The Shanghai composite is now down about 45% from its peak.A quick bit of history on my position on China. I first got in in 2003 with PTR, swapped into SNP shortly thereafter, sold the last of SNP last June because I felt it had gone too far too fast and I was worried about a big drop.
I was four or five months and about 85% too early with the sale.
All along I have assumed I would get back in and although I am not getting back in today it makes sense to start thinking seriously about figuring a way back in. There is no realistic probability of a market going to zero so after cutting in half what is the risk?
If China is/was a bubble then should we compare it to the Nasdaq? I'm not sure that is right but if it is then the risk might be another 25% down from the peak or put another way maybe it could cut in half again to total 75% from the peak?
The reason I don't think comparing to Nasdaq is right is that the Chinese economy is not rolling over, the companies that are part of the mania are the building blocks of the country (how many non tech stocks dropped by more than 50% from 2000-2002?), the various surpluses make the country very sound and there are others.
China does have all sorts of issues too. No one seems real comfortable with the numbers from the financial companies, pure capitalism is not their strong suit, if the oil subsidy every gets lifted it could be a game changer for the Chinese consumer, the pollution is awful, they're not scoring points for their ideas on humanitarian issues and there are others.
Like every theme/investment destination there are pluses and minuses but now down 45% the minuses don't seem to weigh as heavy. I am not saying it can't cut in half from here (I'm not that pie in the sky) but I don't think it is the most likely outcome. If I go back in it would be one company with only a 2-3% weight so if I am wrong and the market cuts in half I might have a source of lag not something ruinous.
The bigger macro for China since before I first bought in in that the country will become more important globally and that a lot of money would be spent to modernize the country as a middle class develops. This bigger macro is no different than it was five years ago, no different than it was at the peak last October and is the same today. Regardless of what direction the next 1000 points is for the Composite the story on the ground will be the same.
23 comments:
I've recently bought CHN, SSRX, and CNY. Not ready to try FXI yet.
I wonder if a bad/contentious Olympics would have a significant effect on their market.
Hi Roger,
If you're going to make a 2-3% allocation, it's a good bet. Countries don't go to zero as you say. One of the great opportunities in the last 10 years was Russia after it got creamed in the late 1990's.
Although, you'll have company-specific risk vs. just country risk. However, should the Chinese market rebound, this one stock could be a major source of alpha for an entire year even if the rest of your portfolio is level with the market.
I prefer to buy the entire country. I'm not prepared to do that just yet.
I'm curious if you have general thoughts on the currency? Moom mentioned CNY which is the new Renminbi ETN. There are other options to buy the currency too. I am not sure about ETNs because it trades in the forward markets (I think) and there is credit risk associated with Morgan Stanley (again, I think).
Best,
Jonh
Roger,
I don't know if you are one who backtests (or second guesses) the trades you've been in, and I know you're not a fan of stops but...
Have you checked to see what a stop loss would have to have been to (1) at least have gotten you out when you exited but (2) allow you to have captured more of the China move?
Your decision may not have been so purely mechanical, and volatility has made stops sometimes useless. Nevertheless, even an apparently ridiculous safety "trailing stop" may have proven useful in the China exposure.
(Trailing safety stops allow me to sleep after reading the commenters on Mish's website.)
R in NY
SD, we already have contentious so I am not worried about that. Bad, what ever that could mean could be a negative if bad means an outlier of some sort.
moom and John, CNY is the ETN I disclosed test driving a few days ago and so far, ehhhh. i am not clear it tracks USDCNY as close as I'd like but i plan to give it at least a couple of months.
Rick aside from not wanting to touch the iguana (Saturday Night Live reference) SNP was hopping around 5-10% per day in either direction. At the time of the sale I specifically mentioned my opinion that right then and there I didn't think the stock lent itself to stop orders. Right around the same time I shaved off some Volvo with a stop order.
Its not that I don't like stops I just don't think they can be the best thing for every stock--nothing can.
Roger,
I have been asking you for about the last six months the same question. Give me an update on how the curve looks now in reference to the financial sector. Is it time to get in??
Also, what is your gut feeling on Citi's reporting #'s on Friday?
Thanks,
BWJR
So the yield curve is going through a process of trying to normalize, that is good.
Do you think the writedowns from here will not be enough to shock the market?
Did you think at any point this was a bear market? If so then the magnitude and duration is not right.
How big do you think this entire deal is? If it is as big as people say do you really think it could be over in 10 1/2 months (the length of time from peak to what is now the trough)?
House prices appear in free fall to me.
Credit spreads have not recovered.
Why would someone want to jump back in now? The Patience to not do something stupid just to do something is sometimes needed when investing.
Though it certainly never reached zero, the Nikkei closed at 13398 last night. Zero might actually be preferable for the wayward souls who've been on that 18-year joy ride.
I was thinking the other night about the nascence of China's economy. How many Google-like (in terms of success, not sector) opportunities are over there? I'm finally settling down with Taleb's book which I received as a much-coveted Christmas gift.
Sifting through the opportunities is worthwhile, I think. And having Prudence ride shotgun is an imperative.
http://tinyurl.com/5rfw89
Could some one please check my math. By my calculations the cost per square foot for housing has fallen 6.4 percent from January to March.
Now I do not want to calculate a yearly rate on that because my house maybe worth a box of cracker jacks come Christmas.
The point is I think the other shoe is dropping and it is not good
BTW, I took the avg cost per square foot for Jan vs Mar and weighted the decline by the total square footage per county in Jan 2008.
This is more significant than I had predicted and I am considering going short so I would really appreciate any comments or errors you might find.
seg
"I was four or five months and about 85% too early with the sale."
Dude, a little use of trader techniques (i.e. stochastic, MACD, etc.) could have let you ride the wave a little longer.
Use the entire investing palette, not just 3 or 4 favorite colors.
What more could happen? Why it could take a 50% hit! Having already taken a 50% hit is no proof against that. Chinese banks have lent too much money to too many businesses. Competition is fierce, margins are small, and financial misdeeds are not being uncovered at a rate that reflects human propensity to steal. It won't take a huge drop in exports to turn slim margins into negative margins, and it won't take too much insolvency to start turning over financial stones to see what has been happening. How do I know this? Human nature and history. Easy loans, super-heated growth, lax oversight. There is only outcome.
For BWJR (and others who are itching to "do something" in these market doldrums),
There is always directionless trading. With a little diligence, you can profit from delta neutral and gamma neutral option strategies. The volatility has be high (although somewhat muted these days), even if we are stuck in a range.
There are some high flyers out there (the whole fertilizer group has been riding a roller coaster these past few weeks - see POT, MOS, CF etc) even as they've been up 50 and 60% YTD! And if it feels like a bubble, you can set up a delta neutral position that will profit from the passage of time.
Get paid something for your patience.
As for a bottom, I'm extremely doubtful - stop by your local car dealership and - after making it clear that you just bought a car and are definitely NOT interested in buying - ask them how business has been.
My sources say that the inflation in producer prices and inputs (energy, commodities - including fertilizer) is interacting badly with the sudden withdrawal of the home equity ATM machines.
I don't think we need look past the persistent protestations of the financial CEOs who assure us that "the worst is over". People don't seem to see the analogy to being run over by truck: sure, the truck is gone, but it hurts like hell, and no one's saying that the ambulance is on its way.
R in NY
ROGER,
IN WHAT ETF OR FUND WOULD YOU SUGGEST WE LOOK AT TO INVEST IN CHINA?? HOW WOULD YOU INVEST??
Once again, your attempts to "time" the market meet total failure.
Why not just allocate 3-5% to china, and just rebalance as it moves up or down?
An investor would be far better off with a buy/hold/rebalance strategy, than your weak attempts to "figure a way back in".
Anon (1:05 AM): I find Trustnet is good for funds and etfs, choosing the best performer of the last 6 months cuts out a lot of the noise. Just bear in mind if the rise is mainly in the last month it's probably a spike.
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I've been following China fairly closely, as it's probably the most powerful* of the emerging markets. The recent falls since October seem to track the SnP to some extent, so I'll probably wait until a definite uptrend is established or the macro environment improves. This will mean I'll miss the first part of the rise but I'm too aware of the potential for large losses in emerging markets. Currency movements could help somewhat.
The stock market there has certainly been hit by the prospects of recession elsewhere. You could say the loss of exports are priced into the market now. It's a bit of a contrarian play but financials, retailers and emerging economies could be the best performers of the next 12 months. Russia has been touted everywhere here as the most under-valued BRIC country, Brazil seems to have more good news than bad and I don't know about India except it's not dependent on exporting.
I still have a fund that covers all BRICs but sold those invested separately in China and India.
*I say the most powerful because of the population size and uranium and coal stores.
Some good comments. Leisa good luck with Talleb; not an easy read.
I am unlikely to buy a fund for China. The reader who thinks going in now could be stupid (which BTW would be a great sign if a lot of people felt that way) makes a good point about financials. It's not so much I don't trust them but more that I am concerned that the people who do not trust them could be right, I don't want the exposure and things like FXI have that exposure.
I have owned FXI in the past but won't be going back in. I have a stock in mind that I won't front run here.
To the dude who called me dude I addressed the stop order issue in a comment higher up in this post. the stock at the time was hopping around too much, IMO, for any sort of tight stop. The best thing in hind sight would have been no sale and no stop order. I am convinced that a stop order would have netted me a lower price. Stops are useful but not for every single stock.
Philip I do say pretty clearly that a 50% drop from here is possible but that I do not think it is the most likely outcome--really the entire post is about this point.
Roy the problems with Japan come from a bunch of flaws in their entire system from back in the 1980s involving cross ownership and no writedowns. There appears to be no undoing those things. If China has any problems that we don;t really understand yet I think it would be something to do with gov't stakes in a lot of the companies we know from China.
For all the comments about housing prices and square footage and such...personally I do think this matters, and I think it is a big contributor to what I think is a bear market but, and there is a but to the entire line of thought, the market can go up nonetheless. Assuming you have the number right it means the market should go down but the market obviously has plenty of history for going up when it shouldn't.
Roger,
The A share market (closed market) is not what foreigner invest in. Most people invest in H Shares out of HK and are freely traded. The valuation are very different (although the gap is really closed as the A share sentiment is aweful).
Remember as a USD investor, one would get the nice tailwind of RMB appreciation (4%+ this year and probably at a 8% sustainable rate over 3-4 years).
Telecom and Consumer are interesting sectors. Exporters and labor intensive sectors are not. Per capital income are just hitting the critical value where consumption have historically taken off.
I would disagree with your comments the Financial sector numbers are questionable in general. Or said another way, are Bank of China's Book values any or less solid than Citigroup's or UBS? With 10% GDP growth, there is much more room for sweeping NPLs under the carpet than the subprime problem in the US with flatline growth.
Big risks: Inflation! And more inflation!
AI
I wonder how all those newly minted Chinese investors are dealing with the decline. Did they (could they) sell? Are they sitting on big losses? Will they stop spending? Are they going to have to work longer? Do they now hate capitalism?
China has been exporting deflation and importing inflation (mainly ours) for some time and, as I understand it, the loss of purchasing power is sufficiently severe that one of the few ways ordinary Chinese citizens have of preserving it is through stock ownership (not as bad as the Zimbabwe situation was by a long shot but none-the-less akin). Frankly it will be interesting to see if China holds on long enough to carry the Olympics off.
As far as financials go, Barry Ritholtz at http://tinyurl.com/6knxey summarizes the trading issue nicely (and the reason I remain overweight commodities and underweight, actually net short, financials and real estate):
"So if you are looking for a true contrary trade, which do you choose:
- The one in a long-term uptrend with no sign of any technical weakness, widely disbelieved the whole way up?
- Or, do you go for the relentlessly beat up, long term down trend -- the one if you are buying here, you are merely guessing the worst is over."
"To the dude who called me dude I addressed the stop order issue in a comment higher up in this post. the stock at the time was hopping around too much, IMO, for any sort of tight stop. The best thing in hind sight would have been no sale and no stop order. I am convinced that a stop order would have netted me a lower price. Stops are useful but not for every single stock."
Fair enough, but I wasn't referring to stops, I was alluding to general TA techniques. In general, it seems like a lot of times when you sell or reduce exposure, it's based on "feel"; all I'm saying is, let the "feeling" that it might be time to act be the impetus to then use some TA to fine-tune your ultimate action.
And while I'm at it, let's all hope for a Celtics/Lakers final, with the Celts triumphant...somewhere Red Auerbach is reaching for a cigar...
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