Mad Hedge Fund Trader

Chinese Growth Spurs Asian Markets

Hong Kong will be a prime beneficiary. The upside breakout to a new 10 month high of 19,500 in Hong Kong’s Hang Seng Index last night, up 70% from its March low, could be a signal for better emerging market performance everywhere. I have always viewed the former British crown colony as the older, better dressed, more respectable brother of its rougher, often irresponsible, riskier sibling in China. Hong Kong companies offer experienced management, believable accounting, and liquid, unrestricted securities to trade. The Hong Kong dollar is pegged to the US currency, eliminating currency risk for dollar based investors. Foreign capital flows into Hong Kong have been huge this year, as investors cash in their US blue chips for Chinese ones. Once considered a place where you only played with your “mad” money, Hong Kong is rapidly becoming a core holding. Look at Marty Whitman’s 3rd Avenue Fund, which has and eyebrow raising 39% of its holdings in Hong Kong stocks. Now there’s a bet and a half! Hong Kong is the China play that lets you sleep at night. Look at the iShares Hong Kong Index ETF (EWF).

Intel Earnings Send Asian Markets Higher

No surpise there. ) Intel’s blowout earning yesterday made crystal clear who is going to be buttering our bread for the next few decades (see income statement at www.intc.com/releasede...). More than 80% of their earnings came from abroad, far and away the main driver of economic activity in the world today. If it weren’t for the outrageous $1.4 billion antitrust fine from the EC, the earnings would have been even better. If you are going to own equity, make it a BRIC one. If allocation restrictions won’t let you go 100% foreign and you must buy the US, make sure they are American companies that are really foreign ones in disguise like Intel (INTC), Oracle (ORCL), Hewlett Packard (HPQ), Microsoft (MSFT). You don’t want to own anything that is dependent on newly impoverished Americans buying their products.

Choosing International ETFs

Step carefully. We are gathering a head of steam towards our next financial crisis, even before the current ones are solved. The perpetrator will be new financial product du jour, the super leveraged Exchange Traded Funds (ETF’s), which are being created at a breakneck rate, sucking in billions of dollars from investors. ProShares has filed for 94 funds, which offer traders 300% long or short plays in markets as diverse as the Russell 1000 Index, the MSCI Malaysia Index, and the Nikkei 225 stock average. Direxion has gathered $3.4 billion with 16 different 3X funds launched since November. There are now more than 800 ETF’s, and I have been a big fan of those for emerging markets (EEM) and short Treasuries (TBT), which allow investors to take positions in niche sectors and foreign markets which are otherwise difficult or expensive to get into. These also allow mutual funds the only means to go short, and include tax advantages and hedging opportunities. But the leveraged versions include risks that most buyers don’t fully understand, even if they parse through the voluminous prospecti with a magnifying class. They promise their triple tracking only for the day you buy it. Beyond that, the tracking error can be huge. The mechanics of these funds force them to be buyers of every rally and sellers of every dip. Over time, leveraged short funds can actually suffer large losses, even in falling markets, and vice versa. It is just a matter of time before one of these goes to zero, wiping out investors. They are already being blamed for an increase in market volatility in the last hour of trading. Gaming sector ETF’s has become the new blood sport for nimble hedge funds. You can expect a replay of a movie you’ve seen before. At the first sign of trouble, liquidity will disappear, auditors will mark them down to nothing, and suddenly the whole world will be for sale. Sound familiar? You have been warned!

Economic Crisis Serves as Wake Up Call for Asian Export Market

As it should. Japan’s closely watched tankan report was released today, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9% in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2%, double the fall seen in the US. The last time the numbers were this bad, two atomic bombs had just been dropped on Japan and it lost WWII. Prime Minister Taro Aso’s government is embroiled in multiple scandals, taking his approval rating down to 23%, so the ruling Liberal Democratic Party’s half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of ¥87 in January, making the country’s essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota Motors (TM) has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13% of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.

The Impact of a Global Recession on Asia

First, Mr. du Plessis, I have been studying your work and I really admire it. My blast for today: The Chinese government has expressed “concern” about the safety of their $696 billion investment in US Treasury bonds. What they are not telling you is that they are even more “concerned” about the hundreds of billions of Fannie Mae, Freddie Mac, GMAC, and other agency debt, which is either now untradeable or has gone into the toilet. And “concerned” they should be. Not only is some of the paper they own now worthless, there is an impending 50% devaluation of the dollar in the cards which is the guaranteed result of current US government printing press policies. One of the great luxuries of running a dictatorship is that you can skip mark-to-market accounting. The government entities that own all of this garbage are carrying it on their books at par because they intend to hold it to maturity. If China used mark-to-market they would have plunged into another civil war by now. Expert to hear more “concerns” from Japan, Singapore, and the sovereign wealth funds that are in the same boat.