Tag Archives: chinese

Everyone Is Starting To Get It (Finally)

China is rocking worldwide markets. Some investors are getting caught off guard by the volatility. The volatility could lead to meaningful declines by year-end. On Monday morning, many investors woke up to see Dow futures down 500 points and the S&P (NYSEARCA: SPY ) futures down 3%. CNBC and Bloomberg have finally gotten the memo that the drop in the Chinese equity markets is serious. Forget Greece, forget interest rates, forget oil and forget the dollar. Those issues do not matter at the moment. The Chinese markets are in free fall and it will bring the international markets to their knees for the rest of the year. Wall street needs to come back from the Hamptons and start preparing for a serious correction. Understanding why the correction in China is not just a temporary issue requires an understanding of what pushed the market up over the past year. From June 2014 to June 2015, the Shanghai increased from 2000 to nearly 5200, a 160% increase. A large part of the run-up was funded by retail traders. Source: C alculatedRisk The Chinese markets have been largely bolstered by non-professional investors. These individuals own 85% of equities in that country. China, today, is akin to the US in 2000, when retail investors were pumping up stocks, despite truly understanding those investments. Chinese equities are rife with frauds and over-hyped companies with no tangible models of growth. These are major issues in that country and a large part of the sell-off. As those firms lose the confidence of investors, their stocks will continue to drag down the indices. With the vast majority of those involved being everyday middle-class investors, the dramatic declines will hit their consumption behavior. The Chinese economy, unlike the US, is not entirely reliant on consumer spending. Consumer spending is just ⅓ of the Chinese economy. That represents about $1.8 trillion. A large percentage of that is directed towards American products available to the Chinese people. A market decline may not cause significant GDP contraction, but will cause headaches for foreign companies in China. Source: McKinsey North American consumer discretionary companies, over the past several years, have relied heavily on growth in China to offset sluggish demand for their products in Europe and the America’s. Autos, technology manufacturers, and retailers have grown the top line, in large part, by expanding in China. If middle-class families, which represent 75% of consumer spending in that country, are seeing their wealth decline as the markets wipe out gains, they will reduce buying of American discretionary products, as the wealth effect would suggest. This is what turns this correction into a full-blown downturn for the American markets. US firms can no longer rely on China to bolster the often limited growth worldwide. Yum! Brands (NYSE: YUM ) relies on China for over half of its revenues. General Motors (NYSE: GM ), Wal-Mart (NYSE: WMT ) and just about a quarter of S&P firms are deriving the majority of their expected growth from China. Once spending in that market slows, these firms will be hard pressed in reaching their respective growth targets. The impact of the market meltdown and its effect on consumption should start to materialize in Q3 earnings and become very apparent in Q4. Investors should expect significant revisions to year-end estimates. The lowering of estimates and the eventual decline in EPS should keep the US markets lower for the remainder of 2015 and into early 2016. Markets in North America have traditionally lagged during a correction. The Asian markets began collapsing in June and the US markets are just now (as of last week) starting to fall in a serious manner. The good news, well somewhat good, is that the S&P does not tend to fall as significantly as the Shenzhen or Shanghai. While the downturn here may not be as severe, it will still cause major issues for the rest of 2015. Wall Street has gotten a pass over the past three years as the markets broadly went up. Money managers did not need to do much for returns to materialize. That is not the case going forward. Investors and professional managers need to prepare for a slow growth environment in China. A decline in the indices does not mean investors cannot make money. In July, I suggested three ETFs that trade alongside Chinese volatility. (NYSEARCA: YANG ), (NYSEARCA: YXI ), and (NYSEARCA: FXP ) are all short the Asian equity markets. Each have exploded in the past three months. If the declines persist, as I suspect, these ETFs could still have room to run. Additionally, Shorting American firms which rely heavily on China could be a great move. In June, I suggested a short on NHTC (NASDAQ: NHTC ) because that company obtains 93% of their revenue from China. That has paid off with the stock dropping by 47%. Herbalife (NYSE: HLF ) is another play here. Unlike NHTC, Herbalife has not seen a material decline in its stock, yet the company relies on China as its only growth market. If Herbalife loses growth from China, the company will massively miss the already declining revenue estimates. China is entering a downturn that will continue to wipe out trillions of wealth held by their middle class. This will turn into less consumption of American products and, therefore, lower revenue figures in the coming quarters. While the ETFs that track volatility are spiking, and may seem too risky now, there are still ample ways to make money in this market by looking at firms which disproportionately rely on China for their growth projections. Keep your eyes open and this downturn can be positive for your portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

You Hedged Like We Suggested… Now What?

In my last article I said unless we could rally this summer we’d be in for tough times. I cited the sectors our firm was selling. And provided, for your due diligence, a suggestion for hedging with ETFs. Where does that lead us today? In my last article (August 12,) I wrote “Indeed, unless we can mount a rally in the next six to eight weeks, it may be a long cold winter that follows this long hot summer before we can get back to moving forward.” Those words may seem prophetic now but they were really nothing but common sense. When a plant grows bushy and full, it usually means it is healthy. When it grows straight and willowy, it usually indicates a problem of some sort. It’s the same with markets. As long as all sectors are moving along – at different speeds, of course, but still moving in the same direction – then things are likely to continue in that direction. But when some 20% of all stocks in the S&P 500 are down 10% or more, and most others are flat to a little down or a bit up, trouble is brewing. Yes, Apple, Amazon, Google and Netflix were still roaring ahead providing, because of their large market cap, an inaccurate picture of “the markets.” As a result of this dichotomy I wrote, “We’re reallocating our portfolio strategy to reflect what we believe to be the likelihood of a dull market that vacillates between heightened expectations and dashed expectations. That means lightening up on developing markets, energy, industrials, materials, utilities and even some technology firms.” That meant pretty much everything! I advocated buying a couple unique situations as well as “shares of ProShares UltraShort S&P 500 (NYSEARCA: SDS ), which moves inverse to the S&P 500 at double the rate of movement, as well as shares of the iPath S&P 500 VIX (NYSEARCA: VXX ), which is a reflection of the volatility I imagine we’ll be seeing more of in the coming weeks and months.” Via client and subscriber e-mail, we’ve since added shares of AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ) to this mix. But our best purchase decision of 2 weeks ago was not as a hedge for our long positions but as an outright short on hubris and autocracy, shares of Direxion CSI 300 China A Shares (NYSEARCA: CHAD ). CHAD is an unleveraged short on the 300 largest and most liquid Chinese A Share companies. All of these hedges served their purpose, with VXX up more than 17% on Monday, August 24th, and CHAD up greater than 12% that day. What to do now? I wish I could tell you that we are covering or placing trailing stops under these marvelous hedges, taking our profits, and beginning to reinvest in fine, now cheap, companies. But I cannot. We are in fact using any bounces – and they will come; no market goes straight up or straight down – to sell. We’re doing so even if it means taking small losses on the long side. I simply don’t see a catalyst that will make this week-long crash a distant memory with the market marching inexorably higher. I see such a hope as unsustainable in the real world, the real world consisting of a collapsing Chinese economy (about which we have warned in numerous previous articles;) a Russia unable to sell its only “product” for more than it costs to produce it; an Iran bloated with the gift of tens of billions of dollars with which to foment terror; Brazil; a dithering Fed; Greece; and on and on. If you are thinking of buying something on any bounce, may I suggest that the above VXX, HDGE, SDS and CHAD might be fine choices to serve as a hedge for any long positions you choose to keep. And I do think you should keep some long positions. For us, the washed-out Big Energy firms are now looking very attractive, for instance. I’m not advocating selling everything. Indeed, I have written puts in our family and some client accounts on Apple. If it never gets put to us, we’ll enjoy the free money from those who think it will crash severely. And if it is put to us, I’m OK owning Apple at 10 times trailing, understated, earnings. We’re also adding to our energy exposure during this selloff – Royal Dutch Shell (RDS-B) for 12 times earnings and a 5.5% yield? I’m OK with waiting for it to recover. No fancy algorithms, no Fibonacci technicals, nothing complicated. Just good old-fashioned stock-picking with a very large hedged position, under which we’ll place trailing stops in what I hope will be the not too distant future. And, at this rate (not that I expect it to continue at this rate!) a full-blown bear market of a 20% or greater decline could be on us by mid-September! While we take a certain pride in having advised exiting most long sectors just 12 days ago and instead buying the short hedges above, the market will always make fools of those who rest on their laurels. We remain keenly focused on each day’s market action and look forward to responding to the best of our ability, come what may… _________________ Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. Disclosure: I am/we are long VXX, CHAD, SDS, HDGE. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Between Chinese Slowdown And Falling Dollar, SLV Remains Up

Summary The Fed remains on the fence about whether it plans to raise rates next month. China’s economic concerns work as a double-edged sword for the silver market. The recent fall of the U.S. dollar has also helped pull up SLV. Will this rally last? In the past couple of weeks, iShares Silver Trust (NYSEARCA: SLV ) has slightly rallied. And even though concerns over China may bring down the price of SLV , on account of potential lower growth in demand for silver, the Fed is still likely to lead the way in moving SLV. The recent weakness of the U.S. dollar and the low chances of a rate hike in September are keeping up SLV. Will this recent rally last long? The Fed remains on the fence I think that if the FOMC was trying all along to keep us guessing on whether it plans to raise rates in September, then mission accomplished. The minutes of the July meeting only added more uncertainty with respect to the rate hike, which is still on the table for the September meeting. The minutes showed that members are mostly positive about the outlook of the labor market: “The pace of job gains had been solid and the unemployment rate had declined, with a range of labor market indicators suggesting that underutilization of labor resources had continued to diminish.” But it was noted that there are also remaining concerns over what the progress of wages: “In addition, it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation.” For the silver market, a weaker Chinese economy — the recent news was that manufacturing PMI fell to its lowest level since 2009 — may also translate to lower demand for silver. But the recent changes due to these concerns, e.g. devaluation of its currency, may have also pulled down the U.S. dollar. Moreover, the latest news from China along with the moves towards devaluing the Yuan have kept the market guessing about the Fed’s rate hike. Currently, the implied probabilities of a September rate hike are at only 28% — still much higher than where they were after the release of the July FOMC meeting statement. The odds of a rate hike in October and December reached 34% and 60%, respectively. Not much higher than where they were earlier this month. This week, the second estimate for the second quarter GDP will come out. A stronger-than-expected growth rate – the current estimates are for 3.2% — could strengthen the U.S. dollar and slightly raise the odds a rate hike. Thus, a positive report could bring back down the price of SLV. But the big report will be released next week: the non-farm payrolls for August. Another strong report, especially when it comes to wages, could raise again the odds of a Fed considering raising rates sooner rather than later. I still think, it won’t behoove the U.S. economy at this point to have even such a modest rate raise, considering the latest developments in China, the lack of growth in wages, the low core inflation – which is still well below the FOMC target, the downward pressure of oil prices on inflation and the jobs growth in the energy industry. In total the FOMC may be better off to delay liftoff until 2016. But for now, the market remains confused. In such times, SLV slightly benefits, even for a short time, as it has rallied in the past couple of months. Moreover, the recent fall in the U.S. dollar has also provided back-wind for SLV. As you can see below, the price of SLV is still strongly correlated with the major currencies pairs, mainly the Euro/USD. (click to enlarge) Source: Bloomberg and Google finance On a broader scale, i.e. over a course of a year and not just over the past few weeks, the U.S. dollar has strengthened against other currencies, as presented in the chart below. (click to enlarge) Source: FRED and Google finance The rally of the U.S. dollar in the past year may have also contributed to the weakness of SLV. Only in the past few weeks, SLV bounced back as the U.S. dollar changed direction. Albeit the general direction in the past year for both of these items was reverse. Despite the weakness in the silver market, at first glance, the demand for the SLV ETF has only slightly diminished in the past several months. (click to enlarge) Source: SLV and Google finance This could suggest that even though the price of silver is going down, investors aren’t backing out of this precious metal. The recent devaluation of the U.S. dollar in part due to the weakness in China and possible delay in first rate hike in years has also provided a bit of relief in the silver market. I don’t think this rally will last long and could change course especially if the upcoming economic reports mainly GDP, to come out this week, and non-farm payroll, to be released next week, show stronger-than-expected numbers. But in any case, if the FOMC were to delay the historic liftoff to a later date (perhaps December), this could also provide another short-term boost to SLV. (For more please see: ” Will Higher Physical Demand for Silver Drive Up SLV? “) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.