Saturday, November 5, 2011

Problems in China

Fascinating couple of articles on the Globe and Mail today regarding the problems in China. 

You can read them here:

Bank of America Issues Jittery China Forecast

And here:

China's Vanishing Factory Bosses

Conclusion

China consumes 40-50% of the worlds commoditites.  When the music stops, and these articles are definite warning signs, Canada and every other commodity producing country will get hit hard.  Nearly every commodity (except natural gas) has gone up in a parabolic curve over the last few years.  The TSX will likely be worth half what it is today when this is all said and done.  If you look at the margins and returns these commodity producers are earning it's a clear sign that it is not sustainable. 

So what is the individual investor to do?  First, if you look at many of the commodity companies in Canada, many are already priced for a significant fall in commodity prices.  I would recommend selling every commoditity producer, especially speculative ones.  If you have a good way of shorting actual commodities like copper, iron, and cement let me know.  Shorting marginal oil producers will also be a good way to make money. 

Owning some Fairfax Financial is also a great way to protect yourself.  I have a signficiant amount of my net worth in the company.  They are currently 100% hedged and own some derivative contracts that will pay off handsomely if we have any deflation over the next 9 years.  They don't own anything commodity related and in fact the CEO Prem Watsa has been bearish on commodities and China for a while now.  I have commented on this before.  Read the letter to shareholders for the past couple years to read about Mr. Watsa's concerns. 

On the topic of FFH, I have read every single shareholder letter since 1986.  I made some condensed notes about each and every market call Prem Watsa has ever made since starting Fairfax.  One would be very wise to listen when Mr. Watsa says something.  If you are interesting in these notes send me an email. 

I would also suggest telling friends and family how to protect themselves, if they will listen to you.  At least you've done your part.  The TSX is predominately a commodity index and with financials making up the next biggest chunk.  Very dangerous. 


Best Regards,
Kevin

Disclosure - Long FFH

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