jaudio shorts

I never saw a short I didn't like, until now.

Back on November 10th, gullapalli asked me if I was going to short the China markets with Proshares new ETF (FXP) which seeks to be the inverse double of the FTSE/Xinhua China 25 index. I must confess, I didn't know one was about to be offered until after I researched due to gullapalli's question. You see, I consider myself to be the "every man investor". I am a typical non-professional stock trading American, going about my daily business with my wife, job, and financial goals. Though I pour through all kinds of news for my own recreation and betterment, I don't spend my day surrounded with flat screens projecting the latest market movements with the Wall Street Journal in my face as Jim Cramer throws a chair at the wall. I enjoy life, and I am content to know that stress isn't going to cause my heart to explode by the age of 45. I read, research, weigh decisions, and decide. Then I repeat the process, all without losing my head.

That being said, I have been in a relentless search for more information regarding markets, stock price movements, and the like. I have learned a lot from the SLO, and will continue to study and learn well beyond the game. Part of this search for information was spawned from gullapalli's question.

I first needed to know exactly what the FTSE/Xinhua China 25 was. The home page was a great start, and it had a PDF that describes all about it, the companies that comprise it, and the like. The first couple sentences in the PDF sum it up by stating,

"Investors globally use the FTSE/Xinhua China 25 Index to gain exposure to the Hong Kong markets. The Index consists of the 25 largest and most liquid Chinese stocks (Red Chip and H Shares) listed and trading on the Hong Kong Exchange."

The Red Chips are companies incorporated in Hong Kong, and the H Shares are those incorporated in mainland China.

Although I had already made my decision about shorting China even before going to the homepage, it set me off on another round of research for the next several days and will continue into the coming months. Despite my interest in the China markets, they would have no part in my SLO portfolio. The man who "never saw a short he didn't like", wouldn't be shorting China with FXP.

Why?

The reasons are relatively simple. The first one is the fact that there is only about a month left in the game. Most SLO traders are buying and trading like madmen. A month seems like a long time for most. I buy and hold like a madman. With only one month left in the game, I could drop some cash on FXP and hope that China tanks, but there simply isn't enough time for me. Even if the China markets crash tomorrow, I will not regret this decision. I am content in knowing that if China plummets, then the US markets will follow China's lead downward, which will benefit me due to my short positions in the US markets. However, China could go strong for another 12-24 months, so I would be wasting my money in FXP. In the next month, I will either climb the leader board to take my shot at dethroning Vad, or I will fade into insignificance. My portfolio will boom or bust just the way it is regardless of a position in FXP. Putting a small percentage into FXP won't make a difference when all is said and done.

The second reason I won't short with FXP is borrowed from one of our current top 5 traders, Keith Barton. Back on November 12th in his blog entry, "The term I am looking for is humble", KB lists 5 commandments that dictate his behavior. The first commandment is "Invest in only what you know". I know very little about China, and I will adhere to the first commandment. Yes, in a short period of time I was able to get a general overview of the FTSE/Xinhua China 25. Yes, I can spend several hours getting up to speed on the intricacies of the Chinese markets. Yes, I can plug in methodology to take a short position, but not enough methodology to make money in a month. Vad made money on FXP by timing his entry and exit well. My ego isn't big enough to think that I have that ability. There is a lot of money to be made and lost in bubble markets, and I am not convinced China's is ready to burst just yet. More reading and research is required on my part before I would take the plunge.

A solid case can be made to short China with FXP, and I would like to hear from Vad to get his take on it. My initial take on China investors is that they are not rattled easily. The FTSE/Xinhua China 25 index has been on fire since mid-August, topping out around the beginning of November. Though it has retreated off of its high, it looks like the bull in China has slowed, not stopped. One of the reasons I would consider shorting would be Warren Buffett selling his stake in PetroChina. PetroChina makes up about 8.5% of the FTSE/Xinhua China 25 index, and Buffett thought it was time to get out. Though he isn't a market timer, Buffett and his team saw the opportunity to cash out, which means he doesn't see the potential in PetroChina that he saw when he bought his stake. The Buffett move speaks volumes. Fidelity also sold 91% of its American Depository Receipts in early 2007, according to the Financial Times. An Achilles heel to the index could be the banking industry in China. Almost 27% of the index is in the banking sector, so if there is any type of banking crisis, it could hammer the index hard, although I know next to nothing about any of the 6 big banks in the index. Again, this is another path to follow in research.

One of the most bought stocks a couple weeks ago was in fact FXP. I would like to know your reasons as to why you made the decision. Though I would not buy FXP for this game, I do see a solid argument for purchasing FXP for the next 12-24 months. Here's to hearing your comments.

--Jonathan

Comments: View Comments |  Wednesday November 28, 2007