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Sunday, November 21, 2010

This Week: Red China Rolling Over?

Stock market trend: Up

 I have begun to cash out of many of my positions and take profits in anticipation of a flat to down US market until the end of December. Both tax selling and the taking of profits coupled with uncertain outlooks in communist China and in the PIGG portion of Europe suggest less upside reward than an undeniably strong technical market trend might suggest at this point. Better to be early than late is my motto.

 And speaking of early,I have begun to build a short position in the communist Chinese stock market using the exchange traded fund FXP. Just as I was a bit too early shorting the housing bubble, I may indeed be a bit early on the China bubble. However, here is what I'm seeing.

 First, as my early warning system, I maintain a watch list of 64 Chinese stocks listed on Market Edge. Over the past month, I've noticed a systematic deterioration in many of the stocks. 23 show deteriorating conditions while only six show improving conditions. Of the six with improving conditions, three of them are agricultural stocks.

 Second, from a fundamental perspective, economists within the Communist Party have come to a critical inflationary fork in the road. One fork – the path of contractionary monetary policy, rising interest rates, and price controls – leads inevitably to a business cycle downturn. The other fork – allowing the Chinese currency to strengthen so as to reduce the price of food, commodities, energy, raw materials, and imported consumer and investment goods – leads to a far more stable transition to an economy less dependent on exports.

 It is crystal clear that the Communist Party has chosen the wrong fork. The biggest danger of traveling along the rising interest rate path is to prick the speculative bubble otherwise known as real estate in China – all the while attracting a flood of speculative hot money flows.

 The bigger picture is that communist China cannot continue to experience export led growth catalyzed by American and European consumers. The American and European economies simply don't have the firepower to sustain communist China's growth.

 The last thing I should say about investing in China is that it is far better to play the long side of the communist Chinese market by investing in peripheral plays like Australia, which provides China with many of its commodities, and Germany which provides China with many of its capital goods. However, the main reason I don't like investing in communist Chinese stocks (besides the fact that it is a ruthlessly totalitarian country whose political and military leaders are out to destroy America) is that the vast majority of Chinese companies put creating jobs ahead of making money. That doth not a robust return make.

 Navarro's Trading Summary

 With the big macro picture out of the way, let's finish with a brief discussion of my trading strategies. The last letter I strongly recommended going long the yuan via CYB, short the long bond via TBT, and short the Japanese yen, YCS. 

 The TBT trade turned out the best – it went up six points, and I've taken my profits for now while I wait for the Irish crisis to subside. As I painfully learned during the last European crisis, a flight to the US dollar pushes down bond prices and boost yields – which is exactly the opposite direction TBT plays it.

 I'm also making some modest money on my yen short while I continue continue to hold CYB while I wait, perhaps like Godot, for that bright shiny day when the Communist Party figures out it is in China's best interest to let the yuan go up significantly.

 In terms of the rest of my portfolio, I added two stocks to my short-term trading portfolio based solely on an interesting discussion in one of my MBA classes. The stocks are Imax (IMAX) and Clicksoftware (CKSW). Just be careful with Clicksoftware because it has a small float.

 In my short-term trading portfolio, I also bailed on COIN, which was a failed play on California's failed marijuana initiative and abandoned ship on DirecTV based on growing information that the Internet is becoming more and more of a substitute for cable than simply DirecTV.

 My favorite little penny play and best performer continues to be Stellar Biotech (SBOTF). Profit takers hit the stock fairly heavily for a couple of weeks but it's back trying to inch above a buck. This is a stock to accumulate and forget about for a few years and then likely be very happily surprised.

Since I got into the rare earth bonanza a bit late, my small positions in several stocks continue to be flat to down.  I reiterate that this is a long-term building project. My small positions include ARAFF, GDLNF,GWMGF, and LYSCF.

Finally, my dumb move of the fall quarter is opening up a small position in the uranium stock URZ recommended by a stock site called Ahead of the Herd – I promptly wound up significantly underwater. I still can't figure out whether I have been "pumped and dumped" or whether the site simply made a bad call. If anybody has any information about this stock site, send me an e-mail and let me know whether it has helped you make money or lost money.

Have a great Thanksgiving! And as the ultimate expression of patriotism, go out and buy a bunch of cheap Chinese stuff on Black Friday to put around your Christmas tree. LOL

DISCLAIMER: There are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal correction.

11:42 am est 


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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.







DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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