy Industries and India's Ghodawat Energy. But it is Sinovel that put AMSC into the black.

China has big plans for clean energy. This month its government will present its 12th five-year-plan, which aims for 180 gigawatts (billions of watts) of wind installations by 2020. Domestic production has grown so fast in just five years that the country has already blown past the 30-gigawatt goal for 2020 that was set back in 2007. China installed more wind turbines last year than the U.S. State banks and utilities have nourished producers like China Ming Yang Wing Power Group (MY), which recently debuted on the New York Stock Exchange, Dongfang Turbine, and Goldwind (002202.Shanghai or 2208.HongKong). The largest, with a 25% domestic share, is AMSC's partner Sinovel.

On Friday, Sinovel got state approval for its $525 million initial public offer. It also has a $6.5 billion commitment from a Chinese bank. According to the prospectus, sales grew about 70% in the first half of 2010 and new contract awards have built its backlog to 10 gigawatts worth of turbines.

The Bottom Line

AMSC's pricey shares look overvalued because of its reliance on a Chinese wind-turbine maker, whose production outpaces sales.

But as fast as Sinovel has grown, the prospectus shows that its production has outpaced shipments by about a third. Consequently, as the right side of the graph shows, average inventories piled up in the six months ended June to more than 270 days' cost of materials. The Chinese prospectus reports Sinovel's purchases from AMSC for last few years, and those numbers roughly track the sales to Sinovel reported by AMSC. The only exception is the first half of calendar year 2010, when Sinovel shows some $70 million worth of purchases. AMSC reported selling about twice that amount. The prospectus also shows that Sinovel has been buying electronic-control systems from another company.

"We don't see any issues there," says AMSC's Yurek. His electronics will be in the bigger turbines that Sinovel is planning for China's offshore wind farms. Within five years, Sinovel aims to be the world's leading turbine maker.

Now that Sinovel plans to go public, AMSC investors can see if that growth matches AMSC's towering valuation. 

Eleven Themes for 2011

RichrdBernstein Eleven Themes for 2011
FloorNew York, NY 100212-692-4000www.rba-llc.com

Here are our eleven investment themes for 2011.  Each of these is either specifically orgenerally embedded in our investment strategies.

1. The US Dollar Continues to Appreciate.
Despite all the talk about debasing the dollar, the DXY Index has actually risen about2% so far in 2010.¹  In addition, most investors remain unaware that the dollar
troughed in April… 2008!  We expect the dollar to continue to appreciate in 2011.

2. The US Outperforms Emerging Markets.
Although the MSCI Emerging Market Index² has outperformed the S&P 500 so far in2010 (15.9% vs.11.9%), the gap is smaller than most investors expected at thebeginning of the year.  Perhaps more important, the S&P 500 has outperformed theBRIC countries (11.9%vs.8.7%), which few people predicted.  Emerging marketsare now leading the world in negative earnings surprises and remain very expensive.We expect the US to outperform the broader emerging markets universe in 2011.

3. Stocks Outperform Bonds.
Stocks and bonds have performed quite similarly so far in 2010.  The S&P 500's total return stands at 11.9%, compared with the 10.4% total return of the BofA MerrillLynch 15+ Year US Treasury Index.  We expect stocks to outperform bonds in 2011as the US economy continues to expand and as normal upward pressure on longer-term interest rates becomes more apparent

4. Gold Produces a Negative Return.
Gold seems to be in a pure momentum market these days.  Momentum markets areexciting, and the media love them, but they have a nasty tendency to fall faster thanthey rose.  The US dollar troughed in 2008, and inflation expectations are not rising in any meaningful way.  We think that next year, gold's momentum market is likely to cede the spotlight  to more fundamentally-based assets like stocks.

5. Longer-Term Treasury Rates Rise by More Than 150 Basis Points.
Our work suggests that the economy is just beginning to enter the mid-phase of theeconomic cycle.  The early-cycle was notably anemic because early-cycle industriesbenefitted the most from the credit bubble, but investors should remember that there
is a cycle.  Our quick review of longer-term interest rates suggests that they typicallyincrease during the mid-phase by between 200 and 300 basis points.  Evenassuming weaker-than-average growth next year, longer-term rates are likely to risesubstantially._______________

6. Energy and Materials Sectors Outperform.
If the economy is indeed beginning to enter the mid-phase of the cycle, then energyand materials stocks begin to take leadership positions.  We expect both globalsectors to outperform in 2011.

7. US Consumer Stocks Outperform EM Consumer Stocks.
According to one fund-manager survey we recently saw, the emerging marketconsumer is the most popular investment theme among emerging-market fundmanagers.  With inflation rising and monetary policies tightening in a growing numberof emerging markets, it seems unlikely that this theme will meet expectations.  Wecontinue to believe that US employment will be stronger than most investors expectnext year, which could produce positive surprises for US consumer stocks.

8. Small-Caps Continue to Dominate Large-Caps Around the World.
The MSCI AC World Small Cap Index has risen 21.7% so far in 2010, which is more
than double the MSCI ACWI's +10.2%.  And yet, investors have generally not
warmed up to smaller companies.  By our calculations, US smaller companies havebeen outperforming China for nearly three years, have twice the 2011 projectedearnings growth of China, and have half the valuation.

9. Muni Bonds Outperform EM Non-Dollar Debt.
We find it curious that investors are so enamored of local-currency-denominatedemerging-market debt, since this sector of the fixed-income markets has historicallybeen the riskiest.  At the other extreme, investors widely believe that US municipalbonds are extremely risky, when they have historically been a far more conservative
investment.  Investors clearly believe that "it will be different this time."  We are not so Sure.

10. Japan Outperforms China.
This is another performance comparison that runs counter to investors' expectations. Japan has outperformed China by more than 800 basis points so far in 2010.  With expectations being so high for China and so low for Japan, we expect Japan's outperformance versus China to continue.

Aerospace Reacts To Korean Scuffle, Nuclear Breaking Point

Rick Whittington, 11.30.10, 12:30 PM EST

Here are the aerospace ramifications you should watch for, as tensions brew in the East and nations eye a new START.

As the U.S. contemplates a major new arms control treaty, the various actors and personages might wish to review the events of the past month. President Obama embraced China on the first stop of an Asian whirlwind, sending a clear message of support and succor to Pacific Rim and Indian Ocean neighbors of the world's second-most-populous nation.

After propelling itself out of economic ruins, India has undergone breakneck development over the past decade, elevating global commerce and benefiting both emerging and developed regions alike. As India grabs its piece of the action, other nations of all stripes have gone along for a most dynamic and exhilarating--but at times also enervating--ride.

 

An increasingly integrated global economy has upset nearly all models of economic and financial markets, rendering most forecasts unduly cautious and unable to see the broad benefits of growing trade and commercial interdependence. Today's German business confidence report signals boom time conditions in Europe's most consequential country, on the heels of a year of focus on its least important members; recent fascination with Greece, Portugal and Ireland has led many to reiterate a litany of negatives.

The world remains imperfect, as Washington continues to look the other way on North Korea and its Beijing sponsors rattling the neighborhood dishes, but resurgent figures show the benefits of mitigated government intervention in the America's still dominant economy as it returns to free market principles.

After its Indian love fest and long-delayed mini-romance in resource-rich Indonesia, the U.S. was accorded a most brusque bounce at an ensuing G-20 forum, which bridled at ill-conceived notions of managed trade and rule enactment and rightly left most participants cold. Opening the door to criticism, President Obama endured two days of jibes and insults, intensified by two preceding years in which he talked down his own country's heritage and decades-long beneficial leadership role.

With Pandora's Box open, America's newfound multilateralism backfired in spades and we were sent packing to the next venue, hoping to bolster regional security initiatives in the wake of increasingly aggressive Chinese military actions this past year. 2009's bows did their trick, emboldening instead of pacifying and upping aggression quotients rather than engendering cooperation.

All this action came on the heels of Russian Prime Minister Medvedev's Kurile sightseeing tour that prompted Japan--which still claims the Russian-occupied isles as its own--to recall its ambassador from Moscow and issue a loud protest. Instead of supporting this ever staunch ally, Washington instead chose to amplify the benefits of rapprochement with a post-Soviet empire, in hopes of selling what can only be termed a disastrous new Strategic Arms Reduction Treaty (START) to the American public and Congress.

Arraying an impressive gathering of Republican foreign policy dons, the administration is pushing for ratification of a paper that was negotiated with Russia with reckless disregard to China's growing conventional and nuclear military capabilities. As Britain and France, as well as other NATO allies, further reduce their nonnuclear forces, the last thing we should be doing is reducing the nuclear safety umbrella that has so brilliantly kept the peace for going on 70 years.

The brushfire conflict in Korea and Vietnam was prosecuted without recourse to nuclear weapons. The decisions to execute Saddam Hussein and punish the Taliban for harboring 9/11 terrorists were similarly made without nuclear consideration. Still, the nuclear winter foretold by disarmament advocates never materialized; our aims and deterrent punch were so balanced and restrained that no one dared escalate nuclear conflict.

Yet as America has sharply downsized its military power over the past 20 years, China has materially increased its fighting effectiveness, and we have reached a breaking point. Unable to bridle outrageous North Korean action of the past year and unfettered Iranian nuclear ambition, U.S. foreign policy has emptied its post-Wild West gas tank. The international community upon which we planned to rely is nowhere in sight after recent artillery exchanges. Beijing's puppeteers are resoundingly mum, playing a quite sophisticated but dangerous game.

With fiscal pressure at home and a Republican aisle that is unable to comprehend the profound changes sweeping the international economy, sons of Fannie Mae ( FNM - news - people ) are left to champion Bernanke's balancing act, which promises stronger growth but won't unleash the inflationary bogeyman lawmakers now see under their beds. As the U.S. Dollar firms from the tidal wave of upside corporate profits and indications of new hiring, the broad array of industrial capital goods and new wave technology suppliers that comprise the heart of the American economy will lead in a New Year that promises further new highs in reported earnings.

 

Confidence--which has everything to do with how the market values stocks--will hinge upon numerous imponderables, not the least of which is how the country's leaders stand up to an always volatile and turbulent world. Sending the new START back to the drawing board would be a promising beginning.

The best way to play the equity market has remained the same over the last eight years. Invest in the still relatively low-valued U.S. beneficiaries of global growth. The list encompasses a Boeing ( BA - news - people ) that will either get the 787 off the ground or see much higher orders for its highly profitable 777 to replicate what has already been far better than expected 737 demand. Airbus' A380 Rolls-Royce ( RYCEY.PK - news - people ) engine issues keep the door open for America's formerly Seattle-, now Chicago-based aerospace superstar; the company faces challenges, to be sure, but--along with its European rivals--is sure to be a beneficiary of secularly heightened travel and freight demand.

As the Lockheed/Northrop F-35 continues to fall short of nearly all performance evaluations, demand for Boeing produced upscale F-18s and older F-15s joins with upside satellite buys for both national security and commercial use. If Boeing lands the new aerial tanker contract, which we think is likely, its military side will be as secure as any defense contractor's, while an increasingly profitable commercial aerospace side will propel earnings sharply higher over the course of the new decade. Civil aviation and industrial suppliers such as United Technologies ( UTX - news - people ), Honeywell ( HON - news - people ), Precision Castparts ( PCP - news - people ) and Goodrich ( GR - news - people ) also remain good bets on this theme.

With defense stocks actually declining on the day of the Korean artillery exchange--the first time in memory they didn't go through the roof at reports of active major nation hostilities--the stage remains set for stock-limiting backlog reductions at Northrop, (which JSA Research just put back on a Sell), Lockheed, Raytheon ( RTN - news - people ) and L-3. General Dynamics ( GD - news - people ) is another big loser from altered federal priorities but is somewhat cushioned by promising business jet demand, led by its soon-to-be G-650 powerhouse.

 

Barbarians in love

Private equity in China
私募基金在中国

Barbarians in love
热恋中的野蛮人

Global private-equity firms are seduced by the China dream
中国梦正在吸引着全球的私募基金公司
Nov 25th 2010 | HONG KONG AND NEW YORK | from PRINT EDITION




SO MANY conferences are held in Hong Kong that it is hard to believe one could ever be full. Yet in mid-November the Asian Venture Capital Journal (AVCJ) was forced, with regret, to turn away customers from its private-equity meeting. There was simply no room for the hordes of European and American investors stopping in Hong Kong on their way to China.

最近在香港召开的会议多到不可思议。然而在11月中旬召开的私募股权投资基金（下文简称PE）会议上，亚洲创业投资期刊集团(Asian Venture Capital Journal) 还是被迫惋惜地拒绝了许多顾客，因为已经没有门票提供给那些蜂拥在香港以期进入中国大陆的欧美投资者了。



Three widely held opinions about China (it's big, expanding and filled with entrepreneurs) and some spectacular returns on deals mean many buy-out big-shots are reinventing themselves as China hands. Capital-raising, trivial a decade ago, is booming after a blip in 2009 (see chart). So far this year China-focused funds have accounted for more than 9% of global fund-raising, up from 1% in 2007, according to Thomson Reuters, an information firm.

关于中国市场的三个主流看法（巨大，正在扩张且到处都是企业家）加上巨大的投资回报使得许多并购巨头正在以中国通的形象重新示人。十年前几乎还是空白的PE领域，在经历2009年的短暂低谷后正在急速发展（见图表）。根据一家名为汤森路透（Thomson Reuters）的情报信息提供商的数据，投资于中国的基金已经超过了世界总资金募集量的9%，而2007年时仅占1%。

The usual suspects, including Carlyle, TPG, KKR and Blackstone, have set up China-related operations. All told, there are 167 registered foreign managers of private-equity funds in China and 265 domestic ones, according to Asia Private Equity Research, up from almost none a decade ago. Estimates of China's unregistered firms bounce from 3,000 to 10,000 and above. Many prominent local and Western firms are populated by the children of China's leaders, who bring powerful connections and a degree of political protection.

包括凯雷集团（Carlyle），德克萨斯太平洋集团（TPG），科尔伯格・克拉维斯集团（KKR）和黑石集团（Blackstone）这些江湖老大们都已经开始运作与中国有关的项目。根据亚洲私募股权投资基金调查（Asia Private Equity Research）的结果显示。在中国总计有167个注册的由外国人管理的PE基金，由中国人管理的则有265个，在十年前这个数字几乎还是零。中国未注册PE公司的数量估计已从3000个增长到了10000个以上。许多在一定区域较突出的公司和西方公司都有中国领导人的孩子在其中任职，他们能为公司带来强大的人际关系网和一定程度的政治保护。

There is a gap in China's financial system that private equity can fill. Most capital is channelled through state-controlled banks that offer low returns on deposits and cheap loans to state-controlled companies. Both savers, who want better returns on their investments, and entrepreneurs, who need capital, should be keen on bypassing the state-bank system.

PE基金能够填补中国的金融系统中的一个缺口。因为大多数资金在国有银行渠道中流动，为存款提供低回报并为国有公司提供低息贷款。所以那些期望在投资上有高回报的存款者们和需要资金的企业家们可能都乐于绕过国有银行系统。

China is also particularly seductive for Western buy-out firms. They are keen to find new deals there, now that the boom in leveraged buy-outs in rich countries is over. They also want to ensure that the companies they already own do more business in the Middle Kingdom. Blackstone recently held a gathering in China for 33 chief executives of its portfolio companies to discuss, among other things, how to expand their activities there.

中国也引诱着那些西方的并购公司们。如今杠杆收购在富裕国家已不再风靡，这些公司热衷于在这里寻找新的买卖。他们也希望确保自己已经持有的公司能在这个中央王国多做一些生意，黑石集团（Blackstone）最近将其在中国所投资33家公司的首席执行官召集在了一起，在会议中便涉及了如何在中国扩张他们的公司。

Western private-equity firms are also keen to raise new capital from China. Yuan-denominated funds, recently made available to non-Chinese firms, face less red tape and enable private-equity outfits to team up with local governments to raise money and help locate deals. The largest American firms are all keen on developing such vehicles.

西方PE公司也对从中国募集新的资金充满兴趣。外国公司在最近已经接受了以人民币基金，人民币基金不用再面对繁琐的程序，同时PE团队能与地方政府携手集资并推动交易的产生。那些美国的公司巨头们对此充满期待。




To the extent that aggregate records for private-equity returns exist, results in China are strong (see table). At best, however, these are only vague indicators. Since the industry is new, the sample of deals is pretty small. Because of the pervasive opacity of China, failures are quietly buried. And concern about criticism from Marxist die-hards means that even successes are often hidden.

就已有的PE收益记录来看，中国的成绩是非常好的（见表）。然而这些记录充其量只是一些模糊的指标，由于这是一个新生行业，样本容量非常之小。因为中国在各方面还不够透明，很多失败的交易都被掩盖了。而且考虑到来自马克思主义顽固分子的批评，甚至连许多成功的交易也经常会被掩盖。

Those deals that do get attention tend to be big, successful and involve foreign firms. In June TPG sold a controlling stake in Shenzhen Development Bank for many times its original investment. On a percentage basis, Baring Private Equity is thought to have made even more on an investment in Hidili Industry, a coal producer that was recently refinanced. TPG will probably make another fortune if, as planned, a public offering goes through for Grand Auto, a car-dealership chain in second-tier cities. Carlyle got a rare opportunity to invest in a leading insurance company, China Pacific Life, and made a killing when the insurer listed in Hong Kong last year.

那些的确得到关注的交易往往庞大，成功而且有外国公司参与其中。在六月份，德州太平洋集团（TPG）以高出原始投资很多倍的价格卖出了它在深圳发展银行所持有的控股股份。在百分比的基础上，霸菱投资（Baring Private Equity）被认为在最近一次投资中赚得甚至更多，投资对象是恒鼎实业（Hidili Industry）,一家刚刚进行再融资的煤炭生产商。如果TPG为广汇汽车（Grand Auto）设计的公开募股顺利的话，它还有可能再赚一笔，后者是一家二线城市的连锁汽车经销商。凯雷集团（Carlyle）则得到了一个少有的机会，它得以向太平洋人寿（China Pacific Life）――一家主要的保险公司投资，并在其去年香港上市的过程中大赚了一笔。

A further relaxation of capital-raising rules is another boon. In August officials lifted a restriction on registered insurance companies placing money with private-equity firms: they may now invest up to 5% of their assets this way. And yuan-denominated funds may eventually be opened to non-Chinese investors.

对融资监管条例的进一步放宽是另一利好消息。8月份，官方解除了对注册保险公司投资于PE公司的限制：保险公司最高可将其总资产的5%投资于PE公司。同时人民币基金可能最终允许向外国投资者开放。

No one does indiscriminate bullishness better than the private-equity industry. Yet for all the buzz, the reality of operating in China is likely to test even its professional optimists. For a start, three of the techniques buy-out shops often use in the West―dismemberment, leverage and tax avoidance―are unfeasible in China.

人们对PE行业的信心正无可比拟。但在这一片嘈杂之中，中国的PE运作现状可能要考验那些即使是持乐观观点的从业者。作为一个开始，分割、杠杆收购、避税这三项西方并购公司经常使用的手段在中国仍是很难实施的。


There ain't no RJR Nabiscos here

这里可没有雷诺兹-纳贝斯克

Gaining control of acquired companies, which is usually deemed essential for buy-outs, is also difficult. Many industries are considered "strategic" and therefore off limits, or open to investment only in exceptional cases, such as finance. Across all sectors a typical Chinese private-equity investment is a non-controlling stake of 15-40% in an operating company, with the money intended (but not always used) as growth capital. For dollar-based funds, which had been the norm until yuan-denominated ones took off, laborious government approvals are required to close deals. These can take months or even years. Those who have attempted to take a majority stake in a company, as Carlyle did in 2005 when it tried to buy 85% of Xugong Group Construction Machinery, China's largest maker of building machinery, have tended to fail.

想要获得所投资公司的控制权也很困难，而这对并购公司来说却通常是非常重要的。许多行业被认为是"战略性"的，因此被禁止进入，或者如金融界那样仅在例外的情况下允许投资。典型的中国PE投资是这样的：在一家公司中持有15%-40%的非控制性股份，所投资金预计用以发展（但并不一定会被使用）。花上数月甚至是数年的功夫以获得政府许可来达成交易，这在人民币基金蓬勃发展之前，对于美元基金来说是家常便饭。那些试图获得某家公司多数股权的努力则往往面临失败的结局，比如凯雷集团在2005年曾试图购买徐工工程机械集团85%的股份，这是中国最大的工程机械制造商，结果不言而喻。

Given these hurdles, finding suitable investments is hard. KKR raised a $4 billion Asian fund in 2007 that, at the time, was supposed to be largely focused on China, but it is widely believed that only a fraction of the money has been spent. Since 2005 private-equity firms have raised more than $57 billion for investment in China, according to Preqin, a research firm, but much of that is thought not to have been deployed.

在有这些障碍的情况下，想找到合适的投资是困难的。科尔伯格・克拉维斯集团（KKR）曾在2007年建立了一个40亿美元的亚洲基金，在当时被认为其会将主要精力集中于中国，但该基金目前只用掉了很小一部分的资金。来自调查公司Preqin的数据显示，从2005年起，PE公司们以在中国投资为目的而募集的资金超过570亿美元，但其中大多数被认为并没有得到有效利用。

As a result, too many firms are chasing too few deals. One executive at a leading American buy-out firm says that, more than any potential regulatory issue in China, he is concerned about the "intense amount of competition" from local firms, which outmanoeuvre Western firms on deals and also poach their staff.

因此，想做生意的公司太多，而能做的买卖又太少。美国某主要并购公司的一位执行官说道，比起中国潜在的监管问题，他更担心来自本土公司的"过度竞争"，因为本土公司在交易中总能胜过西方公司一筹，而且会使用挖墙脚这样的手段。

Faced with the problem of finding suitable private targets, many of the bigger firms have turned to PIPE deals: the acronym stands for "private investments in public equity". These typically involve buying a large slice of a Hong Kong-listed company. That avoids the drudgery of sorting out a private firm, but makes it rather hard to justify large fees. The alternative is gruelling: doling out stakes of $5m-10m and certainly no more than $100m, and only after painstaking due diligence.

面对无法找到合适的私有公司作为投资目标的困境，许多大公司转而寻求PIPE交易，即私人股权投资已上市公司股份。这类交易通常需要购买在香港上市公司的大量股权，这虽免除了整治所投公司方面所需的冗长繁杂的工作，但却需要付出庞大的费用。另一种选择则会让人受尽折磨：施舍出5百万到1千万美元的股份（当然不能超过1亿美元），并且先得付出大量细致的辛勤工作。

Victoria Capital, a small firm whose managers have a long history in China, invests only after reconstructing a target company's financial statements using original receipts. Arc China, another small firm with experienced managers, invests only in companies which collect revenues in an obviously verifiable way, such as a retail company that receives fees from franchisees at a single point, rather than from a string of wholly owned stores.

Victoria Capital是一家小型投资公司，其负责人对中国的情况非常了解，这家公司只投资那些能够使用收条正本重建财务报表的公司。Arc China这家小公司也拥有经验丰富的管理者，他们只投资那些有清晰且可证实的盈利模式的公司，比如能够依靠特许经营权盈利的零售公司，而不会投资于一堆全线自有的直营商店。

Steven Barnes, managing director of Bain Capital, a private-equity firm, told attendees at the AVCJ conference that it takes twice as many people to manage investments in China as in the West. That may be optimistic. What is more, one of the most important parts of private-equity investing can barely be managed at all. Since firms typically hold only a minority stake, their ability to realise money for their holdings is limited. Recent returns have been almost entirely the result of a strong market for initial public offerings in Asia, which has allowed insiders to receive large payouts. Citigroup reckons that 30% of the recent offerings were backed by private-equity firms, with China heavily represented. If the market flags, that door will shut and the next round of successful conferences in Hong Kong may have less to do with tips on getting into China than with advice on getting out.

PE公司Bain Capital的常务董事Steven Barnes在亚洲创业投资期刊集团（AVCJ）的会议上说道，比起在西方的情况，在中国需要花上两倍的人力去管理投资，这可能还是乐观的看法。更让人担心的是，PE投资最重要的部分之一在这里却几乎无法进行管理。由于PE公司通常只持有少数股权，他们出售手中股份的权力受到限制。最近的回报几乎全是亚洲IPO强势市场的功劳,这让那些内部人士收益颇丰。花旗集团（Citigroup）认为近期的募股有30%都是由PE公司在后支撑，中国的情况尤为突出。如果市场转弱，通往中国的那扇大门就会关上，到了那时，下一轮在香港召开的会议恐怕就不会再讨论如何进入中国，而该为如何逃出中国而出谋划策了。

Commodity speculators do more good than harm

Commodity traders
投机商

Know your onions
了解你的洋葱

Commodity speculators do more good than harm
投机商的存在利大于弊

Nov 11th 2010



THE image of the market-rigging commodity speculator of modern folklore lies somewhere between moustache-twirling pantomime villain and James Bond's evil nemesis ("When I press this button the price of molybdenum will treble, the world will be destroyed and I will be rich, rich, rich!"). Measures are afoot to contain the speculators blamed by buyers, NGOs and politicians for spikes in oil, wheat, corn and other prices and supposedly bring order and harmony to commodity prices. Nicolas Sarkozy, who is taking over the presidency of the G20, is set to use the role to champion measures to bring commodity investors to heel. （首段有点难了，生词过多）

坊间传说的控制市场的商品投机者的形象（某种程度上是）介于长着小胡子的戏剧中的恶棍和詹姆斯邦德的邪恶复仇者之间（"当我按下这个按钮，钼的价格就会翻三倍，世界将会被毁灭，我也会变得很有钱、很有钱！"）。由于石油、小麦、玉米及其他（商品的）价格不断升高，（有关）措施正在筹备以容忍这些受到消费者、NGO和政治官员的责备的投机者，据推测这些措施会使商品价格恢复正常秩序和水平。马上就要接任G20主席的萨科奇打算通过自己的角色来支持这些措施从而使商品投机者就范。

Those naturally inclined to dismiss any French efforts to regulate financial markets should note that Angela Merkel, Germany's chancellor, is on his side too. And American regulatory reforms include the introduction of mandatory position limits on trading in energy, metals and agricultural commodities early next year.
那些自然地倾向于无视任何法国调整金融市场的努力的人们应该注意到，德国总理默克尔也站在了萨科奇的一边。美国的整顿改革包括了明年年初对能源、金属和农产品交易的强制性持仓限额。

More boring than bad
（仅仅是）更加让人心烦而不是更坏

Institutional investors and hedge-fund bosses do not deserve the attention they are getting. They are far duller folk than their caricatures and the offences they are accused of crumble on closer examination. There is almost no evidence to connect speculators to the commodity-price spikes that they are routinely blamed for creating (see article). And what little distortion speculators may cause is soundly trumped by the service they provide. In particular, they supply liquidity and price information that makes futures markets more efficient. Speculators plug the gap when the hedging requirements of raw-material producers and buyers do not coincide, offering a counterparty for trades that might otherwise have no takers.（本段后几句也有点难，但不影响理解）

机构投资者和对冲基金老板不该受到目前这么多的关注。他们要远比由于crumble on closer examination（所受到）的讽刺和冒犯反应更加迟钝。几乎没有证据证明投机者与商品价格暴涨有关，而商品价格的暴涨则是他们平日里受到责备的原因。并且投机商引起的微不足道的价格失真必然会由他们所提供的服务超过。尤其，他们提供了使未来市场更加有效的流动性和价格信息。当原材料生产商和买家的避险需要不一致时，投机商通过提供买家或者卖家来填补他们之间的缝隙。

The suggestion that speculators deliberately manipulate markets to earn profits through bubbles and busts simply does not hold water. The explanation for the sudden spikes in the prices of many commodities in recent years lies in nothing more sinister than the laws of supply and demand. A ravenous China, underinvestment in mining and agriculture, tight markets and unexpected disruptions to production are usually to blame for rapid price movements. When supply is tight, a small increase in demand can have a disproportionately large effect on price. Even if speculators do sometimes push prices out of kilter the fundamentals soon regain the upper hand.

说投机者有意操纵市场在泡沫和萧条中攫取利润完全说不通。最近几年一些商品价格的突然暴涨与其说是因为市场的险恶，不如说是因为供求定理。由于采矿业和农业的投资不足、供不应求的市场以及随时可能中断的生产，贪得无厌的中国才应该对快速的价格运动负责。当供给不足时，需求的一个微小增量就可能对价格造成不成比例的更大的影响。即使投机者确实在某些时候出于平衡推动了价格的上涨，但要不了多久市场规律就会重新占据优势。

And the amount of cash invested is tiny compared with the size of the total commodities market. It seems unlikely that such a small tail could wag such a large dog, especially given that investors almost exclusively trade futures contracts. They rarely take physical delivery of raw materials and have no effect on the actual production and consumption of metal, grain or oil.

另外，投机的那部分资金与整个商品市场的规模相比只是很小的一部分。这么一个小尾巴不大可能拖动那只大狗，更何况这些投机者几乎不准碰期货交易这一块。他们很少进行原材料的实物交割，对金属、谷物或者石油的实际生产和消费没有影响。

The worst that can be said about speculators, then, is that they may add a little to the volatility that anyway characterises commodity markets. Yet even that charge is hard to maintain. An OECD report suggests that there is little difference in volatility between exchange-traded agricultural commodities (such as wheat and corn) and non-exchange-traded ones (such as apples and onions).

因此，最糟糕的情况无非是这些投机商带来了些许的波动，但无论如何这些波动也正是商品市场的特征。但是他们对价格的控制其实很难维持。OECD的一份报告表明，在（价格）波动方面，交易所买卖的农产品（如小麦和玉米）和非交易所买卖的农产品（比如苹果和洋葱）之间并不存在明显的差异。

Commodity speculators make for tempting scapegoats and populist attempts to limit their activities will play well for both Mr Sarkozy and Mrs Merkel as they struggle to regain favour with voters in France and Germany. They come at little cost as neither country is home to much trading. Any restrictions will only serve to hit the centre of European commodity trading, the London Metal Exchange. It is the politicians, not the investors, who risk becoming the real villains in this affair.

商品投机者成了替罪羊，并且那些民粹主义者试图限制他们的（投机）活动，而所有这一切最终会对萨科奇先生和默克尔女士有利，因为他们两人正致力于重新获得各自在法国和德国的选民支持。而这一切来的几乎不需要什么成本，因为整个国家也并不想看到如此多的投机活动。任何限制（措施）只会冲击到作为欧洲商品交易中心的伦敦金属交易所。因此，正是那些政客们而不是投机者，在这个问题上冒着成为坏人的风险行事。

Leaders
领导人

备注：全文都是在肯定投机行为，甚至一度认为存在一定的波动正是市场经济所固有的特性。很明显作者是反对政府干预的，很明显是新右派的思想。这本来无可厚非，因为自由主义与国家干预从来都是各领风骚数30年。我惊异于西方的报纸竟然都如此具有学术水平的同时也不免遗憾。遗憾的是本篇文章甚至将价格的波动归咎于中国的因素，认为中国对市场的规制太多。总之，文章将中国视为一个"贪得无厌者"，我觉得有失该杂志也好报纸也好的客观性，乃至作者存在敌视中国的情绪。说实在的，认真翻译《经济学家》文章的5天以来，我反到对西方世界有了更冷静的认识。要知道，之前我是一个总是抱怨国情的cynic，还好还好。所以我在想，有时候我们国家一味的按和捂，反倒会让人们觉得里面肯定有什么见不得人的东西。看来，果然堵不如疏。放手让大家自己去判断，去甄别。但问题来了，又有多少国民具备这种甄别的能力呢？且不说大众，该报纸在大学生群体中，又有几人阅读？我突然想起了历史学范畴的"新民"，政治学范畴的"公民社会"，甚至包括09诺贝尔经济学奖得主埃莉诺奥斯特罗姆所谓的自主治理理论，或许一切的一切都在于人的素质，在于人首先对自己负责，即我理解的是首先具备辨别真伪的能力，之后自然知善恶与美丑。此所谓"真善美"，"真"因为回答世界是什么，所以必须在逻辑上先于"善美"这些回答世界应该是什么的价值判断。所以，一个不具备独立思考和判断能力的人，他的价值观也必然是混乱和易受到影响的。扯远了。就此打住。欢迎拍砖！