Courtesy of Daniel Sckolnik, ETF Periscope
“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.” — Confucius
There is a wonderful scene in “All the President’s Men,” the movie about the Watergate scandal, when one of the film’s shady characters advises the hero to “follow the money” if he wants to find out who is behind the break-in. “Follow the money.” This might be a sound strategy to consider for investors to consider as they are pondering their plan of attack for 2011.
So exactly where does one find themselves after tracking down the scent of money to its source? Well, contrary to that millennium-old adage, “all roads lead to Rome,” it might be more correct to say that all roads lead to Beijing. After all, as of 2008 China has overtaken Japan as the largest major foreign holder of Treasury Securities on the planet. A quick peak at the U.S. Treasury Department’s website reveals that, as of October, China holds a mind-numbing nine hundred billion dollars in these securities. That is part of the larger picture, of course, as they are generally recognized as the world’s largest creditor nation. What does that mean to the markets?
In simple terms, China may be dancing while everyone else tries to follow its lead. This can be problematic, especially if no one is sure where on the dance floor they are going. Perhaps not even the Chinese themselves.
The Chinese economy has been indisputably white hot for the past several years, and now the brakes are being slammed on in an effort to reign in the specter of inflation. However, it may be too late to tame that particular dragon. China is experiencing the fastest rise in inflation in over two years, and the Chinese government has just raised interest rates again last week, the second time in the last two months. It is predicted that several more rate increases will follow within the next six months.
So what happens if the economy of China begins to slow down? Well, demand for commodities certainly could be affected. The country’s vast appetite for precious and industrial metals, agricultural commodities and energy all could be impacted in a significant way. While lower commodity prices can be regarded in principal as a good thing, the rate of decrease is really what would impact the markets in the short term.
Of course, at certain price levels, these same commodities become attractive again. If gold corrects back down 20% from its current level, it is a safe bet that there will be a strong influx of new buyers. Same for oil, if it hits the $70 mark. As for the current state of China’s real estate market, which many compare to the recent U.S. bubble that burst in 2008, it is not unlikely that a double-digit correction could occur.
On the other hand, the momentum of China’s economy could continue unabated, in spite of the inflationary precautions being currently implemented. This is also possible, particularly in the short term, as it is in line with the Bullish tendencies of just about every current indicator, including the record-breaking price of gold and silver, oil seemingly inching up to the century mark and several of the benchmark U.S. equity market indexes pushing above the highs of the last two years, including the Dow Jones Industrial Average (DJIA) and the S&P 500(SPX).
Here are a few ETFs and ETNs that can be used to play the China card, either to the upside or the downside, depending on whether you are sitting on the Bullish or Bearish side of the fence.
If you’re interested in copper, then JJC (iPath DJ-UBS Copper Total Return Sub-Index) is one way to play it. It was up 42% in 2010. This ETN tracks the Dow Jones-UBS Copper Subindex Total Return Index, which closely follows the price of copper futures as traded on COMEX.
The largest gold ETF is GLD (SPDR Gold Trust). It is designed to track the spot price of gold bullion and was up 29% this past year.
If you want to play the broad China equity market, then FXI (iShares FTSE/Xinhua China 25 Index) can be used. It was up about 2% in 2010 and tracks the FTSE/Xinhua China 25 Index, which measures the performance of the largest companies in China’s equity market.
This may be a good play if you are leaning towards the Bearish side, since a burst in China’s economic bubble would certainly slam their financial markets. Down 6% in 2010, CHIX (Global X China Financials ETF) tracks the S-BOX China Financials Index. It is comprised of securities of companies which have their main business operations in the financial sector and are either based in China or have their main business there.
For the ultimate Bearish position, consider FXP (ProShares Ultrashort FTSE/Xinhua China), which was down 28% last year. It tracks the FTSE/Xinhua China 25 Index (-200%), and corresponds to 2X the opposite of the daily performance of the FTSE/Xinhua China 25 Index.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.” – Confucius
There is a wonderful scene in “All the President’s Men,” the movie about the Watergate scandal, when one of the film’s shady characters advises the hero to “follow the money” if he wants to find out who is behind the break-in. “Follow the money.” This might be a sound strategy to consider for investors to consider as they are pondering their plan of attack for 2011.
So exactly where does one find themselves after tracking down the scent of money to its source? Well, contrary to that millennium-old adage, “all roads lead to Rome,” it might be more correct to say that all roads lead to Beijing. After all, as of 2008 China has overtaken Japan as the largest major foreign holder of Treasury Securities on the planet. A quick peak at the U.S. Treasury Department’s website reveals that, as of October, China holds a mind-numbing nine hundred billion dollars in these securities. That is part of the larger picture, of course, as they are generally recognized as the world’s largest creditor nation. What does that mean to the markets?
In simple terms, China may be dancing while everyone else tries to follow its lead. This can be problematic, especially if no one is sure where on the dance floor they are going. Perhaps not even the Chinese themselves.
The Chinese economy has been indisputably white hot for the past several years, and now the brakes are being slammed on in an effort to reign in the specter of inflation. However, it may be too late to tame that particular dragon. China is experiencing the fastest rise in inflation in over two years, and the Chinese government has just raised interest rates again last week, the second time in the last two months. It is predicted that several more rate increases will follow within the next six months.
So what happens if the economy of China begins to slow down? Well, demand for commodities certainly could be affected. The country’s vast appetite for precious and industrial metals, agricultural commodities and energy all could be impacted in a significant way. While lower commodity prices can be regarded in principal as a good thing, the rate of decrease is really what would impact the markets in the short term.
Of course, at certain price levels, these same commodities become attractive again. If gold corrects back down 20% from its current level, it is a safe bet that there will be a strong influx of new buyers. Same for oil, if it hits the $70 mark. As for the current state of China’s real estate market, which many compare to the recent U.S. bubble that burst in 2008, it is not unlikely that a double-digit correction could occur.
On the other hand, the momentum of China’s economy could continue unabated, in spite of the inflationary precautions being currently implemented. This is also possible, particularly in the short term, as it is in line with the Bullish tendencies of just about every current indicator, including the record-breaking price of gold and silver, oil seemingly inching up to the century mark and several of the benchmark U.S. equity market indexes pushing above the highs of the last two years, including the Dow Jones Industrial Average (DJIA) and the S&P 500(SPX).
Here are a few ETFs and ETNs that can be used to play the China card, either to the upside or the downside, depending on whether you are sitting on the Bullish or Bearish side of the fence.
If you’re interested in copper, then JJC (iPath DJ-UBS Copper Total Return Sub-Index) is one way to play it. It was up 42% in 2010. This ETN tracks the Dow Jones-UBS Copper Subindex Total Return Index, which closely follows the price of copper futures as traded on COMEX.
The largest gold ETF is GLD (SPDR Gold Trust). It is designed to track the spot price of gold bullion and was up 29% this past year.
If you want to play the broad China equity market, then FXI (iShares FTSE/Xinhua China 25 Index) can be used. It was up about 2% in 2010 and tracks the FTSE/Xinhua China 25 Index, which measures the performance of the largest companies in China’s equity market.
This may be a good play if you are leaning towards the Bearish side, since a burst in China’s economic bubble would certainly slam their financial markets. Down 6% in 2010, CHIX (Global X China Financials ETF) tracks the S-BOX China Financials Index. It is comprised of securities of companies which have their main business operations in the financial sector and are either based in China or have their main business there.
For the ultimate Bearish position, consider FXP (ProShares Ultrashort FTSE/Xinhua China), which was down 28% last year. It tracks the FTSE/Xinhua China 25 Index (-200%), and corresponds to 2X the opposite of the daily performance of the FTSE/Xinhua China 25 Index.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
