Today the Shanghai index posted its worst day since 2007, plummeting a whopping 8.5%. This took a significant chunk out of rally that has occurred since the Chinese government took efforts to actively halt the declines in the market, via capital injections, trading restrictions, and public proclamations against bearish participants. China is significant for a variety of reasons, but mostly because its ascension has been the primary driver of growth for the global economy over the last decade. Its thirst for natural resources has bolstered commodity prices and global trade. Stocks inherently fluctuate so while that is clearly a massive decline, the preceding rally had been even greater. Ultimately, what will matter is how the real Chinese economy does. Will policymakers take additional steps such as economic stimulus if the situation gets worse? I don’t know the answers to these questions yet, but this volatility can spread to all markets so it is simply something that is worth monitoring. At TTCM we aren’t invested in Chinese companies because we didn’t see great value and the accounting in many circumstances has been questionable. Still, many U.S. and international companies derive a lot of their profits in China so if the stock market issues expand to the economy, that will clearly be a negative.
We’ve seen great rallies in most of our large financial positions, but anything related to commodities has been killed. Truthfully, it is almost better for the crash in markets such as energy to be as severe as this one is, to get the maximum reduction in capital investment. Ultimately, lower prices increase demand and reduce supply. It does take time though but this fundamental transition is occurring. The selloff is creating some really good opportunities for us but it is important to realize that they will be long-term investments. There has been total capitulation in the prices of these stocks and so now prices are quite a bit below fundamental value. We don’t expect to pick the bottom, but by incrementally adding to high quality names as prices get cheaper, we are setting the stage for attractive future returns. We also still see good value in many of our largest financial positions, so just because they have gone up a lot, we still believe there is a lot of upside. As always, if you have any questions please don’t hesitate to give me a call directly!