1/19/14 Pest Control Report/ Rethinking Emerging Markets

Most banks and loan brokers require homes be inspected for wood destroying pests before financing a loan.  The report is usually based on a visual inspection of the property, and will note (a) the presence of termites, carpenter ants, or rot, (b) evidence of their activity, and/or (c) conditions conducive to pests (direct contact between earth and wood, leaks, standing water).

No such report is required for banks and brokerages selling portfolio destroying assets.  We're left to seek our own assurances prior to purchase.  Let's take a brief 'visual' through this weekend's media reports for signs of instability in China.

(a)  http://www.reuters.com/article/2014/01/16/china-icbc-idUSL3N0KQ1MT20140116

Jan 16 (Reuters) - Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.

"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product)," an ICBC spokesman told Reuters by phone on Tuesday.

'A situation completely does not exist?'  I think that's 'bank speak' for 'sell ICBC.' 

What's the 'developing situation' behind their statement?

The trust product, called "2010 China Credit / Credit Equals Gold #1 Collective Trust Product", used the funds it raised from wealthy investors in 2010 to make a loan to unlisted coal company Shanxi Zhenfu Energy Group Ltd.

But in May 2012, Zhenfu Energy's vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.

Following an investigation, China Credit Trust told investors that Zhenfu Energy had taken out high-interest underground loans totaling 2.9 billion yuan, bringing its total liabilities to 5.9 billion yuan and threatening its ability to repay the trust loan.

China's coal industry has been battered by falling prices over the last year. Several other banks and trust companies are facing losses on loans to another coal company, Liansheng Resources Group.

I don't know about the banks, but that bothers me!  Let's take a look at a 2-year chart of coal producers (KOL):

http://finance.yahoo.com/echarts?s=KOL+Interactive#symbol=kol;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

That looks a lot like a chart of the homebuilders (XHB) between 2006 and 2008.  A bunny slope about to drop off into a diamond slope.

(b) We've all seen the 'visuals' of China's pollution problem.  China's corruption problem?  No one on the outside really knows.  The best we can do is monitor the behavior of insiders.  If I were living in China and had the money to reside anywhere around the globe, would I stay or leave?   What percentage of top-tier Chinese families are emigrating?

http://www.businessinsider.com/chinese-millionaires-leaving-the-country-2014-1

A new report shows that 64 percent of Chinese millionaires have either emigrated or plan to emigrate—taking their spending and fortunes with them. The United States is their favorite destination.

The report from Hurun, a wealth research firm that focuses on China, said that one-third of China's super rich—or those worth $16 million or more—have already emigrated.

The data offer the latest snapshot of China's worrying wealth flight, with massive numbers of rich Chinese taking their families and fortunes overseas. Previous studies show the main reasons rich Chinese are leaving is to pursue better educations for their kids, and to escape the pollution and overcrowding in urban China.

All emerging markets are not the same.  It's a market of emerging economies, and going forward some will do better than others.