By Matt Nesto
Two months ago it was all about the debt ceiling and U.S. downgrade. Then it was Fed chief Ben Bernanke in focus. Now, it seems the market moves every day reacting to developments in the European financial crisis. "The market can only focus on one thing at a time," says well-known value investor Vitaliy Katsenelson, chief investment officer at Investment Management Associates.
"That's why nobody is talking about China or Japan because we are focused on Europe today," says Katsenelson. "The spotlight will be there when things get worse."
Katsenelson was an early adopter of China skepticism and has remained bearish on the country for more than a year. Today, the fact that China is slowing and struggling with inflation and over-capacity is a given. The debate is over how much the world's second largest economy will slow.
"The argument between hard landing and soft landing is going to be won by hard landing," Katsenelson says in the attached clip, pointing to the collapse in copper prices as "just the beginning."
In fact, if you compare some of the benchmarks in Europe to those in China and the industrial metals markets over the last one-month, a clear shift is already evident. In just 30 days, the Hang Seng Index and the Shenzhen Index are both down about 12%, Copper and Silver are down more 20%, but the benchmark stock indexes from Germany, France, Italy, Spain are all up by 2% to 8%.
With so much of the global growth story resting on China's shoulders, any change in the narrative will have widespread consequences. Katsenelson is not only avoiding Chinese stocks, he sees suffering ahead for China-linked commodity exporting economies like Australia, Russia, Canada, and Brazil. He's also avoiding "companies that provide equipment" like Caterpillar (CAT).
"Caterpillar's sales went up a lot, but its margins hit an all-time high, so I would have to normalize CAT's earnings and margins and suddenly they are not earning $8 or $9 a share, they're earning maybe $3," he says. "So it would be attractive to us at $30."
CAT is now trading in the mid-70's, and has fallen nearly 40% in five-months. His point is, "if you think they look cheap now, I would argue that you probably have plenty of time to wait because they'll get a lot cheaper."