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BillyTG (29.78)

MACRO investing: Big to Small; Plus, China Proposes to Cut $2TRILLION

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April 24, 2011 – Comments (9)

Uh oh.

Chinese actions demonstrate yet another reason why US investors without global perspectives are going to get slaughtered.  I left my last 2 investment newsletters because the stock pickers were just that---stock pickers.  They had no interest in, and little knowledge of, the global macro situation.  I see CAPS players, including one rated at 100, continue to push individual stock selection, without regard for the larger picture. They can crunch numbers like it's nobody's business, and they can identify "value" in their companies.  It all assumes, however, that the status quo will remain the status quo.

In the last year, I'e been lucky enough to meet with a hedge fund manager, and have been greatly persuaded by the investment methodology of the best hedge fund managers---Jim Rogers, John Paulson, George Soros, Michael Burry, etc.  Do you know what they all do that your average TMFer does NOT do?  They look primarily at big macro trends. By doing that, by seeing the major shifts, the bets are much safer and surer, and risk is much less.  While someone like Jim Rogers will buy up the whole Sri Lankan market, Michael Burry takes it one step further and, after determining where the big moves are going to happen, narrows down the asset class in question to particularly attractive individual equities.  That's what he did to profit off the subprime mortgage fiasco, and it's what he's doing now with gold and real estate.  It's BIG TO SMALL.  Get the big picture, THEN analyze the hell out of your little companies.  I'm no stock market genius, but it's obvious when you see this style in action that these guys are using a superior method of investment.

There has never been a time more critical than now in understanding macro moves.  Your financial situation might depend on it.  Investing in your little bubble of microcaps, without regard for the bigger economic tsunamis out there, is setting yourself up for wipeout. 

 

 All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

 

China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings

 

9 Comments – Post Your Own

#1) On April 24, 2011 at 12:12 PM, BillyTG (29.78) wrote:

PS Happy Easter!

Please pardon my tardiness in pleasantries

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#2) On April 24, 2011 at 1:59 PM, MoneyWorksforMe (< 20) wrote:

BillyTG,

"There has never been a time more critical than now in understanding macro moves.  Your financial situation might depend on it.  Investing in your little bubble of microcaps, without regard for the bigger economic tsunamis out there, is setting yourself up for wipeout."

Good post, I couldn't agree more. If people have learned anything from the financial crisis, it should be that the macro picture matters a great deal when investing in equities. There was literally no place to hide, and I believe the next crisis will be just as, if not more pervasive than the previous one. 

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#3) On April 24, 2011 at 3:09 PM, Frankydontfailme (27.22) wrote:

What do you think China (and other growing nations), will diversify into? Clearly silver and gold are plays of the moment, if not also the future, but what do you see as the next key investment?

 

Are there any strongly undervalued assets? 

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#4) On April 24, 2011 at 5:19 PM, TMFBabo (100.00) wrote:

Since I'm pretty sure you're referring to me about the stockpicking and ignoring macro comments, I'd like to offer up some comments in my defense:

While I do want to be a stock picker, I do not ignore macro.  First off, stock pickers should care about what sectors they invest in and what sectors they avoid.  I care about the effects of rising input costs on retailers and restaurants and how lowered margins can lead to lowered multiples people are willing to pay and a ton of other bad things. 

I care also about pricing power.  The best? Commodities producers themselves.  I think it's actually a good idea to own low cost producers or companies with decent cost structures who own a ton of assets in relation to market cap or enterprise value.  

I started off not caring about macro, but the environment is too scary NOT to care.  I've seen a bunch of people say gold is in a bubble and such, but I have been careful not to say such things.  I am still gathering info on the macro environment and how to act accordingly. 

To say individual stock pickers don't care about macro is a bit much, in my opinion.  That's an unfair, sweeping generalization.

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#5) On April 24, 2011 at 7:21 PM, buffalonate (95.93) wrote:

Gold is a bubble.  It is not a good investment.  It is speculative and its value is driven by fear alone.  Gold would be a good investment if its value was stable but it is not.  Have you seen the price chart of gold in the 1980's?  It goes straight up and then straight down.  That hardly seems like a safe hedge to me considering how high gold has already risen.  I think owning brazilian index fund or bonds would be a good hedge because their currency value is rising?  Am I crazy?

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#6) On April 24, 2011 at 10:41 PM, ETFsRule (99.94) wrote:

"What do you think China (and other growing nations), will diversify into? Clearly silver and gold are plays of the moment, if not also the future, but what do you see as the next key investment?

Are there any strongly undervalued assets? "

Well, if China is selling their US assets, then they are going to convert a lot of that into Chinese currency. Their currency has been held artifically low for so long, it seems inevitable that it will go up in value.

And I agree with buffalonate, gold is clearly in a bubble right now. This seems like a good time to buy emerging-market stocks.

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#7) On April 26, 2011 at 9:42 AM, mtf00l (43.65) wrote:

I don't think the value of gold is based on fear in general.  I think it is based on fear of what the U. S. government will or wont do.

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#8) On May 08, 2011 at 11:18 AM, skypilot2005 (< 20) wrote:

 On April 24, 2011 at 10:41 PM, ETFsRule (99.88) wrote:

"Well, if China is selling their US assets, then they are going to convert a lot of that into Chinese currency. Their currency has been held artifically low for so long, it seems inevitable that it will go up in value."

I sold a chunk of my miners early last week before the pull back and then initiated one new miner position and added to another exsisting miner position after the drop.  I think we will see even lower miner share prices before the year is over.  Then, the miners will go back up primarily because of inflation fears.  An increase in economic activity would also, positively effect the stocks when that happens.

In your scenario, do you fell Guangshen Railway (GSH) would be an appropriate “pick”? 

I think it may appreciate in tandem with the Chinese currency with the currency's appreciation giving it an added  "boost". 

I am asking because, I am looking to add to my existing position but I am indecisive. I'd appreciate hearing some other view points.  It’s near its 52 week high.   But, using the same reasons Buffet bought his railroad and the growth rate in China, I feel it maybe a good long-term buy, now.  I just hope it pulls back, again.   I currently have a low average cost of $17.02 per share.

 

Sky Pilot

 

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#9) On May 08, 2011 at 6:13 PM, ETFsRule (99.94) wrote:

Sky Pilot:

I'm not sure about GSH. My understanding is that they basically just operate one railway: the Shenzhen-Guangzhou-Pingshi railway. So I'm not sure if they really have a lot of growth prospects for the future. I'm not an expert on them by any means though, and there are a lot of things to like about GSH. The dividend is a nice bonus.

I wrote a blog about how I pick Chinese stocks. CNTF is by far my #1 pick, and I'm still bullish on CHRM and MY as well.

And if you're interested in solar stocks, I would take a look at DQ and TSL.

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