Last week in this space (MorningWord 1/10/14: Chinese TakeOut) we highlighted the very poor sentiment (possibly for good reason) related to emerging market economies & markets, specifically China. If there is a theme so far in 2014, it is EM under-performance, and fear that stagnant growth in the second largest economy in the world could eventually throw some cold water on the developed world’s economic recovery.
Yesterday, Business Insider ran a story titled “One Thing That Could Go Wrong Is China” highlighting Morgan Stanley strategist Joachim Fels’ concerns relating to China:
The consensus view is that the authorities have everything under control and that the transition from export- and leverage-driven growth to consumption- and reform-driven growth will go smoothly. Our worry is that this transition, while likely to be successful eventually, will turn out be more tricky in the near term, mainly because financial conditions have tightened considerably, as evidenced by higher money market rates and bond yields. This in turn is likely to produce a sharper-than-expected downturn in China’s growth during the first half of this year, which may well lead to renewed fears of a hard landing
This could obviously be a fairly dire result in the near term, but I think it is important to note that this sort of commentary appears to be a whole heck of a lot more prevalent as the Shanghai Composite flirts with the all important 2000 level, which was a significant psychological and technical level in the throws of the financial crisis:
On the single stock front, it would probably make more sense to focus on U.S. multi-nationals that have a disproportionate amount of their earnings and sales from China, rather than looking to depress already depressed Chinese equities.
WYNN, a stock that made new ALL-TIME HIGHS YESTERDAY, gets almost 75% of their sales and will get all future growth from Macau. That could be a very interesting short candidate once the technical momentum cools for those who think that Chinese economic growth could be stagnant for 2014. WYNN is up 70% in the last year and 25% alone since the beginning of December, seemingly incorporating a decent bit of good news. The stock broke out at $180 in mid December and went up 10% in what appeared to be a straight line, near term target on a whiff of caution would be the 50 day moving average (circled below):
WYNN has not officially set its reporting date, but Bloomberg estimates Jan 31st the day it reported last year. If this was the case, the weekly options are implying about a 4.5% one day move, which would be rich the 4 qtr avg move of only 1.5%. However, since realized volatility in WYNN has picked up to start 2014, part of the elevated options pricing is related to existing volatility.
Steve Wynn, WYNN’s illustrious co-founder and CEO, has demonstrated admirable foresight in growing the business over the past decade. But that does not mean that WYNN is immune to broader macro pressures. WYNN’s dependence on Macau has been a blessing for the past few years, but if Chinese growth slows, that dependence can also be a curse. As a 30 P/E multiple stock with only 10% expected annual earnings growth over the next 2 years, the bar is set quite high, and investors are not playing with the House’s money.