Tag Archives: china

Summer Madness To Nut Case? A Fall Preview Of ETFs

Summer 2015 saw investors sweating it out on the markets as the U.S. stock market ran into a correction territory thanks to the China gloom, Fed uncertainty, emerging market weakness and slumping commodities. Perhaps they should have stuck to the popular trading adage “Sell in May and Go Away”. After all, the May end to early September period has historically been known for melting profits at the bourses. This time around, the markets went berserk with performances swinging from sky-high in certain sectors to dreadful by others. Will the markets continue to shake in fall as well? Let’s check out: Housing Booms The housing market fired on all cylinders in summer thanks to soaring demand for new and rented homes, rising wages, accelerating job growth, affordable mortgage rates, and of course increasing consumer confidence. Among the most notable data, new home construction jumped to an almost eight-year high in July and existing home sales rose to an eight-year high. Further, homebuilder confidence in August surged to a level not seen in decades. The robust numbers spread optimism across the sector with the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) and the SPDR Homebuilders ETF (NYSEARCA: XHB ) touching new highs on August 18 and 19, respectively. Both the ETFs have a decent Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook and were up 3.6% and 0.1%, respectively, over the past three months. The outperformance is likely to continue in the coming months given that the residential and commercial building industry has a solid Zacks Rank in the top 29%. China Glooms China has been roiling the global stock markets since the start of the summer with worries intensifying last month when the country surprisingly devalued its currency renminbi by 2% to ramp up exports. After that, sluggish factory activity data heightened fears of China’s hard landing and the resultant global damage. This led to terrible trading in China ETFs, which were the hot spot at the start the year. Even the latest round of monetary easing by the People’s Bank of China (PBOC) to fight the malaise did not help the stocks to recover the losses. Given the steep decline in the stocks, China ETFs had a bloodbath with the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEARCA: CNXT ) and the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (NYSEARCA: ASHS ) stealing the show. Each of the funds was down over 20% in August and nearly 53% over the past three months. CNXT has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook while ASHS has a Zacks ET Rank of 3. Rough trading in China is likely to continue at least in the near term given that the world’s second-largest economy is faltering with slower growth, credit crunch, a property market slump, weak domestic demand, lower industrial production and lower factory output. Corporate profits are also lower than a year ago. Additionally, a slew of recent measures are not helping in any way to revive investors’ confidence. Further, most analysts believe that China will continue to face a long period of uncertainty that would result in more volatility Crazy Run of ‘The Oil’ After a stable start to summer, oil saw a frenzied August, showing large swings in its prices. In fact, the commodity exhibited the maximum volatility in 24 years . This is because oil price enjoyed its biggest rally of more than 25% in the last three days of August but softened again as worries about growth in the Asian powerhouse resurfaced. U.S. crude was trading around $60 per barrel for most of the first half of summer but gradually dropped to nearly $38 per barrel on August 25 – a level not seen since 2009. Oil suddenly sprung up to over $49 per barrel for a three-day period ending August 31, and again retreated to around $46 per barrel. Even after the spectacular three-day performance, energy ETFs failed to recoup their losses made in mid-to-late summer. In particular, stock-based energy ETFs like the First Trust ISE-Revere Natural Gas Index ETF (NYSEARCA: FCG ) and the PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ: PSCE ) plunged 35.9% and 32.4%, respectively, over the past three months while futures-based energy ETFs like the iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ) and the United States Oil ETF (NYSEARCA: USO ) lost 31.6% and 27%, respectively. FCG and PSCE have a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. The outlook for oil and the related ETFs look dull at present given the unfavorable demand and supply dynamics. In fact, the International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied through 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years. Yet, demand is currently not as strong as expected given the China slowdown and weakness in emerging markets. Automotive Thrives The U.S. automotive industry is on top gear with fat wallets, rising income and increasing consumer confidence adding adequate fuel. This is especially true as auto sales have been consecutively on the rise over the past four months with sales remaining above the healthy 17-million mark. The industry is likely to flourish going forward given that the economy is gaining traction after the first-quarter slump. Economic activity is picking up, labor market is strengthening, consumer spending is increasing, and the housing market is improving. Additionally, lower gasoline price is a huge boon to auto sales. The upside can be further confirmed by the solid Zacks Industry Rank, as about two-thirds of the industries under the auto sector have a strong Zacks Rank in the top 30%, suggesting growth ahead. Investors could ride out this surging sector with the only pure play the First Trust NASDAQ Global Auto Index ETF (NASDAQ: CARZ ) . The fund was a victim of recent broad sell-off, shedding 16.4% over the last three months. However, the ETF has a solid Zacks ETF Rank of 2 with a High risk outlook, urging investors to take advantage of the current beaten down price. Link to the original post on Zacks.com

This Bear ETF Will Hedge Your Portfolio

Thanks to persistent weakness in China, worries over global repercussions have intensified. In fact, some are of the opinion that the China turmoil, plunging oil price and slowdown in key emerging markets will knock out chances of the Fed’s September lift-off and delay the rates hike to later this year or early next year. This uncertainty spooked the markets across the board in the last couple of weeks and sent many investors looking for alternatives as protection against a slump. While volatility ETNs like the iPath S&P 500 VIX Short-Term Futures ETN ( VXX) are definitely popular choices in this type of an environment, these can face significant problems over long-time periods when the futures curve isn’t favorable. Meanwhile, precious metals such gold have been highly volatile as a slew of upbeat U.S. economic data pushed the greenback higher and started weighing on commodities across the spectrum. On the other hand, the global risk-off trade situation has resulted in a flight to safety to gold. Additionally, the returns from the other traditional safe haven – Treasury bonds – are also unstable at present as any positive news flow about the U.S. economy is negative for Treasury bonds. As such, there are very few options left for investors to hedge their portfolios. Fortunately, there is one solid option – the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ) – which has been doing well lately. Is This A Better Hedge in Current Turmoil? This ETF has been on the market since 2011, a difficult period for bears. Though it has been beaten down since its inception, it has delivered stellar performances in recent months, especially after the volatility levels picked up. This is especially true as HDGE gained nearly 5.5% in the trailing one-month period compared to the loss of about 7.2% for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) . From a year-to-date look, the bear ETF has delivered returns of about 2% against 5.8% decline for SPY. Additionally, it has outperformed other popular hedge plays like the SPDR Gold Trust ETF (NYSEARCA: GLD ) and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) over the past six months, suggesting that this could be a better play for investors seeking an inversely correlated choice in today’s market. Inside HDGE The ETF is actively managed and seeks capital appreciation by taking short positions in a number of U.S. listed companies. The securities selected for the fund are based on the philosophy from Ranger Alternative Management, which utilizes a bottom-up, fundamental, research driven security selection process. In particular, the managers of this active fund will look to go short in firms with low earnings quality or aggressive accounting practices, as this might be a sign that the firms are attempting to hide deteriorating operations or are looking to boost EPS over the short term. Additionally, the managers will look to identify earnings-driven events that could be a catalyst for price declines such as downward earnings revisions or reduced forward guidance – the two factors that can signal trouble for a company. The fund has amassed $143.7 million in its asset base while trades in good volume of around 151,000 shares a day on average. However, it is a bit pricey when compared to other hedging products. Management fees come in at 1.5%, while a number of other costs like short interest expense, other expense, and acquired fund fees result in a net expense ratio of 2.92%. Bottom Line HDGE is a pretty innovative product that looks to give investors short exposure to the U.S. equity market. The focus on companies with weak earnings suggests that it is zeroing in on firms that are probably the most susceptible to sluggish market conditions, and thus could fall in bear markets or when the bull loses steam. So for investors ready to bear a higher expense ratio, this fund seems to be a great choice when markets are stumbling. Moreover, it appears to be a more direct hedge than the volatility, gold or Treasuries. Link to the original post on Zacks.com

The Great Fall Of China: A Wake-Up Call

Three years ago, I said not to be scared of China and that its blue chips were safe. I’ve now changed my mind. Increasingly I’ve come to see Chinese stocks as policy-driven at best, and completely speculative at worst. For those who still desire China exposure, I suggest four stocks with high-quality management and less exposure to the China madness. Three years ago I was living in Hong Kong and I wrote that more investors should consider Chinese “blue chips.” I believed in the China reform story. In some ways, I still do – but in the very long term. I wrote that, after some low-level scandals in the market, the bigger stocks — those dual- or triple-listed in China, Hong Kong and the US — were safe, thanks to the extensive requirements for financial reporting. But I have come to realize that Chinese stocks are driven by the speculative greed and fear of the Chinese retail punter, and the vast majority of those punters have no concept of fundamental analysis. In a country with a singularity of government, government policy (and worse, just rumors around government policy) drive price action in stocks. Insider trading is rampant. Even stocks in listed Hong Kong can be suspicious. Muddy Waters Research’s short on Superb Summit , and the Financial Times calling out Hanergy , which was later suspended from trading, are just two examples. The environment in Chinese markets these days reminds me of the US markets of the era of Robber Barons, where those big players in the know profited from the unsophisticated average investor. (For a great read on the era of the Robber Barons, pick up Fifty Years on Wall Street by Henry Clews, originally published in 1908, which explains how the Robber Barons like Jay Gould, Daniel Drew and Commodore Vanderbilt made their fortunes.) Now the Chinese government is going after some of these so-called manipulators, many of whom have come from large Chinese brokerage houses. What kind of a market is where apparently institutional investors are banned from selling shares? It is one of total madness. Also, with State-Owned Enterprises like many of those listed in my original article, unfortunately I’ve seen very slow progress. They are still run as tools for policy, not for shareholder returns. The recent actions by the Chinese government to try to prop up the stock market demonstrate that clearly. And with hundreds of stocks suspended, daily index closing prices in Shanghai are not a true indication of where the markets should really price. While diversification is important, Warren Buffett has always said to “stick to your knitting.” Investors wanting China exposure also need to have very long-term holding horizons — to let the very slow reforms taking place in China move into place. It means that even those Chinese stocks listed in the US are likely to prove very risky, given the level of diversification they may provide to your overall portfolio. Even with the best intentions, the average Chinese management team is largely at the mercy of Chinese policy. Even the ADRs of dual-listed stocks — thanks to the larger trading volumes in the China-listed shares – are driven by and suffering from the short-term, highly speculative (and, frankly, messed-up) nature of Chinese capital markets. So what’s the solution? Obviously, one can avoid China altogether and lose out on exposure to “The China Century,” as Jim Rogers puts it. The least demanding option is to buy China ETFs such as FXI (NYSEARCA: FXI ) or MCHI (NYSEARCA: MCHI ). A third option is to be extremely selective on individual stocks. Do your homework on management teams and avoid stocks listed in Mainland China in order to reduce the volatility related to the speculative behavior of Mainland investors. One stock I like in this regard is Baidu (NASDAQ: BIDU ). Morgan Stanley has a price target of $248 on the stock, and according to Jefferies , Baidu is over 50% cheaper than Google. But for me, more importantly, it’s about CEO Robin Li. He was educated and started his career in the US and he is highly visible in Western media. His personality has won my confidence. (See interviews with him here and here .) Obviously Baidu is a “new China” play, and some may argue that it’s already fairly priced, or that they prefer Google in terms of investing in search. Three other stocks I like are China-centric conglomerates with Western or Western-style management with extremely long track records of sensible management of their assets. They are Hong Kong-listed CK Hutchison Holdings ( OTCPK:CKHUY ) (the result of the restructuring of Hutchison Whampoa and Cheung Kong Holdings), run by Asia’s richest man, Sir Ka-Shing Li; Hong Kong-listed Swire Pacific ( OTCPK:SWRAY ), controlled by the British Swire family; and Singapore-listed Jardin Matheson ( OTCPK:JMHLY ), controlled by the British Keswick family. These three conglomerates give you exposure to both industrial and consumer operations globally, but with a bias towards China trade. Although they are in very much “old economy” areas, such as property, infrastructure, energy, automobiles, transportation and telecommunications, they are run by highly respected management teams and have very long histories of revenue growth and dividend payments. The recent falls in their stock prices provide good entry points for long-term holders. While these are not get-rich-quick stocks, they will offer reasonable, equity-like returns with the safety coming from sound operations and solid management teams. As mature cash cows, they benefit from China’s long-term evolution, but involve less risk than other, “more Chinese” stocks. I have lived in Hong Kong for 5 years, been to the mainland many times and followed the Chinese stock market for the last 12 years. Right now these are the only four “China stocks” on my radar, thanks to my unease with the development of Chinese capital markets. I would recommend buying CK Hutchison and Swire Pacific on the Hong Kong exchange, tickers 0001 and 0019 respectively, and Jardine Matheson on the Singapore exchange, ticker J36. That’s because the local exchanges offer far more liquidity, and hence cheaper trading costs, than OTC / pink sheets in the US. In a side note, for those interested in shareholder friendly reform in Asia, Japan is making a lot of progress in that area with recently implemented corporate governance and share owner governance rules starting to bear fruit. From a macro perspective, it would be no surprise to you to know I prefer Japanese stocks over Chinese stocks given a 20- or 3-year time frame. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BIDU over 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.