-- Chinese Proverb
During the past three weeks, two of the smartest and hardest working people at the office have solicited my opinion on Chinese stocks. One wanted to put a lump sum into Baidu (BIDU) at $409 per share and the other was re-allocating an IRA from US Treasuries into an Asia mutual fund. Like me, these folks have no formal training in economics or money management. They are dedicated healthcare professionals who are trudging their way through a depressed Michigan economy and trying to figure out where to allocate their retirement funds-- not so they can have a yacht in the British Virgin Islands, only so they can avoid being a burden on their families when they cannot work any longer.
From a fundamental standpoint Chinese stocks are expensive, trading at 50X next year's earnings, and the chief consumer of China's massive manufacturing base, the US, is heading into a recession. Add to this the tightening credit markets and price controls imposed by the Chinese central bankers and I do not see much short or intermediate upside to investing in China.
From a technical standpoint, the chart looks tired at best, and downright scary at worst:
The FXI, an exchange-traded fund covering the Chinese stock index, has broken down through its 50 and 200-day moving averages and is heading toward September lows. The US market has wiped out all the meager gains from 2007, and China may do something similar.
Add to this scenario the opacity of the Chinese regulatory structure, the unknown unknowns of the political hierarchy, the increasing pollution and public health consequences and a complete lack of a sustainable economic track record, and the risks to investing in China are phenomenal. The Chinese people are great, but their government and regulatory agencies… not so much.
Whether we are trading stocks, investing retirement funds, or monitoring a laboring patient for that matter, it’s all about risk management. Does the potential upside benefit warrant taking the risk? For China, for me, the answer is no way, not today.
Today, BIDU closed at $265, a 35% drop from the solicitation on December 28th. Investment counselors may downplay such losses as “looking at the short term” when retirement is 20 or more years away. I say Bullshit. A 35% haircut is a real loss of your hard earned scratch, and it hurts. Period.
If China flounders, then the bull market case for liquid and grain commodities completely changes. Oil has been trading close to $100 per barrel partly because the continuing demand of a booming Chinese is baked in. The same goes for agricultural grains, fertilizer and equipment. If the Chinese economy rolls over, the demand structure is gone for these things. Monsanto (MON) and Deere (DE) have had great runs the past year, but their fundamental and technical analysis is changing rapidly.
The US dollar (see below) is bouncing off multi-year lows, but seems to have bottomed from a technical standpoint and may see some strengthening real soon. This does not portend well for US exporting companies that benefit from a lower dollar. Without a burgeoning Chinese middle class and a weak US dollar, Deere (DE) will not be selling as many tractors and combines.
Giving financial advice can be more difficult than giving medical advice. The losses are real and the pain can be exquisite. Always mitigate risk. Always. Sure we’ll miss some opportunities, but there will always be others. I've made some gains in Asia the past couple years, but that horse has run, my friend. Sometimes US Treasuries are okay… even if retirement is 20 years away.
The only Chinese you should even think of buying is the Moo-Goo-Gy-Pan at Chinn-Chinn’s this weekend.
Be careful out there.
4 comments:
Are you still in your Financial?
They are looking so good,
I am just talking my book though.
and maybe they go to 0.
You didn't tell them that the fact that they wanted to invest in it, meant' that it had topped out?
I was refering to baidu
Baidu hit it's high at $409. If I had been confident with my conclusion at the time I could have made some money with a short position-- but I was chicken.
I am continuing to hold my FXP, Ulthrashort China for now, and perhaps I am being greedy.
Yes, JPM ans WB are performing well this week. I will need to set a sell stop here and take some profits, however meager, if they drop. I am surprised at the relative lack of pop with a 3/4 point rate cut. I'll be patient for another few days because I think these names will be accumulated as another rate cut is slowly priced in. Sell stops, sell stops, sell stops.
Absolutely take profits when you can IMHO. The other thing is that, there will be opportunities tomorrow. and always tomorrows when you have cash.
especially in this market....
but I'm firm that the financials are the only thing you can get long.
but... an epic wash out is possible.
I'm suspecting a ridiculous run in financials from here... but greedy is one thing.
I'm not watching emerging markets, The other play in financials are that the dividends behave like bonds at these levels.
But... if we make a new high 132.25 in the SPY... we have a little bull run on our hands... and I'd bet that the Naz and made it's near term low.....
but I don't call bottoms.
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