ZC on precipice and LULU

Back from Greece and looking to fire up the blog:  ahead on short ZC position from 760; about to break through 735 which has been the repeated low of the last month:

Prior to the summer run up Corn was in the 550s.  I have no idea if it can rapidly return there but feel this is a decently safe position to enter into an extension of the position.  I did the same on the LULU short, less for technical reasons than increasing fundamental conviction at 68:

I’m down on the effective ZNGA long position (by shorting Jan 13 & 14 puts at 3 & 2.5; the premiums got most of the move down and I also feel there isn’t much further move down there but perhaps could have waited a bit longer to enter the position: now trading underneath net asset value makes the risk minimal I think.

 

 

James Fallows’ China Airborne

China Airborne is a slight misnomer of a title — implying the usual indomitable success stories about China’s recent economic growth.  These are plentiful: gushing portrayals of new airports from Tom Friedman, warnings from Niall Ferguson or even Tom Siebel (part of this itunes lecture, admittedly given in darker US economic days of 2009.)

Fallows’ mixed work — it is repetitive at times and meanders too much around personal experiences in ways to my taste others such as Robert Kaplan do better — takes a different approach.  It wonders if Chinese economic progress may be capped by its controlled, state-centered approach.  Fallows is an avid pilot.  Is China capable of creating a high value industry such as the Airlines?  The question is treated at all levels: production of planes, placement of airports, training of pilots, control (now largely military) of Chinese airspace?

While he concludes that someone who answers authoritatively the question either knows much less or much more than him, the strong hints are he believes not.  The complexity of airplane development is one thread of the book, and sometimes comic state control from make work jobs to his own confrontations with police.

If you have four pages to read they are pages 92-96: “Apex Industries” and escaping the smiley curve.  The smiley curve represents a U shape of profit margins.  Brands and high value development are one, profitable edge of the “U” and high end retail and service are the other, where China is stuck at the bottom.   The compelling data is that trade deficits mask a lot of this phenomena – the entire iphone is represented as part of a Chinese trade deficit as a finished product but at best less than a tenth of the profit goes to China for example.

An Apex industry is drawn from biology’s “apex predator”: the lion on the savanna whose presence depends on layers of prey below them on the food chain.  If they’re there, the whole ecosystem is in good shape.  Aviation is obviously one of those apexes, biotech might be a natural other one.  Here the book tantalizingly ignores a more full investigation into the state of university systems (rampant cheating and poor if voluminous paper production in China has them nearly outside the global academic community.)  It also discusses the state firewall and gives anecdotes of the war against Google.  Had these been more fully explored the book might have made a greater impact than it did in publication this year.

The verdict on Boeing (BA $69) is unclear — though he provides a lens on the history of aviation one doesn’t find elsewhere, including early Chinese aviation pioneers in the Sun Yat-Sen era.  Several analysts discuss the enormous mistake Boeing has made in the outsourcing of much of the value chain — but this also hints at strong value to be found in General Electric (GE $23) engines; GE spends $2 billion annually on engine R&D he claims compared to $300 million in all of China.

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