"We have some clients in China asking us this week to defer volumes," a senior executive at a global commodities trading house told the Financial Times. "China is hand to mouth at the moment."
According to the article, in the past few days, Chinese consumers of iron ore and coal are asking traders to defer shipments. Some are defaulting on their contracts.
And today, a Reuters article said metal storage facilities in China are so full, they're now storing excess iron ore in granaries. Copper is piling up in areas traditionally used to store cars. From the article…
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At Qingdao Port, home to one of China's largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-story building, spill over into an area signposted "grains storage" and almost to the street. |
This is the latest in a string of "Chinese slowdown" news, which has stolen headlines for the past few years... The question remains if China's government – whose foreign reserves are more than $1 trillion – will be able to control the nation's current economic slowdown or if we will see a severe contraction… a so-called "hard landing." Honestly, we don't know the answer. But we don't have to in order to make money from the situation.
Stansberry & Associates Editor in Chief Brian Hunt discussed the Chinese slowdown and ways to profit from it last week in the May 14 Digest. As he discussed, the easiest way to short the Chinese market for those outside the country is through the world's largest commodity producers. China consumes over 60% of the world's iron ore. It's the world's No. 1 consumer of coal. And it will likely overtake India as the world's largest gold consumer this year.
When China commodity imports slow, companies like Vale (one of the world's largest iron-ore producers) and BHP Billiton (the world's largest mining company) lose a huge portion of their revenues. Their shares will tumble… And as Brian pointed out, they're already falling.
But these are huge companies – BHP Billiton has a market cap of nearly $200 billion and Vale is almost $100 billion. And while China is responsible for the majority of their business, they'll still survive a Chinese slowdown.
So what's the purest play on a Chinese slowdown? Which mining firm derives so much revenue from China it couldn't possibly survive a Chinese hard landing?
Fortescue Metals is the world's fourth-largest iron-ore producer. It has a market cap of $15 billion. And 98% of the company's sales are to China. Short-selling master and China bear Jim Chanos, who heads the hedge fund Kynikos Associates, discussed Fortescue at last month's Grant's Interest Rate Observer Conference in New York City.
Before discussing why Fortescue is particularly vulnerable, a word on iron-ore... It's one of the most common commodities in the world. It's a low-margin business and the textbook definition of a "boring commodity" – as opposed to gold or rare-earth metals (which are, by definition, rare). It wasn't until the Chinese growth story caught investors' imagination that iron-ore took off.
Take a look at this chart of iron-ore prices going back to 1900 (from Chanos' presentation)… The price declined for 100 years... until China came onto the radar.
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Now, Chinese demand is slowing (at the same time iron-ore producers are ramping up production).
Back to Fortescue... In addition to heavy reliance on China, the company has $6.4 billion in debt and growing. And if iron-ore prices fall to less than $100 a ton (they're currently at $131 a ton, a five-month low), Fortescue will have trouble covering its debt payments.
Our Alliance members, who have had access to the "beta" issues of our newest service DailyWealth Trader, are familiar with Chanos' thesis. In DailyWealth Trader, we've shown readers four of the famed trader's favorite shorts right now. All four stocks have declined by an average of 10.8% over a 17-day holding period.
Following well-known, successful traders and hedge-fund managers like Chanos is a great way to learn about trading and investing... and make huge profits. These investors and traders have huge research budgets and the world's best contacts. No, they're not always right... But cherry-picking their best ideas can make you a lot of money.
That's one of the major benefits of reading DailyWealth Trader. We're tracking the world's smartest money managers and reporting on the best of their trades. If you want trading tips from David Einhorn, who runs the Greenlight Capital hedge fund... the legendary head of Berkshire Hathaway Warren Buffett... Bill Ackman, who runs the hedge fund Pershing Square Capital, and of course, Chanos, you'll find them in DailyWealth Trader.
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Maybe once again… Goldman Sachs knew something most of us didn't. (This certainly wouldn't be the first time.) Last week, the huge Wall Street investment bank said in advance of Facebook's initial public offering (IPO) that it would sell 30 million of its 65.9 million shares of the social media website.
Time and time again, we tell our readers to avoid IPOs. The primary reason a company goes public is so the owners can cash out. Mark Zuckerberg, Facebook's founder and CEO, did so last week to the tune of $16 billion. And it's Wall Street's job, through promoting and pricing the offering, to make sure the owners get as much money as possible. They earn huge fees for their efforts.
According to a Wall Street Journal article today, the reasons for the plummeting stock are "an overly aggressive IPO price, the increased number of shares offered, and concerns about Facebook's slowing revenue growth." Again, we advise you to avoid IPOs.
New 52-week highs (as of 5/18/2012): Vanguard Inflation Protected Securities Fund (VIPSX).
A lot of subscribers have written in to thank Dan for his repeated recommendations of Wal-Mart. Have you had success with Dan's recommendations? Let us know at feedback@stansberryresearch.com.
"Just letting you know that for a while now I have been selling Walmart puts very successfully. Every time any one your letters recommends Walmart I sell puts. I'm sure eventually I will end up with the stock and I will be happy to have it in my portfolio. Until that time comes, its a great way to reap some profit from this stock. I'm very happy with my flex membership." – Paid-up subscriber Carmen Grillo
"I remember Warren Buffett saying he kept thinking for years that WalMart was always too expensive, but it just kept going up. Finally he pulled the trigger. I considered it for a few months and bought direct in a DRIP in July 2006. I still have it and am very happy with it. It will probably go to my kids when I leave this planet." – Paid-up subscriber Gene Barnes
"Thanks to Dan's consistent analysis and recommendation of WMT the company was on my radar screen for part of my parents retirement portfolio. When the problems developed in Mexico and the price dropped I was prepared to act. I entered my position and just two weeks later WMT shows its strength in a down market." – Paid-up subscriber CS
Regards,
Sean Goldsmith
New York, New York
May 21, 2012
China defaults on commodities contracts... This company will fail if China crashes... Facebook plunges... Wal-Mart success stories...