Value Hunting the SSE and Commodity Markets?

Just recently, on May 2008, I posted the following posting, Would you be Bullish On the Chinese Stock Markets?

And Jim Rogers was still bullish and he was mentioned in a Bloomberg news article stating his bullish stance, Investor Jim Rogers Buys Chinese Shares as Market Hits `Bottom'

• April 27 (Bloomberg) -- Investor Jim Rogers is buying Chinese shares, among the world's worst performers this year, as the market has bottomed, and he's focusing on agriculture, tourism, airlines and education.
  
  ``All my new money goes to commodities and China,'' said Rogers, who co-founded the Quantum fund with George Soros in the 1970s and correctly predicted the start of the commodities boom in 1999. He spoke at a seminar in Beijing yesterday.
  
  ``All the panic looks like a bottom,'' he said. ``I have bought in the last four to five weeks. I've been buying shares in China for the first time in a long time.''

I wasn't.

I wrote the following passage in that blog posting,Would you be Bullish On the Chinese Stock Markets?

• At this moment of time, the SSE is only at 3604 pts. Which is LOWER than what it was on May 17th 2007 when the SSE was at 4048 pts. In my opinion, the decline was rather deadly. I mean, the SSE did NOT fall off the cliff but instead it was like rolling off a hill. And because it was rolling off the cliff and not falling off the cliff, I reckon that many did not realise how drastic the fall could be. And sadly, the longer the time pass, the decline eventually turned severe!

And yesterday the SSE closed at 2457.20 pts! The below is a screenshot of the interactive chart loaded on cnbc website, http://www.cnbc.com/id/15837290?q=CN%3bSHI

In almost 3 months time the SSE has lost 1146.8 pts!

And the scariest thing is that if you look at the above chart, it still appears as if the SSE is only rolling down the hill!

However, the bigger picture now shows the exact deadly plunge in this market!

Now of course such a plunge would create curiosity. Contrarians and Value investors surely would be curious if there now exist investing opportunity in the SSE.

Yesterday, John Mauldin's Outside the Box, featured an important essay from Vitaliy Katsenelson, called A Value Investor Looks At China

Here's a rather interesting passage.

• Oh wait, the story about the shopping mall is not a figment of my imagination (I am not that good) but has already taken place. In 2005 NY Times ran an article titled China, New Land of Shoppers, Builds Malls on Gigantic Scale, it talked about the biggest shopping mall in the world that happened to be in Dongguan, China. The article said:
  
  "Not long ago, shopping in China consisted mostly of lining up to entreat surly clerks to accept cash in exchange for ugly merchandise that did not fit. But now, Chinese have started to embrace America's modern "shop till you drop" ethos and are in the midst of a buy-at-the-mall frenzy.... by 2010, China is expected to be home to at least 7 of the world's 10 largest malls... Already, four shopping malls in China are larger than the Mall of America. Two, including the South China Mall, are bigger than the West Edmonton Mall in Alberta, which just surrendered its status as the world's largest to an enormous retail center in Beijing." (emphasis added)
  
  Fast forward three years and you find a very different story: the biggest mall in the world - the South China mall, with space for fifteen hundred stores, only has a dozen stores open for business - it is empty. Shoppers never materialized. Billions of dollars have been wasted.
  
  Analyzing the Chinese economy while it is growing at superfast rates is like analyzing a credit card company or a mortgage originator during an economic expansion - all you see is reward - the growth. But the defaults - the risk - are masked by a healthy economy and constantly increasing new business that is profitable at first. The true colors of that growth only appear after the economy slows down and new accounts mature. (In fact, the banks or credit card companies in the U.S. that showed the lowest loan growth during last expansionary cycle have a lot fewer credit problems than those that did - U.S. Bank Co comes to mind here.)
  
  The consequences of LSGO are likely to be very painful for China. As of today we don't know how much of the recent growth came from wasteful, unproductive growth. Only after a slowdown will the true problems surface.

And Mr. Vitaliy wrote his opinion on the commodities market and China.

• It gets worse: high commodity prices
  Chinese demand for stuff (oil, metals, machinery etc...) has a tremendous impact on commodities, driving their prices many fold. High (and rising) commodity prices are negative for developed world economies but they are catastrophic to developing economies - they bring comparatively higher inflation and often stagflation. Here is why:
  
  Inflation is sourced from two broad categories: commodities (stuff) and wages. Emerging markets are twice as cursed when it comes to inflation:
  
  1. Commodity prices (less shipping costs and government controls - the Chinese government limits price increases on certain commodities, but we know that doesn't work in the long-term) are the same around the world. Thus the U.S. and China will see a similar increase in commodity prices (at least in dollar terms). But the commodity component represents a larger portion of the total product cost in China than in the U.S., as wages in China are a less significant component of a total cost. For instance, bread baked in the U.S. and China will require the same amount of wheat and wheat will cost as much. But baker wages will be significantly larger in the U.S. than in China and will result in a much higher cost of the finished product. Therefore, a spike in wheat prices will have a larger impact on the loaf of bread in China than in the US.
  
  2. Wage inflation: the US and Europe have little wage inflation, as rising unemployment has diminished the already weak bargaining power of the labor force, keeping wages in check. Economic expansion has put significant upward pressure on wages inflation in China (and India as well).
  
  In combination, these two factors were responsible for inflation in high single digits in China, double the rate of inflation in the U.S.
  
  China is not the cheapest place in the world to manufacture, not anymore. To its benefit, cheaper countries (Singapore, Vietnam etc...) are not big enough to steal a significant amount of capacity and the US in many cases doesn't have the needed infrastructure to bring manufacturing back. Appreciation in the renminbi and high oil prices (which are driving shipping rates up, placing a significant premium on the distance factor) are making Chinese produced goods even less attractive. Something has to give: either the U.S. will consume less or China will keep prices low to stimulate the demand, swallowing the loss, or a combination of both.

Do give that article a read. Here's the link again: A Value Investor Looks At China

And regarding commodities, FinancialSense market commentator wrote the following piece Commodity Correction - Coming Into an Important Bottom?

How now?

Would you dare go bargain hunting for some Chinese Stocks and do you think the grand commodity bull run is truly dead?