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For the last 30 years, the economy that has achieved the fastest
and most consistent growth in the world may well be China's.
Despite the current global recession, the Chinese economy still
grew 9.8% in 2008. It marked the first year of single-digit
percentage growth for the country since 2003, after notching
double-digit percentage growth between 2003 and 2007.
Chinese government officials claim that their nation contributed
more than 20% to the world's economic growth last year. They
also optimistically forecast economic growth of at least 8% for
this year. However, a number of independent private sector
estimates, including those from Economist magazine and the
International Monetary Fund, estimate China's economic growth
will fall below 7% and possibly slip to 6%. A fear exists that
civil unrest may occur if the growth rate dips below 8%, since
economic weakness typically boosts unemployment. With relatively
high growth rates, compared to other countries, investors may
wonder if China could offer a hedge against recessionary
conditions elsewhere.
If 2008 is any indication, investors should tread cautiously
before going either long or short in the Chinese market. Despite
the country's growing economy, history shows that the
correlation between global stock markets increases during times
of recession. As the Dow fell 33% last year, the Shanghai
Composite Index plunged 65%. The iShares FTSE/Xinhua China 25 (FXI),
an exchange-traded fund (ETF) that follows 25 companies on the
Shanghai stock exchange, dropped 47.76% last year. If you were
shorting the Shanghai stock exchange through UltraShort FTSE/Xinhua
China 25 (FXP), you would have lost 53.61%. You might expect a
short ETF to turn a profit if the stock index that it tracks
plummets but China certainly did not follow that pattern last
year.
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Despite the positive spin that
Chinese government officials are giving to the country's
economic outlook, it is hard for me to belief that its stock
market is ready to rebound. But that hasn't stopped its
leaders from expressing renewed confidence in its economy.
The Chinese government reported last week that its
industrial output last year rose by 5.7%, while its retail
industry grew by 17.4%, year-on-year. In addition, China has
nearly $2 trillion in reserves and a low debt-to-GDP ratio
of 18%, compared to 80% in the United States and 160% in
Japan.
On the other hand, other economic signs indicate a
significantly slowing economy in China. Its exports fell in
February by a whopping 25.7%. Millions of people have been
left jobless and thousands of export firms have closed shop.
With consumer prices falling, some analysts are discussing
the possibility of deflation in China.
Since investors hate uncertainty, China is not looking very
enticing right now. Of course, if investors decide stock
markets around the world have been pounded enough and the
current bear market rally may be a sign that the worst is
behind us, China's beaten down stock market could rally as
strongly as any around the globe.
Personally, I am not yet ready to move into China either
long or short. If you, however, think that the Chinese
market has bottomed out and that its government stimulus
spending will give the Chinese economy a boost, you may want
to consider going long. For those who expect more fallout in
the Chinese market this year, you may be tempted to put a
little money into a short ETF. But if you're like me and you
dislike losing money and investing without a clear market
direction in sight, you can monitor these ETFs from the
sidelines along with the Fabian team.
| Long |
Short |
| iShares FTSE/Xinhua
China 25 Index (FXI) |
Ultrashort FTSE/Xinhua
China 25 Index (FXP) |
| PowerShares Gldn
Dragon Halter USX China (PGJ) |
|
| SPDR S&P China ETF (GXC) |
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If you're looking for guidance
about which ETFs to trade and when, check out my ETF Trader
service by
clicking here. Right now, I have 3 prime profit
opportunities on my watch list which I'm about to pull the
trigger on. Be sure to be there with us to rake in the
gains. As always, I encourage you to send me any questions
that you have about ETFs. I'll follow up in future ETF
Talks.
Sincerely,
Doug Fabian
Editor
ETF Trader
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Finding Treasure Island
In ordinary market
conditions, it's nearly impossible to find attractive
companies whose net cash exceeds market cap. That money
would act as a floor, and the negative enterprise value
could entice arbitrageurs to step in and collect a quick
profit. But in this market, the usual rules don't apply.
Leveraged buyouts and other mergers and acquisition
activity has dried up because of the lack of financing
-- leaving deals for the rest of us that would usually
be off the table by now. For instance, which of these
firms has 45 million outstanding shares worth a total of
$135 million even though the firm has accumulated a cash
stockpile (net of a trivial amount of debt) in excess of
$230 million?
A.) Genentech
(DNA)
B.) Palm
(PALM)
C.) General
Motors (GM)
D.) MGM
Mirage (MGM)
E.)
Nam Tai Electronics (NTE)
(Please click on one the
links above. After you make your choice, we'll show you
the correct answer on our web site.)
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Visit this link to read additional articles from today's
leading market experts!
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