How Not To Trade the Chinese Earthquake

Ok, the market is downright giddy post-expiration. Either giddy or short busting as many people, including a few I work with, seemed to think this 1410 level on the S&P would be serious resistance. I thought so too, but technical levels are just guidelines. This is definitely a living example of how high skepticism in rallies fuels rallies higher. Haven’t posted in a while so thought I’d opine on two points I think are relevant to this current rally: the China Earthquake and the current industrial/commodities leadership sectors. I’m reluctant to recommend long ideas while the market is so hyperactively giddy or, as Pete Najarian on Fast Money says, giddy-up (when the market is giddy, it goes up…simple!).

China Earthquake Trades

Some of you might find the concepts I’m going to throw out here inconsistent or contradictory, to which I say, please, have a flexible mind and be able to think with just a tiny bit of complexity. LONG TERM (5-10 years), and medium term (next year or so), industrials and commodities IS the place to be, and nowhere else. Mark my words. The replacement of “ing” in the word DEVELOPING nations with “ed” is the biggest opportunity of our lifetimes. Not just the BRIC (Brazil, Russia, India, China) countries but also importantly the Mid East as well as Southeastern Asia and parts of South America like Colombia. So, if you’re not going to cash out your investments in the next year or so, this doesn’t concern you.

For the traders/short term investors, I believe traders are assessing the ginormous earthquake damage in China wrong, and I am a strong seller into the earthquake-rebuild commodity rally. There’s nothing wrong with trading this rally as long as you realize there is no fundamental support for the rise in commodity prices just because of the earthquake rebuild. First, it doesn’t even seem like China is halfway done with the rescue operations and people are speculating how much commodity demand there’ll be for the rebuild.

One thing I’ve learn is that traders and this market are impatient, but large physical events like an earthquake recovery take years. Yes, the rebuild will be there and will suck up a lot of commodities, but that will be months if not years in the future, at which point we’d lave long lost the A.D.D. attention span of the market. I’m guessing that within a week or two, traders will be looking at the rescue operations still going on slowly and demand for metals might actually drop as factories in the region are all out of action. Traders will see this as their theory not playing out and sell the overbought metals. Once we clear out these dummies, then I’d add to my long term positions, but not before.

The China demand for metals will be there, just as the airplane demand is there, but people still sold Boeing (BA) shares as the delays pushed the plane deliveries out further into the future. This is happening right now, which is why everyday I wake up grateful for this opportunity to buy Boeing 787-plays like Precision Castparts (PCP) for cheaper than I could have at this time if Boeing were already on schedule to deliver planes this year rather than next.

I believe the exact same scenario will play out with commodities and China: the pent up demand will be that much greater with this earthquake rebuild as people are correctly anticipating- it’s just a bit further out into the future than most people can patiently wait for…which gives the rest of us the perfect “buy the dip” opportunity.

**Disclosure: I own shares of PCP

Comments

[NOWHEREMAN:]

Lets forget the earthquake and concentrate on the other aspect. China is not going to stop the annual migration of its 15-20 million citizens into cities. The commodity pressure will remain. However, the quake will add to the pressure on commodities.

That being said. Everything China needs to replace massive amounts of power lines not only from the quake but from the snowstorm as well. They have to restore their grid, who knows how much power generating capacity has really been lost. Dam Stability, Nuclear stability. They are not the United States where after a natural disaster, it takes years to even begin to rebuild.

Image will be more important than ever.

2008 May 22 04:13 AM

[weng ho teng:]

Any article discussing how to profit off the earthquake while many thousands of Chinese citizens are still buried in the rubble is immoral to the point of being pornographic.

This article should be removed and an apology posted in its place.

The idea of posting an article of this nature after the World Trade Center abomination of the London subway bombings would be unthinkable.

Why is that so? What is it about the Chinese people that makes you think this article would not enrage them? Do you think they are different from you.

A true disgrace.

2008 May 22 08:59 AM

[odin:]

Weng... my sympathies if you have been affected personally by the earthquake. Even if you havent, it is undoubtedly a tragedy -- for China and the world.

However, it is important to also remember that the world doesnt stop (as it hasnt for any other tragedy in the past...). Which is a good thing in my mind. Industrious people go about and do their job rather than getting paralyzed. Even those who suffer because of the tragedy are better off BECAUSE of such an attitude. (imagine if rescue workers were paralyzed instead of doing their job). While there is a mourning period in China, life has not stopped (The exchange is open..companies affected by the quake are still being bought and sold). Again, a good thing.

Now, as the point of "profitting off the earthquake": many people here invest as a profession. It is their JOB to look at situations objectively. One wouldnt doubt the planners in Zhong Nan Hai (or rescue workers) if they had to make hard decisions about who lived and who died in the midst of the tragedy nor should one fault investors here. Without knowing someone personally (there are many I know, who do trade dispassionately but are the first ones to contribute physically and financially in situations like these), I'd be hardpressed to pass a judgement like that and demand that analysis and opinions be stopped.

2008 May 22 10:30 AM

[huangthomas:]

Well said, odin. Since Olympic torch relay fiasco in Paris, London, and San Francisco. Beijing government has unleashed "a bunch of G & T (words of Cafferty, CNN) into Internets to harass anyone who have slightest negative opinion on China. Here in Seeking alpha, Michael Pettis has been harassed by saying air in China is filthy. Chinese President Hu Jing-Tao ordered to stop it. But Beijing government still left a small group of more articulate G & T in the Internets.

2008 May 22 12:26 PM

[rlirph:]

The Sichuan earthquake was a human tragedy that I cry every time when the images are shown. I even started a donation matching campaign at my company.

While it is important to be respectful to the dead one cannot be helpful to the living if he stays at home to mourn. We can channel our sorrow into positive energy to help the ones who are living or we can be respectful and stay home.

2008 May 22 12:55 PM

[huangthomas:]

In this country, we do not enforce a uniform morality or conscience on the society.

2008 May 22 02:50 PM