Liars Poker

A big shot is a lot of little shots that keep shooting

Are the Chinese bluffing?

Iron ore contracts are coming up for renewal. The Chinese account for one half the world demand and negotiate with three major suppliers (miners). Prices are up from the lows of the fall because the miners settled deals with the Japanese and the South Koreas before having tea with the Chinese. The Chinese loaded up on iron ore inventories in the first quarter of 09, 75 million tonnes from 45 million tonnes, to tide over if negotiations were less than congenial.

This Chinese saving for a rainy day led to a tripling in shipping rates (baltic dry index from 1400 to 4200), a twenty per cent increase in the Australian Dollar (one of the larger suppliers) and doubling in value of stock exhanges from Shanghai to Mumbai.

Alas the Chinese inventory figures are reported by their Customs Department two months in arrears (February most recent) which leaves the best guess, best evidence, the daily reported direction of shipping rates which have cooled to 3600 hovering near a twenty day average.
The diviners of chart prices believe that there is one more leg up in shipping rates, something to do with a full moon, new moon, and no moon, but they are remarkably accurate. Were this so then markets, and the miners, are calling the Chinese bluff.

Indian equities seem to agree. The market have cooled in the last month but the correction (decline) in prices has been less than expected. As a matter of full disclosure the author had bet against India stock prices the last two weeks and covered those position with a modest profit on 26 June.

There is the small matter of the Indian government budget that will be announced on 6 July. The Finance Minister will say that Indian GDP is growing, it is, that the government needs to borrow more money than expected, which in India is itself an expectation, but that there is a plan that presumably will not dwell impolitely on the oil and fertilizer subsidies that do not appear on the government's balance sheet.

Despite this looming shadow of financial reality India equity markets refuse to die. There is much to look forward to. $500 billion in infrastructure spending, a defence budget that will generate $25 billion in ofset requirements (domestic production capability) in the next five
years, and the political will to disinvest (sell shares) in Public Sector Undertakings (government companies).

The latter being the most important because raising money by selling shares is a gift in the closed financial world of government debts and deficits. The Indian Governmen is at once the largest shareholder (30% of the Indian market cap, $300 billion) and potential share issuer.
Naturally a seller of shares prefers higher prices, especially when unloading equity in a national air carrier that loses a buck for every four bucks in revenue.

Though the author enjoys the ski slope of price correction, it appears that the universe of real midcap Indian companies ready for a +20=50% run

manana


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