WSW Sunday, October 18, 2009

If you are expecting global warming stuff, it’s here:

https://chiefio.wordpress.com/category/agw-and-gistemp-issues/ and under the GIStemp tab up top.

This posting is about the other thing I do, looking at investment markets.

Daily Notes

IMHO, we are at a “local market top”. I’ve largely stepped aside to cash for any volatile positions. I continue to hold things like high dividend oil trusts and long term investments like BRKA Birkshire Hathaway. But it’s time to assure you have stop loss orders in place and watch the market closely.

It is likely that I may be slow in getting out the next “WSW” due to something I discovered in the way NASA GISS GIStemp handles temperatures and the “Global Warming” hysteria. Please forgive that delay, should it happen.

Wall Street Week – Sunday, October 18, 2009

Well, we are back “off to the races”. This is the most frequent occurance when you hit the moving average stack. About one in 3 or one in 4 you punch through lower in a “correction” rather than a “dip”. The best bet is for the rebound, but you are ready for a “sell out” if the dip turns into a correction. In any case, we ‘resolved to the upside’. Good enough.

We got through options expiration on Friday, Oct 16 with only a tiny sag. These folks have a nice readable calendar

This matters because the “hot hands” and “big players” do a lot of options. At expiration, these bets “settle” and you get a “tell” about what they are doing. This week, the “tell” said “more or less balanced book”. The good news is that a balanced trade book is not betting (nor pushing) the market down. The bad news is that we’re near the end of a long run and ‘balanced book’ often proceeds “down soon”. The “smart money” is not yet shorting things (pushing down) nor have they driven it up hard (not making a lot of new bets). We’re in the “cruising” stage. We keep going the way we’ve been going, but not forever…

So I’m “all in” but the next thing to do is to watch for the next reversal / correction back to the Simple Moving Averages and prepare for it. Sell your loosers, keep your winners, put stop loss orders behind the ones that have run up the most, and think “protecton” not “bet big now”. Bet big AT the SMA stack, protect when far away from it.

Oh, and start taking your positions and plotting them all on one chart (as we do here and under the “races” tab. Pick he worst ones and sell them. They will go down the most in a reversal. Pick the ones with large secure dividends and those doing “stairsteps up” (up, flat, up, flat…) as your “hold through the reversal” positions.

If you would like to see what I said last week, that posting is here:
https://chiefio.wordpress.com/2009/10/11/wsw-sunday-october-11-2009/

The Long Term Context

Last week I explained this particular chart. This week we look at it again. Volume is a bit light, again, but Slow Stochastic is again turning up. This is a very long term chart, so I interpret this as saying “one more run up, then we’re going to be thining out and looking for a return to the SMA stack.

10 Years, NYSE

10 years, NYSE

I’m repeating this text from last week. It looks to me like we have “one eye” and we’re setting up to form the second. So read this again, look at the chart, and watch the next couple of weeks for a down turn after Slow Stochastic is back at the top and inflects.


OK, look first at volume. We have red bars and we have a sideways red line. The sideways red line in a running average of past weeks. Notice that recently volume is below that red line. We have a white blob under the line and above volume. I think of those as “spooky eyes”. When you see two of them, it means volume is falling off and it is time to start being a bit more worried than usual. Take a look at the end of ‘08 where volume has two white blobs with a small spike between them. When you see those “volume eyes” looking at you, go to cash and take a vacation…

What Is Our Context

Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen.

Asset Class Races

Asset Class Recent Race

SPY       The S&P 500 ETF
GLD       Gold ETF
USO       Oil ETF
FXY       Japanese Yen currency fund
SHY       1 to 3 year U.S. Treasury Bond fund
FXE       Euro currency ETF
SLV       Silver fund
BZF       Brazilian currency ETF
EWA       Austria ETF
WOOD      A wood and paper products fund

Same story we’ve seen for months now. Resource economies and non-dollar resource plays winning. Oil has taken off, though. Time to revisit the oil play. Euro, Yen and Gold beating the dollar, but the Brazilian Real is beating them all. Easy money. Resources and OOTUS. Expect this to last for months. Wobbles, returns to the SMA stack, yes, but the theme is going to be around for a while.

What about Brazil? A Closer Look.

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

What I said last week still holds:

Gotta love Brazil. Just gotta love it. But look at the distance from the SMA stack. And look at RSI at 80. This is looking like a “blow off top” where it spikes up, then drops. Have a stop loss behind your position and ride if for all it is worth, but it’s a bit late to be adding to Brazil and it is time to start thinking about how deep the next “dip” will be …

The oil spike and the spike in sugar (SGG) have giving it another lift, but watch out for the inevitable dip. Long term good, but don’t buy on an 80 RSI after a big run up…

Running ETFs

I have a new tool that searches chart patterns and finds those that I describe to it as “interesting”. For this section, “interesting” is those that have price over 25 day Simple Moving Average over 50 SMA over 75 SMA. Basically, those that are in a steady up run.

This is most likely to continue, but will at some point each ticker will hit a “dip” and fall off this search, only to return at the next rise. So a high number is good, until it fails, and a low number can mean time for a second bite at the apple. Being ON the list can be as important as rank on the list. Races tell you how to rank them. Realize that these have not been filtered in any way for the quality of the fund, nor for the volume traded, nor for what they hold. Each ticker must be looked at for those qualities before buying anything. This is just a way to find “things of interest” to explore. So what is on the top of the list?

   MZN 99
   PCY 79
   IHE 70
   RHS 69
   XPH 69
   BNZ 68
   DNH 68
   EWA 68
   PAF 68
   WIP 68
   EMB 62
   TZD 59
   MZO 55
   IPE 50
   BWZ 48
   DBR 48
  IGOV 48
   BSV 47
   MBB 47
   KXI 44
   VDC 43
   XLP 43
  ISHG 37
   DEM 33
   DGS 33
    EU 33
   EWT 33
   TIP 33
   BRF 32
   EPI 32
   EWX 32
   FXA 32
   PIN 32
   QAI 32
   VWO 32
  AAXJ 31
  ADRE 31
   BIK 31
   BZF 31
   DBV 31
   DEF 31
   EDC 31
   EEB 31
   EEH 31
   EEM 31
   EWM 31
   EWZ 31
   FDN 31
   FPX 31
   FRN 31
   FXG 31
   GML 31
   GMM 31
  GULF 31
   ICI 31
   INP 31
   IRO 31
   IYK 31
   PBS 31
   PSL 31
   PTE 31
   UGE 31
   URR 31
   VOX 31
   XGC 31
   BKF 30
   CSD 30
   CZA 30
   ERO 30
   GUR 30
   GXG 30
   HYG 30
   IAI 30
   IDX 30
   ILF 30
   JNK 30
  PNQI 30
  PNXQ 30
   HHH 29
   PGX 28
   XES 28
   IAU 27
   GLD 26
   DGL 25
   DGP 25
   RSX 25
   UBG 25
   UGL 25
   DBP 24
   EIS 24
   JJP 24
   CEW 23
   ENY 23
   MES 23
   IIH 22
   EET 21
  PMNA 20
   PVI 20
   XRU 18
   BVL 17
   INR 17
   GWO 14
   FXC 12
   FXE 12
   FXF 12
   IAH 12
  MCRO 12
   PPH 12
   TUR 12
   UDN 12
   ULE 12
   AFK 11
   AGQ 11
   AIA 11
   AOA 11
   AOK 11
   AOM 11
   BJK 11
   BSC 11
   CVY 11
   DBS 11
   DES 11
   DEW 11
   DLS 11
   DND 11
   DON 11
   DPN 11
   DRF 11
   DRW 11
   DTD 11
   DTH 11
   DTN 11
   DVY 11
   DWX 11
   EES 11
   ELR 11
   ELV 11
   EMG 11
   EMM 11
   EPP 11
   EPS 11
   ERX 11
   EWI 11
   EWK 11
   EWN 11
   EWP 11
   EWW 11
   EZM 11
   EZU 11
   FAD 11
   FCG 11
   FDM 11
   FDV 11
   FGD 11
   FNI 11
   FNX 11
   FTC 11
   FXD 11
   FXH 11
   FXL 11
   FXN 11
   FXO 11
   FXU 11
   GAF 11
   GCE 11
   GDX 11
   GMF 11
   HGI 11
   IAK 11
   ICN 11
   IDV 11
   IEO 11
   IEZ 11
   IGE 11
   IGF 11
   IGN 11
   IGV 11
   IJH 11
   IJK 11
   IJT 11
   ISI 11
   ITA 11
   IVE 11
   IWP 11
   IWR 11
   IWS 11
   IYC 11
   IYE 11
   IYF 11
   IYG 11
   JKD 11
   JKH 11
   JKI 11
   JKL 11
   KCE 11
   KIE 11
   KLD 11
   KOL 11
   LVL 11
   MDY 11
   NFO 11
   NIB 11
    NY 11
   OEF 11
   OIH 11
   PAO 11
   PBP 11
   PDN 11
   PDP 11
   PEF 11
   PEJ 11
   PEY 11
   PEZ 11
   PFA 11
   PFI 11
   PFM 11
   PGM 11
   PHB 11
   PIE 11
   PJG 11
   PJP 11
  PKOL 11
  PQBW 11
   PQZ 11
   PRF 11
  PRFZ 11
   PSJ 11
   PSP 11
   PTF 11
  PTRP 11
   PWB 11
   PWJ 11
   PWP 11
   PXE 11
   PXH 11
   PXI 11
   PXJ 11
   PXQ 11
   PXR 11
   PYH 11
  QQEW 11
  QQXT 11
   RCD 11
   RFG 11
   RFL 11
   RPG 11
   RPV 11
   RWV 11
   RWW 11
   RYE 11
   RYF 11
   RYJ 11
   RZG 11
   RZV 11
   SLV 11
   SLX 11
   STH 11
   SZR 11
   TOK 11
   UKW 11
   UYG 11
   VCR 11
   VDE 11
   VFH 11
   VIG 11
    VO 11
   VOE 11
   VOT 11
   VSS 11
   VYM 11
   XLE 11
   XLY 11
   XME 11
   XOP 11

Several of these we’ve seen in prior weeks. We have PAF near the top, so we could ask Yahoo what it is:

See: http://finance.yahoo.com/q/pr?s=PAF

Another Asia-ex-Japan fund. I’m in EPP, but this is nice confirmation. At the bottom (at 11) is XME a miners and metals fund. And XOP an Oil Exploration and Production fund. Two things we know are running right now. A quick scan also shows silver SLV, oil services OIH, Coal KOL and even MDY the “mid cap” index fund all on the list. And several of my favorite EWx funds including Brazil EWZ. All of that gives confidence that the others have some merit as well. All in all, a nice shopping list. Stable growers tend to rise to the top of this list while rolling or volatile trades tend toward the bottom. They all are “running up” by definition of the screen. So if you want more sedate steady growth, head toward the top. More “action” will tend to the bottom. If you want the most growth per unit time (alpha) you will need to “race” them against each other on a common chart. I’ve bought a couple of things off this list and I’m happy with the results.

You can explore the rest on your own, if you like.

OOTUS – Out Of The U.S.

See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves.

If you are in England, put your money in anything else. The pound has had a bit of an upturn lately, but I don’t see much reason for it to hold. The Yen took a dip. Odd. It usually isn’t very volatile. Probably a central bank intervention, IMHO.

The “Emerging Markets” are all running up nicely. Have been. Will be for a while. Hop on and ride…

Indonesia Fund 1 Year Chart

Indonesia Fund 1 Year Chart

This chart compares FXI – China 25 big stocks, EWZ – Brazil, EWO – Austria, EPI – Wisdom Tree India fund, and the Indonesia fund.

I own some of all of these but FXI (which I might trade back into). A very nice set of things to be riding.

VIX the Volatility Index

The chart of VIX – the Volatility Index.

Low, very low. It is not very interesting right now, and mostly indicates “not time to buy” and “not time to sell” – yet.

VIX  - Volatility Index (not a ticker, you can't trade it)
VXX - Short term VIX futures ETN (a ticker you can trade)
VXZ - Medium term VIX futures ETN (a ticker you can trade)
FXY  Japanese Yen
SH  "Short" sell of SPY
SPY  S&P 500 benchmark

The Dollar

Dollar Trade -Down - back on

Dollar Trade -Down - back on

The “dollar down trade” has moved above the last high. Our “failure to advance” has been broken.

Also, on the RSI, we have this peak being far lower than the last peak. That usually means a trade is “ending soon”.

I would not expect the dollar to run up, but rather to go ‘flat’ for a while. Then it will likely resume the drop as the “stimulus” and “spending programs” continue. We’ve got a $1.4 Trillion deficit this year and no sign of any attempt to reduce spending. That is pretty much guarnateed to “bugger the dollar” long term. Any “dollar strength” will be short lived and an opportunity to re-enter OOTUS and “dollar down” trades.

FXY, the Japanese Yen, is a safe place to park your money followed closely by the Aussy FXA and the Swiss Franc FXF. FXY is dropping a bit right now in what looks like central bank activity. BZF, the Brazilian Real is rising nicely).

Ideas of the Week

I’m “all in” at this point, so no ideas yet. Just protecting gains at they happen. The RIMM “friend of the market maker” trade is exited. I’m pretty much “all in” and at that point the only real “idea” that matters is when to exit a position…

What does the 10 day hourly chart say is happening now?

Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund, EWW for Mexico and IIF for India.

10 Day Hourly Interval Broad Market

10 Day Hourly Interval Broad Market

The “good stuff” continues to be good, the US market is weaker than the OOTUS trades. And I was too slow to do the “day trade” out of QQQQ before the roll down into Friday. I expect we’ll have a rebound and I’ll ride it through to then. This is why I’m interested in an automated trade system for QQQQ; I just don’t pay attention to it on a fast enough basis to make the day trades consistently.

This is a live chart, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now!

Other Asset Classes

The 6 month asset class race:

Asset Class Race

Asset Class Race


SPY  S & P 500 US stocks
GLD  Gold
EEM  Emerging Markets
FXY  Japanese Yen
JJC  Copper
SHY  Short term bonds 1-3 year
USO  U.S. Oil
DBA  Agricultural basket
SLV  Silver
WOOD  Wood / Timber

The “stuff trade” is still running. Metals, wood, oil, silver, you name it.

Oil has started to shoot up. This is why I hold a core position in oil trusts at all time. I size that position so that the dividends cover my oil use. If oil goes up, I don’t care. My dividends go up in proportion. Sometimes I add a trade around it, but doing “Core plus Trade” is a great way to handle oil. The implication is that other oil companies will also start running up a bit now. I’d concentrate on OOTUS oils, since we don’t know what congress will nationalize next (healthcare, banks, and car companies being already on the list or “done deals”…).

So what happened in the Tech Market relative to world markets?

Tech is beating the rest of the US Markets, but OOTUS is still the most stellar choice. The chart does look a bit “toppy” now, and it is time to plan a “trade out”. Put your stop loss orders in place.

Recent months - A Tale of Two Markets

Recent months - A Tale of Two Markets


QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race.

WIP and TIP are winning and that indicates a general world concern about inflation. You ought to have a concern as well. Other bonds are not doing so well. That’s a clue too. Out of regular bonds. In strong currencies. Money to inflation protected assets. WIP and TIP are inflation protected bond funds. TIP is U.S. Treasuries with an inflation adjustment, WIP is “world” bonds with a similar inflation “kicker”.

LQD corporate bonds are in a strong “roll down” and TLT the long term treasuries are also falling. If you must do bonds and can’t do an inflation protection version, at least stay with very short maturities, like SHY. You will still lose the amount of inflation in real purchasing power, but at least you will not have the loss of sales price from a dropping bond market.

What sectors won this week?

10 Best Performing Industries

9.39%  DJ US Transportation Services Index
8.77%  DJ US Food Retailers & Wholesalers...
6.80%  DJ US Automobiles Index
6.04%  DJ US Furnishings Index
6.01%  DJ US Oil Equipment & Services Inde...
5.88%  DJ US Oil Equipment, Services & Dis...
5.79%  DJ US Waste & Disposal Services Ind...
5.68%  DJ US Railroads Index
5.26%  DJ US Integrated Oil & Gas Index
4.97%  DJ US Oil & Gas Index

An odd list. Transportation & rails, food, cars, furniture. Oil I understand. When oil runs up, the industry goes up too, and we had an oil spike up in price. The furnishings and autos has to be bottom fishing. Waste disposal is a “run for safety” play as is food. The transportations are the unexpected ones. Ryder, ticker R, is up 15% on the week. The chart has a nice bottom in and it’s running upside. INT World Fuel Services is on a tear upward, but I know nothing about them. Worth investigating… Then a group of 4 and 5 letter tickers I’ve never seen before, several with latin names. All worth a look to see if there is a South American trucking play here or if it is the Mexco spike sliding into Mexican stocks. UNP and NSC show rails in a nice run and this as a spike off of the SMA stack.

The “autos” were lead by HOG Harley Davidson

17.31%  HOG  Harley-Davidson Inc
10.80%  FIAZY  Fiat S P A
9.07%  PEUGY  Peugeot Citroen S A
7.96%  FIATY  Fiat S P A
5.14%  VLKAY  Volkswagen Ag
4.21%  F  Ford Motor Co
4.12%  FPRA  Ford Motor Co 7.5 PC NTS
3.69% FPRS  Ford Mtr Co Cap Tr Ii

HOG looks like a nice run, but a 17% week is a bit much, wait for a pull back. Ford is doing nicely, especially the preferreds FPRA and FPRS that have a nice dividend. Fiat is the odd one. Someone thinks they can make Chrysler go, I guess… FIAZY has little volume. And Peugeot, who would have thought… I don’t think they will beat the OOTUS trade, but hey, they are going up.

What About Oils?


XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada HAS NOW MERGED WITH SU SUNCOR
BP   British Petroleum
STO  Norway
E    Eni Italy
TOT  Total - France
RDSA  Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU   Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

The Oils had a great run this week. Guess someone realized that the world will continue to run on oil for decades to come… CVX, COP both looked good. SU was stellar.

Some Near Oil and Oil Related Comparisions

.

With oil waking up, these have taken off as well. Brazil and the Real are continuing to do well. CZZ is looking ready to start a new run and XES (or OIH) the oil services fund is moving (hardley a surprise when oil is rising. You need to drill and pipe more of it…)

The REITS race – Real Estate Investment Trusts


PEI  Pennsylvania Real Estate - Mall REIT
VTR  Ventas - sr. care, nursing homes, hospitals
PSA  Public Storage - junk storage units
BXP  Boston Properties - office REIT on BosWash corridor  
HCN  Health Care REIT -  extended care, senior care, medical offices
HCP  Health Care Properties - ex. care, senior living, Dr. offices
PCL  Plum Creek Timber - lumber and trees REIT
SPY  S & P 500 broad stock market benchmark
RPT  Ramco Mall REIT
PLD  Prologis - logistics 

No real change from last week:

Nice slow rising bottom fish. I think there is more money to be made elsewhere, but “buy a tiny” and start accumulating good properties at this bottom.

The REITS have a decade long recovery in front of them. Still plenty of time. Just check the “coverage ratio” on their debt and make sure you are well diversified. (i.e. 3 or 4 of them, not just one, OK?)

Conclusions and Likely Actions

Easing out of positions. Some by design, most by a “trailing stop loss” order to make the decision for me.

Stock Indicators – what and how


If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this section and there is a bit of an explanation.

Click for Disclaimers, Disclosures, and Where To Get Charts

Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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4 Responses to WSW Sunday, October 18, 2009

  1. Mike B. says:

    Hey Chief-

    Do you think the Chinese economy is in full-on Dubai bubble mode? Or is it real growth over there?

    Maybe I watched “Dark Knight” one too many times, but I can’t help but believe that a lot of the books over there are cooked.

    Thanks.

  2. E.M.Smith says:

    @Mike B. :

    One of the hardest things for me to accept about trading (NOT investing!) was that the fundamentals, while advisory and sometimes interesting, were not the most important thing.

    This has LOTS of consequences. One of them is that a “Bubble” can run far longer and further than “reason” would ever expect. Another was that “cooked books” are important in the long run, but what people THINK about the books is more important in the short run (and the short run can be a very long run ;-)

    One example: I made a decent bucket of money on Lehman over about 8 years. Wonderful company. Great franchise. Good “news flow”. Even when the news came out about their being some ‘issues’ with mortgages they still had no taint of scandal.

    And where are they today?

    Gone.

    And why are they gone?

    The books were accounting for junk mortgages as “good” via a wash through a derivative instrument. BUT “everyone was doing it” so it was “OK”…

    At the time LEH Lehman went “flat” I got out.

    You would see a similar pattern in BSC Bear Sterns.

    If you traded based on “the books” you got creamed. If you avoided LEH due to their being in mortgage derivatives or haveing a business model that seemed a bit too good to be true, you missed 8 years of gains.

    It’s all about 2 things:

    1) Timing. You must time your exit and avoid the drop. Even in a gold plated company like GS Goldman Sachs that got nuked right along with everyone else when LEH and BSC got wiped out. GS books were fine, but the stock was not.

    2) What everybody else thinks. That’s why GS had their stock price masacred. Not because their was any real problem with the company or their books.

    So to your question on China:

    My personal opinion is that a great deal of them have dodgey books. I’m also certain that China as a whole is “cleaning our clock” as a manufacturing empire. That second fact will wipe out much of that first opinion…

    News bits (I’m preparing a new WSW posting and was just doing my homework ;-) on China:

    China is now the Number One exporter in the world. (And they are just getting started).

    China is now the Number One Car market in the world. Their domestic market IS growing, and fast.

    China was at the North American Auto Show even though they presently sell no cars here… “watch this space”…

    So China is, most likey, something of a bubble with somewhat cooked books for a lot of companies. So What. You could have 8 years of gains wash by you while you wait…

    So I’m going to be buying some China stocks. Don’t know exactly which ones or exactly when yet, but I will. And I’ll be watching the news flow and the stock charts to known when I ought to be getting out rather than taking risk by holding a flat stock. I’ll also give favor to the majors that have an overseas listing (if they list on the NYSE, their books meet USA law…)

    China is THE manufacturing story for the next couple of decades, at least. Nobody is in a position to change that. India will get a “cut” of it. Brazil will get the materials and resources ‘pin action’. The Asia Ex-China will get a lot of ‘pin action’ too (and may be ‘safer’ for some folks). The EU will hold on to some via various trade rules / laws. The USA is toast in terms of manufacturing until we manage to break the peg to the Chinese currency. “Good luck with that” comes to mind…

    Japan as a society will have issues, but Japanese stocks will benefit from China as they move manufacturing there (such as my Nikon camera with a China lens…)

    In summary: Sure, China is in a bubble, and probably will be for a decade or two to come. That’s where you make money. Just don’t let the door hit you on the way out ;-)

  3. Mike B. says:

    Thanks Chief. That’s some great insight. I might add that it is very similar to what I’ve read about Keynes’ investment (trading?) strategy. It was, oddly enough, based more on psychology than on economics.

    The currency issue really intrigues me. In the past, haven’t developing countries kept their currencies pinned to the dollar to protect against currency deflation? (FWIW, I got absolutely creamed on TelMex, thank you very little IMF). It seems that China is doing it for the opposite reason, i.e. to protect their export economy.

    Are you saying that you would like to be invested in China prior to a floating yuan? Or might a free floating yuan pierce the bubble (if there is one)?

    But you seem to be Bullish on China in both the long and short term.

  4. E.M.Smith says:

    Prices move because someone decides to buy or sell. That is driven by psychology. (Even fundamentals get washed through phych as someone has to read and respond to the fundamentals…). Economics is the background (China beating the USA on manufacturing for structural wage reasons) but psych drives the trading ( news that China is now the biggest domestic auto market… positive; but one banking scandal and they will drop.)

    Currencies are both easy and hard. Easy to understand, but a lot of the move is driven by governments so predition in hard. You have mixed two things. 1) Currency stability. 2) Mercantilism.

    1) There is a constant risk for all “fiat money” (the only kind left in the world today unless you find some gold coins) of inflation. Governments simply can not resist the urge to “print money and spend it”. After all, the money is “free”. You did not have to pass a tax to get it so there is no penalty at the polls… But it dilutes the value of the exiting money. Thus the inevitible inflation. It is a “stealth tax” that takes the value of your money without you doing anything.

    After this is “bad enough” some governments will simply give up and use another countries currency (or a peg to it) rather than risk another round of hyperinflation. (IIRC, Ecuador and Liberia both use the US dollar directly along with a couple of other countries). For a long time, Argentina was pegged to the dollar for similar reasons.

    This “is a good thing” as it stabilizes the money in an unstable place.

    2) Merchantilism is defending the growth of your economy with various legal barriers. One of these can be an “underpriced” currency. “Normally” we expect a ruinous trade imbalance to make the exporters currency rise relative to the importer until such time as the trade imbalance stops. A deliberate “peg” between two countries with such a trade imbalance but with no instability problem is “a bad thing” since the trade imbalance can not rebalance. (i.e. the U.S. continues to have manufacturing destroyed since a Chinese worker at a few pennies is cheaper than a US worker at a few dollars).

    But if the Yuan could rise, that “few pennies” of Yuan would turn into “a few dollars” even if the number of Yuan was held constant (i.e. no internal inflation in China). To prevent this adjustment is held to be merchantilism. Why would China do this? To obtain monopoly playing position on the board, THEN raise prices. (Go ahead, buy your socks from someone else. Oh? Nobody else on the planet has a sock factory? SO sorry ;-)

    That the US is doing nothing about this is very bullish for Chinese industry. In the very long run, eventually the Yuan will rise; and probably a lot. So in the very long run having your cash in Yuan can be a good thing.

    The tricky bit: It could be years or decades before a revaluation of the Yuan and you will find out about it when the Chinese government announces it has already happend. A bit hard to play… Unless you ride a Chinese investment that is doing well all on it’s own and wait for the currency “kicker” as a free bonus…

    So in fact, a “float” of the Yuan will make investments in China worth more in US dollars. (Though with a bit of a wobble as ‘export earnings’ are re-figured…)

    My opinion of China is fairly simple:

    As long as present government policies hold, China wins. Period. There is a bit of risk from their “less than stellar” history of dishonesty (i.e. lead on toys, adulterated food, etc.) implying books might be cooked. But the are winning and they WILL win.

    The transition in government policies will benefit cash sitting in Chinese companies.

    In my opinion, it is just a question of timing the trades in and out.

    Eventually there will be a rollover in The China Story, and then you leave. At times, China will be selling for too high a price, so you trade out ( “Use the Charts, Luke!” ;-)

    But you don’t walk away from China. No way.

    (Personally, I prefer “China related” for the added “safety” at lower return. Shippers carrying raw materials to China. Australian miners. etc. But that’s just me ;-)

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