Posts Tagged ‘FXI’

Big Boost in Chinese Exports Could Lead to More Rapid Tightening

January 11th, 2010 Michael McDonough Comments off

It was widely anticipated that Chinese exports would turn positive in December, but very few expected by such a large magnitude–17.7% y/y.  A portion of the increment was due to a small base effect from a decline in exports in December of last year.  However, on a monthly basis the value of exports still rose to USD130.7bn from USD113.5 in November.  Increase were broad based with textiles rising 25% y/y, compared to 7.3% in November, while mobile phone exports climbed 68.9% y/y in December, versus 13.5% a month prior. Machinery exports jumped 39.6% during the month.  Chinese exports to the US rose 15.9% in December (-1.72% in November), while exports to the EU rose 10.2%.

During December Chinese imports grew by an almost unbelievable 55.9% y/y, versus 26.7% in November.  Strong commodity imports continue to feed China’s investment led recovery.  While, a rise in imports from other Asian countries could be an indication that Chinese exporters have a bullish view on their near-term outlook.;  these imports tend to an input into China’s export processing trade.

China Trade:

Source: Bloomberg

What does this all mean?  First off, if extremely strong export results continue China may be more willing to gradually appreciate the Yuan sooner rather than later, potentially as early as March or April.  Secondly, strong export growth reduces China’s dependency on investment for economic growth, and if this continues it should entice the government to pullback investment and begin tightening monetary policy to curtail growing inflationary fears.  Once it appears  eminent the government will tighten and begin removing liquidity over the near-term, Chinese equity markets should come under pressure.  To help gauge the timing of the eventual move I will be watching a combination of China’s price indices, PMI releases, and trade data.  I anticipate inflation will continue to edge up, led by food prices, while growth should remain robust, meaning the probability of a new tightening cycle should continue to rise.

Categories: Asia/China Tags: ,

A Review of my EQ Based Global Macro Trading Ideas

December 22nd, 2009 Michael McDonough Comments off

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Global Macro Trading IdeasSource: Bloomberg


A Brief Global Macro View on the World’s Markets

October 12th, 2009 Michael McDonough Comments off

This is a very short global macro overview of today’s markets. I do not recommend any of the trades mentioned in this report, but hope they help reinforce your own view or help you generate some news ideas.

Monetary policy around the globe remains easy, providing ample liquidity and room for credit growth. Additionally, fiscal policy remains expansionary, and in some regions the full benefits have likely not yet been realized.

In the U.S., I believe we’ll discover that growth returned in the third quarter this year, primarily due to a turning in the inventory cycle (I will go into more detail on this topic in my Economic First Look when GDP is released). While the U.S. is only just returning to positive growth, some developing nations never experienced contraction or have already returned to growth mode. The trend of developing nations outpacing the developed world should continue and provide some potentially profitable investment opportunities, especially in Brazil and China.

But the punch bowl won’t last forever. An eventual resurgence of inflation and massive government deficits will eventually lead to higher rates and limited room for new fiscal stimulus. In fact, on Tuesday the Australian central bank surprised the world by announcing a rate hike to 3.25% from 3.00% on the back of perceived economic strength. Nevertheless, it will take some time — six to nine months — for other governments and central banks to catch up to Australia’s policy stance, leaving markets around the globe ripe for further appreciation.

As market conditions remain favorable for asset appreciation over the next six to nine months, developing nations — especially Brazil and China — will continue to outpace developed nations — especially the U.S. — in terms of economic growth and equity market performance. Therefore, you should consider long positions in ETFs based on the countries; those include iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI) .

Both of these countries have strong consumer stories:

* In Brazil, personal consumption has been leading its recovery. The country experienced 2.1% sequential growth in consumption in the second quarter, and the metric is generally anticipated to remain robust into 2010 on the back of easy monetary policy. The Brazilian unemployment rate has already fallen to 8.1% in August from 8.8% in May, and it’s widely anticipated to move between 7% and 8% over the coming months.

* In China, if you are a believer of the burgeoning middle-class story, you may want to look at companies like Zhongpin (HOGS) . Zhongpin is a Chinese meat and food products company, specializing in pork products. Additionally, expected increases in the caloric intake of the Chinese population could provide some opportunities in the global fertilizer and agricultural sector. I view China as a more volatile Brazil, with higher return potentials but also much more downside risk.

Additionally, I am bullish on the currencies of commodity-producing economics, including the Australian dollar, Brazilian real, Mexican peso, Chinese renminbi and Korean won. At the same time, I believe the Japanese yen, which has experienced significant appreciation over the past several months, may be overvalued due to deteriorating fundamentals. One way to play this view is taking a long position in Proshares UltraShort Yen (YCS) ETF.

Domestically, I am somewhat overweight on the U.S. technology sector via ETFs or Apple (AAPL) as a single name. It will also be interesting to monitor whether Verizon (VZ) is able to end AT&T’s (T) monopoly on the iPhone. Apple’s contract with AT&T is set to expire in June, and analysts are mixed over whether Verizon can expect to add the product to its line.

I am still somewhat bearish on the U.S. housing sector as foreclosures and mortgage delinquencies across all types of loans continue to weaken the sector. Moreover, the first-time homebuyer tax credit program is set to expire at the end of November; that incentive doubtless had an impact on recent home sales. Continued weakness in the housing sector may place some downward pressure on U.S. REITs.

The show won’t go on forever. A return to growth coupled with fears of economic overheating will cause central banks around the world — likely starting with emerging markets that have already returned to growth — to tighten monetary policy. While at the same time, developed nations will face the repercussions of swelling budget deficits. In Brazil, like in the U.S., monetary policy is expected to remain unchanged for most of 2010, which should provide further support for domestic assets.

In the near term, the biggest downside risk to this investment the possibility that central banks may tighten monetary policy prior to current expectations. But tightening is inevitable; rates in the U.S. will not remain at 0% forever. Once it becomes clear that central banks are approaching a tightening cycle, investors should consider taking profits on their equity positions. Ultimately, higher budget deficits in the U.S. combined with potentially momentous health care reform could lead to higher taxes and rates, coinciding with a period of subdued growth and elevated unemployment.

For more please see my column on


Looking for Alpha through Beta

January 27th, 2008 Michael McDonough Comments off
We still believe there are a lot of good values out there on the Global EQ markets. We are anticipating that China will continue to outperform the US, and India may even outperform China. Looking to take advantage of these markets we found the following two ETFs IFN & FXI, for India and China, respectively. Of course the major risk being here any slight decline in the US market will be exacerbated in these markets do to their high betas. Although at times this can be used for your advantage. Take for example last week when the Indian market dropped something like 15% on Monday and Tuesday, this would imply a substantial loss (probably near 5%) for the SP500. Now when the markets opened IFN dropped from trading at around 55 to 48, to catch up with the Indian markets, but when the 5% loss to the SP500 did not materialize (mostly because of the 75bp cut announced before markets opened) the ETF went back to trading around 54. After the Fed announced the 75bp rate cut (the Fed usually makes these surprise announcements at 8:15 am) the US EQ futures market recovered from what was setting up to be a very negative open(-5%). Since the Indian markets were already closed and had experience a devastating loss over the prior two days the ETF, accordingly, opened significantly lower, but since the loss in the US markets didn’t substantiate the kind of loss seen in India, it quickly recovered. Meaning if this trade were executed you could have seen gains of over 10% within a couple of hours and in our view with limited risk.
As we have said continually we do not believe the US is going to move into a recession, meaning these markets should continue to outperform. We are also looking into the outlook of the Las Vegas Sands (LVS) before their Feb 4th earnings report, we believe the price has been unjustifiably depressed and earnings could surprise to the upside. This is in no way an investment recommendation, but please feel free to look into the data yourself.
*Sorry for the delay in posts we were in the process of relocating to a nicer space.