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Never done it before...its time...
Old 08-10-2007, 10:59 PM   #1
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Never done it before...its time...

...to short China. With all the turmoil in the worlds markets - Europe erasing all of '07s gains, US markets pulling back sharply, the ECB and FED injecting large amounts of money, protectionist legislation looming here at home, and yet...

China's stock market takes no notice.

000001.SS: Basic Chart for SSE Composite Index - Yahoo! Finance

Plus the fact that there have been numerous stories of uninformed Chinese standing in line to open their brokerage accounts. Unaware of Japan 1990 and completely unemotionally prepared for a sharp pullback.

Watch them flee for the exits when it starts to get ugly.

Greenspan has already warned.

So I checked out available ETFs:

GXC - SPDR S&P China ETF
PGJ - PowerShares Golden Dragon Halter USX China Portfolio
FXI - iShares FTSE/Xinhua China 25 Index Fund

Any advice on shorting? Something I should particularly watch out for?

BTW - this is money in the play account...
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Old 08-10-2007, 11:12 PM   #2
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Originally Posted by cyclone6 View Post
...to short China. With all the turmoil in the worlds markets - Europe erasing all of '07s gains, US markets pulling back sharply, the ECB and FED injecting large amounts of money, protectionist legislation looming here at home, and yet...

China's stock market takes no notice.

000001.SS: Basic Chart for SSE Composite Index - Yahoo! Finance

Plus the fact that there have been numerous stories of uninformed Chinese standing in line to open their brokerage accounts. Unaware of Japan 1990 and completely unemotionally prepared for a sharp pullback.

Watch them flee for the exits when it starts to get ugly.

Greenspan has already warned.

So I checked out available ETFs:

GXC - SPDR S&P China ETF
PGJ - PowerShares Golden Dragon Halter USX China Portfolio
FXI - iShares FTSE/Xinhua China 25 Index Fund

Any advice on shorting? Something I should particularly watch out for?

BTW - this is money in the play account...
What to watch out for? Yeah, shorting . What kind of volume do these ETFs have? Have some cash in case you are wrong. Even very gifted investors are right by theory but wrong in their timing of it. If you do enter the black, don't get greedy.
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Old 08-10-2007, 11:14 PM   #3
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I don't have any advice. But shorting China's stock seems like a good idea. Calculated risk, but the reward can be big, and more than likely.
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Old 08-11-2007, 12:17 AM   #4
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Buy puts. It limits your loss to the premium paid.

FXI seems to have the most strikes.
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Old 08-11-2007, 11:47 AM   #5
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Any advice on shorting? Something I should particularly watch out for?
Yeah. A couple billion Chinese can remain irrational for far longer than you can remain solvent keep funding those margin calls.

If you're serious about shorting then you should familiarize yourself with Jim Chanos (of Kynikos) and read "The Art of Short Selling" by Kathryn Staley. There's a good reason that it's so hard to find good examples & books on short-selling.

The beauty is that it only takes a few bucks to return thousands. The reality is that the unpredictability of idiots & the volatility are breathtaking. I have an in-law who shorted himself from ER right back into the workforce by virtue of the QQQQs in 1997-8...
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Old 08-11-2007, 11:57 AM   #6
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Oh man, dont do it.
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Old 08-11-2007, 12:40 PM   #7
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Since you're asking, I wouldn't do it. It seems like it might be a good idea -- I thought I had seen charts that China was trading at a P/E of 40 or so, but when I looked at GXC and FXI they are trading at 20x and 25x (according to their fund pages). Assuming those numbers are close to correct, as a superficial valuation metric that's not irrational enough to short IMHO. Even if they are priced higher you always have to consider the possibility that prices will stay the same while they wait for earnings to catch up to the valuations. Anyway, if you really want to do it I'm with eridanus -- buy puts. But then again I glanced at the LEAPS on FXI and those put premiums looked pretty hefty to me.
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Old 08-11-2007, 01:05 PM   #8
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My understanding is that FXI and other Chinese funds available to US investors are made up of stocks traded in Hong Kong (^HSI: Summary for HANG SENG INDEX - Yahoo! Finance), not in Shanghai. Hong Kong is not nearly as overvalued as Shanghai -- FXI P/E is around 20. I'm not sure it's such a no-brainer to short it.
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Old 08-11-2007, 02:51 PM   #9
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If you do enter the black, don't get greedy.
This is a deeper subject than it sounds like. I run across the mental tricks that occur when I buy options. I look at a $44 option on the QQQQ => 6 months from expiration. Depending on the NAZ volatility it may cost as little as a quarter. Well I know that while it isn’t likely, it is way less than totally off the wall that the QQQQ drop all the way to 40-perhaps even on its way back to 20 where it started the post Dot Bomb recovery. SO WOW- I pay $0.25 to control for 6 months an instrument that could easily go to $4+. 16 to one!

Then the QQQQ starts falling. First thing that happens is that imputed volatility jumps up, so the options get a bump even while still way out of the money. So they double. As the index falls they get a double shot from getting closer to strike, and volatility increasing its effect on the option formula.

Then you start thinking- hey, I’ve owned these things before and they have been nothing but a drain on my portfolio. Or I’ve owned these things before and seen them jump only to return and expire worthless once again. So you start thinking maybe I should nail down some profit and see if I can have a winning year on my options operations.

Practically speaking what I have done is to wait until I am $3 or $4 bucks into the money, depending on time remaining, time/volatility value etc, then sell and roll down to keep a line in the water for a big crash.

But I am always guessing and I know I will actually never hold out for the big hit.

Maybe this could be done more successfully by buying really OTM puts on individual stocks, and mentally kissing the money good-bye at purchase. Might wake up some morning and find out that a whole stack of zeros has been added to your option account.

Anyway my not very clear point is that the risk/reward of some of these positions is less attractive than it may seem, because psychologically it becomes hard to hold on for outsize payoffs.

Ha
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Old 08-11-2007, 02:56 PM   #10
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[COLOR=black]
Anyway my not to clear point is that the risk reward of some of these positions is less attractive than it may seem, because it becomes hard to hold on for huge scores.

Ha
ABSOLUTELY my experience with options! Still fun, but sometimes I sell them the same day I buy em if they swing 20%+ or more. To hard to turn down an extra $1K or $2K for a days work. Many times, if I held on for a month or two, would have made much, much more.
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Old 08-11-2007, 04:53 PM   #11
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While I was an enthusiastic finance undergrad, I onced short Amazon.com. I knew the flip side of the proposition was risky and I lucked out with a 15% return from the short after 3 weeks.

Knowing the flip side of the equation kept me from going further with my bet and I was thrilled with the 15%. To me, any short that ranges from 10-20% is a pretty good short and it is time to start thinking about locking in profits.

Nowadays, I think options are without the way to go and I have not shorted anything since.
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Old 08-11-2007, 08:19 PM   #12
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While I was an enthusiastic finance undergrad, I onced short Amazon.com. I knew the flip side of the proposition was risky and I lucked out with a 15% return from the short after 3 weeks.
All it takes is one comment from the likes of Henry Blodget or Jim Cramer and every bit of careful rational financial analysis that went into the short is out the window.

I got my head (and about $8000) handed to me because I was pretty sure that KMart sucked as a retail outlet-- but Eddy Lampert didn't appreciate my wisdom.

Add in all the other private equity firms, VCs, and M&A arbs and you just can't get a stock to dip into the single-digit P/Es anymore before some fool rushes in where angel investors fear to tread...
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Old 08-11-2007, 08:42 PM   #13
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Time for a nice anecdote.

I was tempted to short a stock exactly once. I read an interesting piece on a guy named Sam Waksal, and what a genuinely immense weasel he was, and that he was performing his weaselish act as CEO of a company he founded, named Imclone. A lot of interesting tidbits and piece parts showed that this guy was just a completely talentless arrogant misleading criminal doodyhead that it was obvious to me that this company was going to fail.

There was no doubt in my mind after reading this piece that the man, his company, and its primary product were nothing but flim-flam frauds.

I decided to try a little shorting, but Ameritrade gave me a bunch of trouble doing it online and I got busy with some work stuff and forgot about it for a while.

Heres a chart with a pointer to that moment in time. Had I held the short a while, I might have made a bit.

As an aside, I have a funny feeling that when we get to the bottom of the program trading thats been creating our late day volatility...china will be somehow involved.
Attached Images
File Type: jpg imclone.jpg (44.1 KB, 8 views)
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