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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.

Gain From Market Correction Via Inverse ETFs

Though the U.S. stock market rode past the nagging Greek debt drama in July, occasional sell-offs in China and severely low oil prices this year, it lost steam in recent sessions. A wavering Chinese economy and the consequent burst of Chinese stock bubbles on the one hand and dimmed chances of the Fed’s sooner-than-expected policy tightening on the other flared up global growth worries and led the markets go into a tailspin. In China, trading has been rocky for long. The Chinese policy makers devalued the currency yuan by 2% presumably to maintain export competitiveness, on August 11. While this hinted at a deepening economic crisis, the release of the flash Chinese manufacturing data (for August) which indicated a six-and-a-half year low number was the final nail in the coffin. Though China sought to restrain the rout by allowed the pension funds to invest about $97 billion in the market, there was no relief in store. Uncertainty in China and lack of precision by the Fed on policy tightening timeline roiled the market momentum and ravaged most risky asset classes. Most importantly, oil prices slipped below $40/barrel on concerns over reduced demand. All these wrecked havoc on global equities and commodities. As per Bank of America Merrill Lynch, equity outflows touched a 15-week high . U.S. Stock-Index futures recorded the deepest weekly plunge in four years in the week ended August 21, 2015. The S&P 500 index is now down 7.6% from its May high and Dow Jones Industrial Average plummeted about 10.3% since it hit a high in May thanks mainly to a freefall in oil prices. NASDAQ Composite also slipped 10% from this year’s high touched in July. Persuaded by the Chinese market carnage, Asian stocks approached a three-year low, commodity prices dived to a 16-year low, while credit risk in Asia rose to the highest level since March 2014. Emerging market equity funds witnessed a flight of capital worth over $6 billion and remained in red for seven straight weeks. Equity market correction this time looks graver as the sentiment has turned more bearish of late due to heightened uncertainty and a slew of negative news in Europe and Japan too. Japan’s Q2 GDP data was downbeat while an imminent snap election in Greece, the epicenter of the Euro zone debt crisis, has increased the risk of volatility in the coming days. Notably, the CBOE Volatility Index (VIX), a fear gauge which measures investor perception of the market’s risk, added over 27% in the last five trading sessions (as of August 21, 2015). While there are several options available in the inverse equity ETFs space, we have highlighted five ETFs that are widely spread across geographies and sectors. These products provided handsome returns over the trailing five-days and one-month period and are expected to continue doing so, especially if the current bearishness persists in the months ahead. ProShares Short Dow 30 ETF (NYSEARCA: DOG ) This product seeks to deliver inverse exposure to the daily performance of the Dow Jones Industrial Average, which includes the 30 blue chip companies. The fund has managed $311 million in its asset base while charging 95 bps in fees and expenses. Volume is moderate as it exchanges more than 700,000 shares per day on average. DOG gained over 5.8% over the past one week and 7.8% in the last one-month frame (as of August 21, 2015). ProShares Short QQQ ETF (NYSEARCA: PSQ ) The fund looks to track the inverse of the day performance of 100 largest domestic and international non-financial companies listed on the tech-heavy NASDAQ. This $277 million-product charges 95 bps in fees and added 7.5% in the last five trading sessions and 9.4% in the last one month (as of August 21, 2015). ProShares Short S&P 500 ETF (NYSEARCA: SH ) This fund provides inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of nearly $1.7 billion and average daily volume of around 3.6 million shares. The fund charges 90 bps in annual fees and added nearly 5.3% in the last five trading sessions and 6.7% in the last one month (as of August 21, 2015). ProShares Short MSCI Emerging Markets ETF (NYSEARCA: EUM ) Since the recent upheaval was global, a look at the emerging markets is warranted. The product seeks to track the opposite of the daily performance of the MSCI Emerging Markets Index. This $461.4-million product trades at volumes of 600,000 shares a day and charges 95 bps in fees. EUM was up 6.7% in the last five days and 15.5% in the last one month. Direxion Daily CSI 300 China A Share Bear 1X Shares (NYSEARCA: CHAD ) As China was the root cause of this massacre, the region offers immense scope to gain via inverses equity ETFs. Having debuted in June 2015, CHAD seeks daily investment results of 100% of the inverse of the performance of the CSI 300 Index. The index is market cap weighted and comprises the largest and most liquid stocks in the Chinese A-share market. Barely a few days old, the fund has already amassed over $320 million in assets. The fund charges 95 bps in fees and was up about 16% in the last five days. Over the last one month, the fund added over 15%. Link to the original post on Zacks.com

Buying The Fear And Hedging With TVIX

Summary Is there reason to fear? Global markets are tumultuous with good reason. The best way to hedge and profit. Buy the fear; sell the greed. A common piece of advice, this is easier to accomplish in theory than practice. It has been a long bull market, one extended unnaturally in the zero interest rate policy environment since the housing crash. The result is elevated PE levels and absurd valuations for momentum-building story stocks. The rounds of quantitative easing under the Fed’s loose monetary policy have left the bond markets historically bloated, a fact substantiated by such notable personae as Bill Gross and Robert Shiller. In spite of these things and because of these things, historical hedges such as gold have been sold-off at an alarming rate. Pessimist blogger extraordinaire Zerohedge reported that as of July 24, 2015 hedge funds were net short gold futures for the first time ever. Hedge funds were selling short the classic hedge. The stock markets shrugged off the alarming fall of crude starting last fall. They shrugged off the 20% rise in the USD and the implications that had on corporate earnings. Earnings “adjusted for currency” became a nice comforting euphemism to bolster revenues hugely supplemented not by improvements in underlying businesses but in widespread financial manipulation via buybacks. Corporations have clearly lacked emphasis on organically growing revenues, opting to organically grow stock prices, touting it as “returning value to shareholders.” The vast majority of shareholders aren’t the ones getting paid in stock options… Russia fell on crude prices, their ruble falling almost 50% in the past year. Then the Chinese stock market started plunging. The Chinese government though, ever resourceful, opted to ban short selling as well as freeze trading on a good many companies in order to halt the precipitous decline ($2 trillion in value lost precipitous). Then in the past month China decided to let their currency, the renminbi decline in value. We’ll just do it once, they said. It will show that our market is becoming more free, they said. The slowdown in manufacturing growth has stymied the engine of global growth, impacting commodities and the countries that relied on their exports of those commodities disastrously. During this tumultuous time the American stock exchanges have remained remarkably consistent. I’ve been seeing a lot of days I thought would end in the red, but luckily for us all someone has been buying the dips and turning the indices green just enough. Today the buying finally lost its luster. The greed palpably began to turn to fear, sending the volatility index (VIX) shooting up over 25% on the day for August 20 . The Dow and S&P 500 both dropped over 2% for the day, and the assuredly-not-irrationally exuberant Nasdaq plummeted over 2.8%. Meanwhile the SPDR Gold Trust ETF (NYSEARCA: GLD ) spiked just shy of 1.75% for the day. Must be pretty worried about rate hikes, huh? That has been the primary focus of investors, as reported by mainstream journalists. How the Fed raising interest rates .25% from effectively zero will cause us all to lose our heads and immediately sell off everything. While markets have certainly responded to FOMC minutes and economic data, these reactions have been little more than knee-jerk ripples for quite some time. I think it is quite apparent that the powers-that-be in the investment world are much more worried about other things: like if our economy isn’t heading for another recession, when Greece will be allowed to default and focus on fixing their economy instead of haggling for more loans, how much China is slowing down, and the absurd amounts of sovereign debt in some pretty important developed countries. Remember when the U.S. sovereign credit rating wasn’t lower than Australia’s? Since S&P downgraded the U.S. in 2011 to AA+ we have added $4 trillion in debt. What’s a trillion a year anyway. What to do The first thing that I had to tell myself: Stop trying to predict the oil bottom. We are awash in an oil supply glut and Iran is gleefully coming to hawk their crude wares to the world. Demand hasn’t caught up to supply, and stock prices in oil companies haven’t caught up to their protracted loss of revenue. Slowdown of Chinese demand made that knife accelerate its fall, and I’m getting far away. it’s simple: when demand starts comfortably outpacing supply it would be wise to evaluate opportunities in the integrated oil market. So what can we do now? If you believe that volatile times are ahead, as I do, you can capitalize on that risk with a hedge that trades in it, the VIX. There are a few ETNs, or exchange-traded notes, whose values track the futures contracts of the volatility index. When the market goes down and the buyers’ market becomes the sellers’, the VIX spikes, and ETNs that track it spike with it. For those who are supremely confident that the economic situation is deteriorating, and fear is coming, there is a VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ), up over 20.5% in market and after-market hours on August 20. If you do not want to expose yourself to leverage (I respect that), you can look into the iPath S&P 500 VIX Short-Term Futures ETN ( VXX), the unleveraged counterpart that tracks the VIX. This simple way to hedge against the market moving against you can be a powerful part of your portfolio. Rather than the small movements of a fund that sells short the Dow or the S&P, you have a hedge that encapsulates fully a diversified buy-the-fear strategy. (click to enlarge) TVIX wasn’t traded on exchanges during the Great Recession, as you can see it only tracks to 2011. That spike in 2011, when the U.S. was bumped down from the highest credit rating and given a negative outlook, could easily be replicated in October. National debt is already over the debt ceiling, as the U.S. treasury website attests, and it is projected to rise through at least 2025. Buckle, up, it’s going to be a volatile fall. If you are more traditional in your tastes, I would suggest the thousands-of-years old gold hedge. China has been buying it en masse, and they seem to be the only ones really controlling the markets, so a follow-the-leader doesn’t seem like too bad of an idea (I jest…sort of). In all seriousness, the rapid devaluation of gold has presented a fantastic buying opportunity. This is a commodity that has held value far beyond the lifespans of empires. For those of us that for some reason can’t have physical gold, a fund that holds gold bars is a suitable substitute, barring a complete shutdown of our financial system. Stan Drunkenmiller, of betting against the pound fame, recently bought $300 million worth of SPDR’s gold ETF that I mentioned earlier . Betting with a billionaire is a good strategy; betting with a billionaire hedging against oncoming catastrophe with an undervalued asset is a fantastic strategy. For long-term peace of mind, buy gold. For short-term profit, buy fear itself. Disclosure: I am/we are long TVIX, GLD. (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.