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FRED
09-26-07, 05:11 PM
http://www.itulip.com/images/Nochinamap.jpgToday I Shorted China

by John Rubino

September 26, 2007

Yesterday I took part in a roundtable discussion with some seriously smart, articulate money managers, two of whom are putting their clients into foreign stocks. Well-run companies with nice dividends in fiscally-sound countries will outperform, they said. And a rising euro or yen or yuan will actually be a great thing for their countries when the dollar really starts to tank, because a rising currency will make these countries far richer. Their companies will be able to buy up foreign assets and their consumers will become engines of growth as they snap up increasingly cheap food, cars and toys.

It all sounds so…civilized, this smooth transition to a world in which the U.S. is no longer central and other countries can consume enough to more than offset the loss of U.S. demand. I played devil’s advocate a bit, pointing out the downside of a plunging dollar for the rest of the world and opined that maybe other stock markets would suffer a bit along the way. But roundtables being what they are, the conversation moved on and I didn’t a chance to make the point all that forcefully. I’ve spent the rest of the day playing the argument over in my head, and far from being convinced by the smooth-transition thesis, I’m more sure than ever that a plunging dollar makes foreign stocks (other than gold miners) nearly as risky as their U.S. counterparts.

In fact, far more likely than a smooth multi-year adjustment process is a series of discontinuities. A bunch of hedge funds blow up and U.S. stocks fall hard, to which the Fed responds with a rate cut. Derivatives start to freeze up and the Dow drops 1,000 points, leading the Fed to cut rates again and sending the dollar to fresh lows. The falling dollar pushes up long term U.S. interest rates, causing financial stocks to plunge and leading the Fed to buy up long-term asset-backed bonds, thus whacking the dollar again. You get the picture. To each new crisis the response is the same, and the pressures on the dollar and U.S. stock prices grow. With the U.S. in turmoil, the stock markets of our trading partners fall, partially in general sympathy, and partially because their soaring currencies are shutting down whole export industries. With the euro at $1.75 (up from $1.40 today), New Yorkers aren’t buying much French wine. With the Canadian dollar at $1.25 (up from $1.00), Californians aren’t visiting Vancouver. And with the Japanese yen and Chinese yuan soaring, Americans in general are squeezing another year or two out of their old game systems, big-screen TVs, and cars. European and Japanese consumers buy a bit more at first, but they lack the shop-till-you drop, put it all on plastic and worry later kind of élan of their recently-departed American counterparts. So European and Asian factories start to close, and voters lose their jobs.

Most of these countries are democracies, more or less, and their governments respond predictably, with rate cuts and tax cuts and higher spending. But these “competitive devaluations” backfire, as the bond markets at long last realize that in a fiat currency world, there is literally no limit to how much paper a panicked government can print. Falling currencies beget higher interest rates, mortgage lending dries up, and it’s game over for stocks. Whew.

Anyhow, as all this is running through my head, I pull up a chart of the FTSE/Xinhua China 25 Index, an ETF that tracks Chinese blue chips, and am wowed by the way it's doubled in the past year, even as the subprime crisis has been hammering the U.S. and U.K. financial sectors.


http://www.itulip.com/images/2602140_Chinastocks.gif


Then I found the following chart in a Financial Sense article by Tedbits Newsletter editor Ty Andros. It depicts the Shanghai Composite index of Chinese stocks, which has had a nice couple of years indeed. You don’t even have to know what a chart this steep depicts. It’s an automatic short just on principle.


http://www.itulip.com/images/2602623_Shanghaistocks.gif


So just a few minutes ago I bet against China (and against the smooth transition theory) by buying some ’09 FTSE/Xinhua China 25 put options. I’ve been happily short U.S. banks and homebuilders for a few years now, but this is my first stab at predicting the secondary effects of the dollar’s collapse. Back in a few months with an update.


John Rubino is co-author, with GoldMoney’s James Turk, of The Coming Collapse of the Dollar and How to Profit From It (Doubleday, December 2004), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for Fidelity Magazine and CFA. His web site is dollarcollapse.com (http://www.dollarcollapse.com/).


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rabot10
09-26-07, 06:04 PM
Great information Fred thanks and keep it coming. I need as much advise and information as I can get in these weird times. God knows I don't have a clue.

Andreuccio
09-26-07, 06:13 PM
I sold all my asian stocks a few weeks ago when I read an article saying maids in Shanghai were now quiting their jobs because they could make more money playing the market. If that doesn't scream "BUBBLE", I don't know what does. Of course, it's probably gone up about 20% since then.

sparki
09-26-07, 11:57 PM
Moin from Germany,

i don´t have the courage to bet against China and especially the Yuan.

But with statistics like this

China Shenhua Energy Co., the nation's largest coal producer, attracted a record of more than 2.6 trillion yuan ($350 billion) in orders for its Shanghai share sale, said two people with direct knowledge of the transaction.

So up to half of the heralded earnings growth of companies listed in Shanghai and Shenzhen may have originated from piling into the country’s red hot stock market. Almost a third of those companies’ income in the first half was non-operational, up from 13 per cent in 2006, and much higher than most developed markets where non-core income usually accounts for less than 10 per cent of total profits

etc

it is getting harder for me day by day not to short.... :-)

sparki
09-27-07, 03:17 AM
Moin again,

<a href="http://ftalphaville.ft.com/blog/2007/09/27/7654/the-short-view-emerging-markets-bubbles-were-not-quite-there-yet/">The Short View: Emerging markets bubbles — we’re not (quite) there yet
</a>

MSCI shows India trading at a multiple of 22.9 and China at 48.8. This does look like a bubble. In both cases, their growth to date owes much to multiple expansion: India’s doubling in three years; China’s trebling in two years. For both, the growth story is compelling, but authorities are tightening monetary policy, not normally a good time for multiples to expand.

So there is not – yet – a generalised emerging markets bubble. There is growth in emerging markets, for those who do the necessary homework and take the necessary risks.

But there is no great bargain opportunity, either. And the way funds are piling in to the most popular markets suggests bubbles could easily form there.

DemonD
09-27-07, 04:51 AM
clue, wanna chime in here with buying puts on the shanghai index which has what, basically tripled this year?

BiscayneSunrise
10-04-07, 02:10 PM
I agree that the Chinese markets are in a bubble but shorting into the teeth of a mania can be very risky business.

Historically, the prognosticators who warn about the mania tend to do so way too early.

Just like one doesn`t want to catch a falling knife, one doesn`t want to try to lasso a missle shot. It`s probably best to wait for technical evidence of the downturn that rather try to short it on the way up

c1ue
10-04-07, 03:16 PM
clue, wanna chime in here with buying puts on the shanghai index which has what, basically tripled this year?

I thought about it - but I don't follow the China stocks nor derivatives, and I don't buy into anything I haven't followed long enough to feel I understand the 'action'.

I look into investing in China or China's markets regularly, but I've never been the type to jump into where the action is - plus the whole 'money roach motel' thing.

Rubino's argument is interesting - also my contacts there are conveying the same types of signals as Andreucchio's maids.

But I didn't short the housing market due to lack of familiarity - though I did short Internet stocks since I had been riding that wave up - and so I'm not ready to play with the China fire just yet.

I actually think that the trade war issue is becoming more likely - what better scapegoat to blame inflation on than China? They're the ones who have been taking American jobs, also passing on increased commodity/decreased dollar costs to the US, and finally running up this huge trade surplus.

If China is no longer buying Treasuries, all the more reason to lay off on them.

Christoph von Gamm
10-07-07, 03:26 PM
China is especially vulnerable to exports to the U.S. and to Europe. Their comparative advantage dwindles with every receding US Dollar cent, whilst at the same time the export surpluses fuel growth inside China therefore heating on the once cheap labor market being the biggest resource to exploit at the moment. Shorting China therefore after this big run appears like a safe bet.

sunny129
10-07-07, 05:16 PM
I did short the indexes of the mortgage lenders, broakers, banks and financials. My initial buys were in positive and later ones have gone into red and still treading the water at this point. The point is there is NO FUNDAMENTAL reason for the current evaluation of above equities but they reversed and going up on the grounds - the worst is over, the bottom is near, the Fed/Govt/politicians will bail out, no recession but slow growth etc !

This reminds me the quote " The market can remain irrational more than you can solvent!" FXI options appear to be highly volatile to trade short term.

For the last 6-12 months ( gradually) I am 10-15% against the market, 10-15% cash , 5% bond and rest long in Mkt with tilt towards large cap value and Internationals. My portfolio has become market neutral with min positive bias. I want to remain in this mode till the picture clears up. I am in early 60s working part time and cannot afford to lose my nest egg like what happened during 2000-2003. Any input will be appreciated.

jk
10-07-07, 05:49 PM
I did short the indexes of the mortgage lenders, broakers, banks and financials. My initial buys were in positive and later ones have gone into red and still treading the water at this point. The point is there is NO FUNDAMENTAL reason for the current evaluation of above equities but they reversed and going up on the grounds - the worst is over, the bottom is near, the Fed/Govt/politicians will bail out, no recession but slow growth etc !

This reminds me the quote " The market can remain irrational more than you can solvent!" FXI options appear to be highly volatile to trade short term.

For the last 6-12 months ( gradually) I am 10-15% against the market, 10-15% cash , 5% bond and rest long in Mkt with tilt towards large cap value and Internationals. My portfolio has become market neutral with min positive bias. I want to remain in this mode till the picture clears up. I am in early 60s working part time and cannot afford to lose my nest egg like what happened during 2000-2003. Any input will be appreciated.

one risk is in a large move to the downside. your international exposure is likely high beta, especially if it is emerging market. your shorts or puts may not hedge as well as you'd like. another risk is generalized, global inflation with all currencies down against gold and perhaps other commodities and real goods. [unless some of your longs are in these industries.] a third risk is in a lack of income - unless some or all of both the large caps and internationals pay decent dividends.

FRED
10-07-07, 05:51 PM
I did short the indexes of the mortgage lenders, broakers, banks and financials. My initial buys were in positive and later ones have gone into red and still treading the water at this point. The point is there is NO FUNDAMENTAL reason for the current evaluation of above equities but they reversed and going up on the grounds - the worst is over, the bottom is near, the Fed/Govt/politicians will bail out, no recession but slow growth etc !

This reminds me the quote " The market can remain irrational more than you can solvent!" FXI options appear to be highly volatile to trade short term.

For the last 6-12 months ( gradually) I am 10-15% against the market, 10-15% cash , 5% bond and rest long in Mkt with tilt towards large cap value and Internationals. My portfolio has become market neutral with min positive bias. I want to remain in this mode till the picture clears up. I am in early 60s working part time and cannot afford to lose my nest egg like what happened during 2000-2003. Any input will be appreciated.

Shorting a bubble is tough. It's usually best to try to catch the first bounce than to try to time the initial crash.

The exact quotation is: ""Markets can remain irrational longer than you can remain solvent." - John Maynard Keynes

And, like a lot of what you read on contrarian web sites today, it first appeared here (http://www.itulip.com/index_old.html), back in 1998.

sunny129
10-08-07, 08:44 PM
Thanks jk for the response and your input.

I am long on the commodity side, long on Con. staples and also healthcare; reduced my exposure to Emerging Mkts, long caps both in domestic and Int'nl along with dividend paying ETFs, minimized my bond exposure to US relative to Int'nl ones plus 1-2% in bear MFs against Developed & Emerg Mkts. Most of my bear ETFs are against US equities except not so much against Tech. I am also partial to telecommunications and networking. I am NOT excluding any segment/sector of the Mkt completely to zero. This is more like strategic allocation of assets for intermediate and longterm.

I don't need the income currently since I plan to work part time till my nest egg grows to the extent where and when i can afford to large margin of error plus large cash position in 6-8 yrs. At this point I am NOT trying to beat the Mkt but capital preservation modest growth of 8-9% PA.

sunny129
10-08-07, 09:13 PM
Thanks Fred for pointing my omission of word ' remain' in that sentence.

If shorting against the bubble is tough what's the alternate? When picture/direction of Mkt gets less foggy, everyone will be at the door to get out. So getting into 100% or predominantly cash and try to time the Mkt, which is futile in my opinion and experience. I am NOT that smart. I feel the strategic allocation of my assets has given me some peace,stability and security with all the uncertainty/confusion out there. I gained quite a bit experience on my own managing my Ret and Taxable portfolios since 1982. I literally froze during 1987 crash, didn't do anything, rided it out and got lucky by default. I have been passive or should I say 'buy and hold' till 2003 when I lost 60% from the peak of March 2000. I recuparated completely (120%) plus some, early this year (in 4yrs+), which is not a small feat. Hence my current position!