Watch for an Opportunity to Invest in China

Includes: FXI, PGJ
by: Keith McCullough

“Tactics without strategy is the noise before defeat.”

-Sun Tzu

Managing risk around this proactively predictable trading range remains our objective here in Q3. All of the noise you hear about “200-day moving averages” to crashes and “Chinese bubbles” are just that – noise. Capitalize on it.

After getting hit on Monday, Asian equities have busted another move to the upside. With the exception of Japan which was flat overnight, most of the major Asian stock markets have tacked on an impressive 2-day rally.

Last night’s moves in Asia included:

  1. China closing up another +1.4%, making its 2-day move +3.5%, and establishing yet another new YTD high of +75.2%.
  2. Hong Kong +2.1%, making its 2-day move +5.8%, and breaking out above my immediate term TRADE line.
  3. Taiwan +1.5%, Korea +2.6%, Australia +1.5%, Thailand +2%, India +3%, and Singapore +3.4%.

The Chinese strategy continues to inspire leadership in the region. Their tactics have been surgical. Their execution, flawless.

China is the 21st century’s growth engine. If you are American and don’t like the sounds of that – too bad. Not unlike Americans versus the British at the outset of the 20th century, the Chinese couldn’t care less.

Remember that China’s stated foreign reserve policy is to maintain three objectives: 1. Liquidity, 2. Safety, and 3. Returns.

By the way, those are unlevered returns backed by organic growth. No, you haven’t seen the Steve Schwarzman of China yet have you? That American private equity poster child would be the antithesis of the Chinese investment philosophy.

Say what you will about your levered long lovers here in America. The Chinese have liquidity. And lots of it. This morning China reported their money stats. Chinese foreign reserves shot up another $178B to $2.13T. That “T” stands for TRILLION. And that is, like the 2009 performance of the Shanghai Composite Exchange, a new high.

Within the Chinese money stats was this little critter that US politicians don’t want to talk about called the money supply. M2 (a measure of the money supply) in China ramped up to +28.5% year-over-year growth in the month of June. That too, is a new high.

With the US government creating more money than God could right now, there is a lot of money floating around out there in this brave new interconnected global world. In the immediate term, it will continue to be reflationary. In the intermediate term, it will lead to one of our Q3 2009 Investment Themes – a Reflation Rotation. And in the long term, reflation will ultimately morph into inflation.

Before you get your shirt in a knot about inflation, take it off, relax, and get a tan or something. We won’t see the political football of reported inflation accelerate in the USA until Q4. In between now and then, all you need to do is buy low, sell high, and trade the range.

Chinese growth accelerated sequentially in Q2 (versus Q1). That we know. What we don’t know is where that growth will end up in Q3. What we know is that economic growth comparisons for Q3 are quite easy (earthquake of generational proportions last year, plus the country’s lockdown for the Olympics). What we know is that stock markets are leading indicators, not lagging ones – and our real-time update on that for both China and Asia overall is on the tape.

Stay long what The Client (China) needs, not what America wants them to need. In the last few weeks, both copper and gold have held their long term TAIL lines of support (copper = $2.08/lb, gold $871/oz). Stay away from the US Dollar (we’re short) and US Treasuries (10-year yields trading back up to 3.54% this morning are signaling that my long term view of reflation morphing into inflation is going to be right).

In the immediate term, China is now OB (over-bought). So please don’t run out and buy it up here with the 200-day monkeys at +75% YTD. In the immediate term, the US Dollar Index will be oversold again at $79.58 and the SP500 will bump up against its immediate term TRADE resistance line of 913 in and around this morning’s open.

In the intermediate term my Range Rover call remains (SP500 871-954). In the long term, as you listen to all of the noises of those who missed both the crash and the squeeze, remember that “tactics without strategy is the noise before defeat.” China gets this, and so should we.

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