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China stocks down 50% but still outperforming USA over last 10 years

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December 18, 2008 – Comments (3) | RELATED TICKERS: EUM

So the logic goes since  China's stock market is down 50% it can't fall any further.  That is not really sound logic though is it.

If I were to show you a company that had low profit margins and high fixed cost and then tell you that production volumes were going to fall 10-20%.

Then what if I told you the 10% drop in production volumes would mean the company fell from profitability to breakeven and at a 20% drop in volumes the company was a money loser. 

What P/E ratio would you use for this obviously cyclical company?

What if I said this "company" were an entire country called China?

What if I told you that China's stock market is about where it was in 2005 when it was growing rapidly.

Now how about this what if I also told you that this country (China) had a stock market that was still outperforming the USA stock market by 70% over the last 10 years.... YES CHINA IS OUTPERFORMING THE USA BY ~70% over the last 10 years.

Now what if I told you that during the last recession China's stock market fell below the U.S. stock market?

 Would you still think that Chinese stocks couldn't fall further ?

 

 Here's a 25 year chart... sorry couldn't post the 10 year chart:

 

 

CHINA IS NOT AN EASY SHORT HERE

I'm not saying now is the best time to short China... frankly the Chinese stock market has the best looking chart of any market... it could in fact be bottoming ( I doubt it ), but still shorting China is risky even if it is right.   

LEVERAGED ETF'S SHORTING EMERGING MARKETS ARE DANGEROUS - EUM IS SAFER.

In the past I've shorted the emerging market with ultra (leveraged ETFS) like EEV and FXP... I would not do that again... 2x ETFs are breaking down because they depend on expensive options premiums which kill returns over the long term... so if you must short emerging markets go with the EUM.

 

3 Comments – Post Your Own

#1) On December 18, 2008 at 12:32 PM, jegr5347 (< 20) wrote:

Dex,

What titanium stilts are holding up the S&P. I just can't understand how the market is processing the news.

Please help understand this. I am in TZA and biting my freakin nails.

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#2) On December 18, 2008 at 2:43 PM, dexion10 (27.02) wrote:

if you are biting your nails you own too much TZA. 

 Rest easy though this week is the option expiration and there is no volume to move the market very far UNTIL AFTER FRIDAY. if you are up on the TZA and you should be as of this post... just sell part or all of it and sleep well tonight.

I don't love 3x ETFs if the trade doesn't work within 3 days... because those ETF's naturally go down because of the levered options and premiums. 

Since the near term for the market is murky - because there are a lot of seasonal factors. Nov & Dec are usually strong months - mutual funds have been running the market up all fall to keep 401k statements the same month to month, etc.

My bet is that the market has much further to fall than to rise but I realize I may be early... so be prepared for that... NEVER go whole hog into the market with a short...that is un-professional.

THE WAY I AM HANDLING MY CONCERNS OF BEING EARLY IS THAT

1. I shorted an individual stock I've followed for years (RYL)

 - I know what RYL is worth

 - I know mgt is not being honest

 - I can comfortably own RYL even when it rises 11%

 - I also partially cover my RYL short on the dips and rebuy it higher

 

2. Short the market with 1x (unlevered) ETFS like the SH and save TWM or TZA for big up days that happen from time to time.

 

3. BE PREPARED TO ABSORB LOSSES UP TO S&P 500 = 1000

Keep a mental note that the market can technically move 100 pts higher on the S&P 500 before the next HUGE technical barrier (930 and 950 should be resistance too)... and fundamentally 15x 2010 earnings is probably around 975....


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#3) On December 20, 2008 at 2:15 PM, strongw (60.20) wrote:

One thing you need to know is that China's stock market is very complicated, and it is seriously manipulated by government and powerful people,not a free market at all!   I have been living here for more than ten years. GDP grows more than 10 times in recent 20 years. Take a look at China A index(not Hang Seng Index, which is a totally different stock market in HongKong),It is almost flat compared to ten years ago. The profits have been squeezed by politicians by every means.If there is no change in Government, never invest in China.

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