jaudio shorts

That's the problem with free markets: when they are making everyone money, they're the best thing since electronic trading. When they are going into the toilet, everyone collectively curses, assigns blame, and jumps out the nearest window--Unless you happen to be in a pseudo-free market, like China.

The Chinese markets are in turmoil right now, clocking a 40% plus loss since last October--and we think we have it bad. For those with money in FXP, the ultrashort China ETF, it's been a money-maker. However, there have been some bumps in the road. Since last October, FXP has climbed upwards of $120 before correcting back to below $60. FXP is now in the mid 80's because of the latest market shock waves, and it doesn't look pretty for the Chinese markets.

Or does it?

The leaders in China have intervened in their market before to give it a bump, and things are shaping up for China to again make an effort to give the market a short term jolt. Back in April, China reduced the stamp tax on stock transactions from .3% down to .1% in order to support the market. The Shanghai composite index then bounced over 4%. This reduction came just 11 months after they raised it from .1% to .3%, put in place to cool the blazing hot Chinese markets, which it did by trimming off over 30% of value. The reduction of the tax in mid April came after the Chinese market had been flat for 2 months and starting to rise. Since then, the Chinese markets have been going up, that is, until about May 15th. Since then, it has been grinding down, getting close to the lows reached in mid-march.

The time is right for the Chinese to intervene, and I am going to protect my profits in FXP with a hedge in the FXI, iShares FTSE/Xinhua ETF.

My 6 month view is that China will go down even further, but with the Olympics coming up, China isn't looking for any bad press, and that includes the markets. China has a big inflation problem, a problem that reached a 12-year high in March, and although it has eased a bit, it is still around 8%. They have the same problems we do with high commodity costs, but government interference with the free market doesn't solve the problem (Jimmy Carter, anyone?). They even have a "weather modification office" that will keep it from raining on the opening ceremonies by way of shooting artillery shells of silver iodide and dry ice at threatening clouds, making it rain before it gets to the stadium. I wish I were making this up. With the propensity to interfere in virtually every aspect of human life, the Chinese leaders can't sit idly by and watch their market go into the tank.

So what are the options?

I'm worried they may take a lesson from the Pakistani playbook and ban short selling prior to the Olympics. The WSJ covered the Pakistani move last week, which resulted in a quick 8% plus boost to the market. If that happens, the FXI will pop and FXP will tank, at least, temporarily. This would be the worst-case scenario for those like me, heavy in FXP. Last March I sold off some FXP, almost hitting the top. As it started downward, I bought positions in the mid 100's, mid 90's and into the mid 80's. By the time April arrived, I had plowed a lot of profits into FXP, taking hits the entire way, looking for the Chinese markets to tank again. Just as FXP turned the corner, the stamp tax was cut and I got crushed down to $60. An almost 30% gain was dead even or at a slight loss in less than 2 months. Now I'm back up to over 10% with FXP, but it's high time to protect profits just in case of some Chinese funny business. Tomorrow I am taking a $30k plus bite of FXI for hedging purposes.

My blogging has been non-existent in the past 2 months due to my efforts to buy a house and having my hours at work increased, defying the sluggish economy. I have a lot of opinions about the current state of real estate specific to my situation, but that will wait for another time (hint***the name jaudio shorts says it all). Kudos to Duffbeer, for offering me some great real estate advice. I followed it, and if the deal works out, I'll come out better than I ever imagined. The advice offered was given at no charge, so many thanks again to Duff. If anyone is looking to buy real estate up in Duffbeer country, don't be afraid to hit him up. He's a straight talker, although he is former Air Force, but I don't hold that against him. Semper Fidelis, even to the Air Farce.

In other trades, I am now long RIMM, SEPR, MAS, IMA, NUAN, and LLY. Although I have lost a lot of money shorting oil, I have bumped up positions in DUG to almost 90K and I have bumped up SMN (ultra short basic materials) to almost 90K. I am a loner with this decision, I know, and the market has punished me for it so far. We will see.

Now it's time to kick back and pray for rain on the opening ceremonies.

---Jonathan

Comments: View Comments |  Tuesday July 1, 2008