09/01/15   Who’s Buying Our Stuff?

Editor’s Corner

Ron Rowland

Blame it on China, or so the economic narrative seems to go. A slowdown for China’s economy means a slowdown for all of the countries exporting their goods and services to China. If that isn’t bad enough, the Chinese government is taking steps to keep more of the country’s cash at home. This includes having Chinese companies and consumers buy from home-based suppliers whenever possible.

Today, the Wall Street Journal reported that year-over-year imports by China were down in July. Germany took the hardest hit with a 13.8% decline. Japan was also down double digits, posting a 13.6% drop. Many other countries are feeling the pain with purchases from India falling 9.9%, Eurozone imports off 8.8%, and South Korea’s receipts dropping 8.8%. The US didn’t fare as bad as any of these, showing just a 4.8% decline. However, all of these figures are likely to get worse, as South Korea released its preliminary August report, showing a 14.7% plunge in exports to China.

Given this backdrop, it is no wonder that world stock prices have declined on fears of an economic slowdown for China. For US companies, and their stock prices, it is important to understand how important China is as a customer. Based on data recently released by the US Bureau of Economic Analysis, China bought $55.5 billion, or 7.3%, of our exports during the first half of 2015. This is a significant percentage, and it has grown substantially over the past couple of decades; however, it is not enough to put China at the top of the list.

Canada is our #1 customer. During the first half of this year, Canada bought $143.8 billion of our goods and services, which represents a whopping 18.8% of our exports. However, this is down 7.0% from levels a year ago. Canada posted back-to-back quarterly GDP declines this year, officially putting the country in recession, so its drop in US imports is not unreasonable.

Canada’s purchases have shrunk by nearly $11 billion so far this year versus a $2.6 billion drop for China. In view of this difference, one has to wonder why Canada does not figure more prominently in the US financial news headlines. The second largest buyer of US exports is Mexico. Mexico is twice the customer that China is, buying $118.4 billion of our exports, representing a 15.3% share, although we do not hear about the Mexican economy very often.

In global trade, nearly everything is interconnected. As discussed above, China has been reducing purchases from Japan, Germany, and South Korea. As it turns out, these countries are the fourth, sixth, and seventh largest customers of US exports, respectively (the UK is the fifth largest). Our customers are feeling the pinch from China, which in turn will put a damper on their ability to buy US exports. Our largest customer is in recession, and many of our other important customers are being impacted by China. The fundamentals seem to confirm the negative technical action taking place in the markets.

Investor Heat Map: 9/2/15


Utilities is on the top for a third week, which is not surprising given its reputation as a defensive sector. However, as we pointed out last week, being at the top of a relative strength ranking sometimes just means it is losing money more slowly than the others. However, over the short-term period of the past week, Utilities has actually lost value more quickly than the other sectors. As a result, its prior substantial lead has all but disappeared. Additionally, the momentum readings are much more compressed this week, with the range between the extremes shrinking from 86 to 35. Telecom improved a spot to grab second place, but it has to share that honor with Consumer Discretionary and Consumer Staples. The concentration among the top-ranked categories pushed Real Estate from second to fifth. It now heads up the second tier with Technology, Health Care, Financials, and Industrials all posting similar momentum scores. Materials and Energy produced the largest bounces this past week and significantly reduced their negative trends. However, the gains were not enough to improve their relative rankings, and they still constitute a third tier from a visual perspective.


All of the style categories improved this past week, but they are still deeply negative and highly compressed. All momentum readings are within a 9-point range for a second week, which implies that all categories are moving in relative unison. Even though there is not much difference in the intermediate-term performance of the various style categories, the mathematics forces one of them to the top. Large-Cap Growth has the distinction of holding down that top spot for the past five weeks as the broader market moved from being very near lifetime highs down to 10-month lows. Mid-Cap Growth is in the #2 spot for a third week as Mid-Cap Blend finds itself close behind for a second week. Mega-Cap moved two places higher, setting up a three-way tie for fourth. Micro-Cap produced the largest change, jumping from last to seventh. As a result, Large-Cap Value now occupies the basement.


As treacherous as the markets have been lately, perhaps there is some comfort from knowing that most other parts of the world have performed even worse. On an intermediate timeframe, the US is now at the top. It moved up from second place and pushed the Eurozone down a notch. The Eurozone was only able to hold the top spot for a week this time, but it has been among the top three for the past eight weeks. Japan was in first two weeks ago, slipped from second to third this week, and is in jeopardy of falling further due to intense selling the past few days. World Equity climbed two spots and EAFE fell two. Canada received enough of the bounce in Energy to move it one place higher, and the UK slipped to seventh. For now, Canada has escaped the lower tier, leaving the three developing market categories and Pacific ex-Japan with that distinction. All four of these categories are deeper in the red than any of the sector or style designations, and China remains the laggard of them all.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“Given the headwinds faced by manufacturers – the rise in the value of the dollar, slowing growth in China, and a volatile stocks market – it may be that slow growth is about the best that can be expected in the near term.”

Don Norman, economist at Manufacturers Alliance for Productivity and Innovation


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