China - December Commodities Trade Data... Let's play.

I was originally going to comment on the velocity of money, as I think it is a prudent subject in relation to the US dollar, and an area that demands some attention when looking forward from our January perch. But stepping off our fair shores for a moment and focusing attention on the largest driver of economic growth has now invaded my thoughts for this blog entry.

So here's my update on China and the preliminary December commodities trade data which was released this morning.(Convenient, no?):

The stand-out commodities for the month on the positive side were crude oil, thermal coal and platinum where imports were significant. On the negative side, we saw large steel net exports, the first net exports since 2008 in aluminium and continuing weak refined nickel net imports.

We continue to see results fall into 3 key investment themes with respect to China:

- Favour upstream commodities, avoid downstream (I.e. prefer met coal & iron ore to steel; prefer bauxite to aluminium)

- Watch for arbitrage reversals: copper imports strong at the moment, aluminium exports strong

- Wary of commodities where China has significant capacity, prefer those where it doesn’t (China is net short of crude oil, nat gas, platinum, iron ore, mined copper, mined nickel. It is long of smelting capacity in copper, nickel and zinc; steel capacity; zinc; alumina/aluminium capacity).

I would expect to see continued strength in energy-related commodity imports in January as cold weather impacts. We may also see continued stockbuilding ahead of Chinese New Year, which is late this year on 14 February. Note that y/y comparisons for the Jan-Feb period are fraught because of the variable dates of the Lunar New Year holiday. We won’t therefore have reliable comparable data until the combined Jan-Feb data is released in March.

So why did this information pique my interest while focusing on domestic and international flows of the US$?

A colleague of mine brought up an interesting idea the other day. There is a unique trade pattern that forms around Presidential Election cycles, in which you will see economic output increase starting about 12 to 18 months before the year of an election. This is a great time for investing in Equities, and focusing on certain sectors during this phase will usually yield great results.

What's interesting is that we are fast approaching the next US election in 2012, and it just so happens that the Chinese Election falls in the same year... Very interesting to say the least, because the US cycle takes place every 4 years, but the Chinese cycle takes place every 5. So the odds of them falling in the same year happens once every 20 years. What an interesting idea as we come off of extreme market lows and we start to see a resurgence of flight to quality, and possibly "riskier" assets?

Lets dial that back a minute and think of the implications of increased economic production in both the US and China running up to the same finish line in 2012. Tie that in to an expected Bull cycle in equities and we have the makings for a "gang-busters" near term investment horizon. Bear's need not apply.

Stay tuned.....