By Steve Goldstein
Critical information for the U.S. trading day
Two big Chinese companies, Alibaba (BABA) and JD.com (JD), are set to report results on Thursday, in what's been a pretty snoozy year for Chinese stocks, with the iShares MSCI China ETF MCHI up just 3%.
Investors who love China stocks point to their super-low valuations, while the bears note China's cold war with the U.S. along with stifling real-estate debt, looming demographic troubles, accounting questions, and, of course, its Communist Party leadership.
Rupert Mitchell, the Australian blogger who authors the Blind Squirrel Macro blog, retorts that American investors are long China whether they like it or not, given the exposure the likes of Apple and Nvidia have to the world's second-largest economy. "Let's face it, everyone is long China risk already anyway! Most just own it at the wrong price," he says.
The right price of course would be Chinese equities. Mitchell says the top non-financial components of the large-cap China ETF FXI trade on 12 times forward earnings, a 9% free cash flow yield and "extraordinary levels" of net cash on their balance sheet.
That's a bargain not just to the Magnificent Seven and the S&P 500 index SPX more generally, but even other emerging markets - the large-cap China ETF overall trades on 8.3 times next 12 month earnings, versus 13 for the emerging markets ex-China ETF EMXC. (Incredibly, the ex-China emerging markets fund now has 86% of the assets of the broader emerging-markets ETF EEM, he adds.)
Sure, but cheap for a reason, right? "I can already hear the 'value trap' pushback, so let me address that. For an asset class to break out of a value trap, it needs new buyers and a catalyst. I am not holding my breath in anticipation of Western pension fund consultants changing their mind too quickly about Chinese equities. We don't need them," he says. The new buyers, he says, can be China's export partners who receive yuan, who right now have been parking them in Chinese bonds. "Next stop (very cheap) equities? Quite possibly," he says.
The recent rise of the yen vs. the yuan also can be a help. "A spectacularly cheap yen has created strong competition in key export markets and shifted significant high end consumption activity offshore. Could China be about to get some of that back," asks Mitchell.
One final support would come from earnings, if the earnings cycle turns. "I know that valuation is never a catalyst for a re-rating of a market," he says. "Nevertheless, this rodent sees plenty of capital returning to Chinese shores just as it appears that the earnings cycle might be turning. Now that is a catalyst."
The market
U.S. stock index futures (ES00) (NQ00) were higher in the early going Tuesday. The big mover was Japan, where the Nikkei 225 JP:NIK incredibly has completely recovered from last Monday's sell-off.
Key asset performance Last 5d 1m YTD 1y S&P 500 5344.39 1.99% -5.70% 12.05% 20.43% Nasdaq Composite 16,780.61 2.53% -9.34% 11.79% 23.11% 10-year Treasury 3.918 2.10 -24.50 3.71 -29.99 Gold 2500.7 1.98% 3.02% 20.70% 28.96% Oil 80.07 8.32% -2.31% 12.25% -2.91% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The U.S. July producer price index came in hotter than expected at the core, with a rise of 0.3%, but cooler than expected at the headline level, with a rise of just 0.1%.
Home Depot (HD) kicked off retail earnings this week with a sales miss, and earnings beat, as it lowered guidance for the year.
Starbucks shares (SBUX) soared after Laxman Narasimhan stepped down as chief executive and was replaced with Chipotle Mexican Grill's (CMG) Brian Niccol. Chipotle stock slumped.
Elon Musk held a conversation with former President Donald Trump that was notable as much for the forum - Musk's X instead of Trump's Truth Social - than any of the comments. Trump Media and Technology (DJT) fell 2% after sliding 5% on Monday.
Best of the web
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Russian navy is trained to target European cities with nuclear-capable missiles.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia TSLA Tesla GME GameStop AAPL Apple TSM Taiwan Semiconductor Manufacturing PLTR Palantir Technologies SMCI Super Micro Computer DJT Trump Media & Technology AMC AMC Entertainment AMZN Amazon.com
The chart
This chart says it all - from the blog Wolf Street, it shows the point at which financial services firm B. Riley Financial (RILY) made an equity offering. The stock lost half its value on Monday after suspending its dividend, projecting a loss, and disclosing a Securities and Exchange Commission subpoena.
Random reads
At least one bear is willing to learn.
Liquid water has been found in Martian samples for the first time.
Sure, cash is in demand, but these King Charles notes went for 11 times face value.
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-Steve Goldstein
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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08-13-24 0833ET
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