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 | Dallas, TX
April 21, 2008, 08:00 EST |  | Dr. Joe Duarte's Market I.Q. |  |  | | |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Auto Industry Bets On China As Savior
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 | What's Hot Today: | |
Global stock markets were again mixed overnight with China falling once again while Europe was mostly higher.
Today's Economic Calendar: No economic reports. Sources: The Wall Street Journal and Marketwatch.com.
News For Thought
Nationalism is rising in China as the Olympics near. The number of Chinese demonstrating against Western companies and the Western media is on the rise.
According to the Wall Street Journal: "Over the weekend, there were demonstrations against French retailer Carrefour SA involving thousands of people in several cities across China. They were part of a broader push for a boycott of the retailer, one of France's biggest investors in China, as punishment for the chaos of the Olympic torch relay in Paris, and for the purported support of the Dalai Lama -- vilified by Beijing -- by one of the Paris company's shareholders. Carrefour has said it has no ties with the Tibetan spiritual leader and pointed out that the vast majority of its products and employees in the country are Chinese."
The climate for venture capital is worsening as the overall worsening economy is starting to affect the sector. Marketwatch reported: "Venture capitalists scaled back their deal-making activity in the first quarter, pushing investments down more than 8% from the previous period to their lowest level in more than a year. According to the quarterly Money Tree report released over the weekend, venture capital investing totaled about $7.1 billion in the first quarter. This is a decline from both the $7.8 billion raised in the fourth quarter and the $7.5 billion raised in the same period last year. " | |
| Auto Industry Bets On China As Savior | |
 | | Beyond The Problems Lies The Pot Of Gold? |  | |
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Protestors against foreign opinion of China lined the streets of Beijing over the weekend as the Chinese government sanctioned a public display of its displeasure with the recent coverage of the situation in Tibet.
Yet, at the core of the situation is the big bet that foreign companies have made on China, starting with the financial sector and in the latest ploy, the auto industry.
According to the Detroit News, General Motors (NYSE: GM) is betting that China's immense purchasing power will be responsible for significant improvement to its bottom line. The paper reported: "The problems facing China's economy - inflation, tightening credit, stock market volatility and the knock-on effects of the US financial crisis - will be overridden by the sheer buying power of millions of Chinese consumers."
The paper added: "Kevin Wale, President of General Motors China, argues that even if America's financial woes do slow China's growth, the Asian nation will still expand by a remarkable 8 to 10 percent this year," adding "For all automakers playing in the China market, the coming years will be a potential bonanza because so many millions of Chinese are reaching the car acquisition stage."
Somehow, despite world class pollution, declining water availability, significant fuel shortages, and overcrowded roads, GM is making a big bet, based on the sheer numbers of Chinese that are likely to buy a car.
Here's how the numbers work out, the U.S. has 784 cars per 1000 people, while China only has 23 vehicles per 1000 people. Just this kind of data, has GM and other car makers salivating.
In fact, they note that in China some families pool resources in order to buy one car, and that even under those circumstances, the sales growth potential is significant.
But, GM has some work to do, despite being the largest carmaker in China. According to Bloomberg: "GM plans to introduce ten new or ramped models in the world's second-biggest auto market over the next two years to win back drivers from Volkswagen AG Santanas and Toyota Motor Corp. Camrys. The company boosted first-quarter China sales 7.4 percent, lagging behind Volkswagen's 33 percent surge."
Bloomberg added: "The Detroit-based automaker plans to invest $1 billion annually in China over the next three to five years, GM China Chairman Kevin Wale said in December. The money will be spent on car and engine development, production facilities, technical and after-sales support and infrastructure."
Conclusion
The Chinese story remains enigmatic, and is in many ways similar to a psychiatric patient with multiple personalities. On one side there is the perception that growth will peak at some point and that social unrest will follow, with an economic catastrophe soon thereafter.
Yet, despite the collapse of the U.S. housing market, a major driver of the demand for Chinese goods, all we've seen is slowing growth rates and the rise of inflation and its exportation from China.
But, that's not an economic collapse. And if anyone thought that the Chinese goverment could be overthrown by its opponents, think again, as many of the recent demonstrations were "sanctioned" by the Chinese government.
GM, Volkswagen and other automakers don't seem to care one iota about risk. In fact, given their paltry growth potential in mature markets, these behemoths of industry are going for broke in China.
That means big money going into China. And that means that the Chinese economy may not suffer as much as anyone has predicted before.
At least not for now. What remains to be seen is what happens after the Olympics. | |
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 | Technical Summary: | |
Stocks Rally But Indexes Do Not Deliver Breakout
Nasdaq delivered a slight new high for the last few weeks, but the S & P 500 remained below 1400.
Our S & P timing model is back on the long side.
Market Vane's Bullish Consensus was at 50% on April 11. This survey got to 40% on January 25th, and the market at least stopped falling for a while after it reached that key and often bullish number.
The Citigroup Panic/Euphoria model was at a less bullish -0.13% rising from a recently low number of -0.51%.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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| Market Moves | |
IBM (NYSE: IBM) Shakes Off Hardware Image
IBM (NYSE: IBM) has shed its image as a hardware company and is now an integrated services company.
Chart Courtesy of StockCharts.com
To be sure, this is not a new concept since Big Blue started down this road many years ago. It's just interesting that it recently shocked Wall Street with better than expected earnings and a better than expected future outlook.
The stock, which is one of our Fallen Angels, has broken out, and has the potential to move to the 140 area in the next few weeks to months if the market's general trend remains favorable.
The results were pushed higher by IBM's global businesses, especially software and consulting. Interestingly, the company has recently bought Diligent Technologies, a storage company.
Under the hood, IBM is selling at 16 times earnings, while growing its growth margins and delivering a nifty 37% return on equity.
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