I was recently lectured on Twitter by a Wall Street strategist
about why emerging market stocks (NYSEARCA:EEM) are a raging buy.
Among his top arguments for being and staying long were extremely
negative sentiment and chart patterns. He was particularly adamant
about "depressed values" in Chinese stocks.
Interestingly, the view among other strategists that emerging
market stocks are trading at bargain basement prices is so common
on Wall Street, you could throw a penny in any direction and hit
the right analyst.
Emerging Markets are BURNING! Don't Burn with
Here's just a recent summary of what Wall Street's best minds
think about the world's largest emerging economy - China
- "Shanghai Composite Could Hit 2,800-3,000 by Year End" - Ryan
Tsai, Senior Investment Strategies at Coutts, 2/19/13
- "The MSCI China Index to rise 8% in 2013" - Helen
Zhu, Chief China Equity Strategist at Goldman Sachs 1/7/13
- "China is screamingly cheap" - Kate Moore, Chief Investment
Strategist at JPMorgan Private Bank, 8/7/13
- "DeMark Says Shanghai to Jump as Economy Strengthens" - Tom
DeMark, Market Studies, 9/16/13
- "China has a lot of tailwinds over the balance of the year"
Eric Brock, at Clough Capital Partners, 9/27/13
The problem with these views - besides the fact they're all dead
wrong - is they ignore reality. Common sense tells us that what's
happening on the streets of Bangkok (NYSEARCA:THD) or Beijing
always trumps an overdue technical bounce or cheap market
valuation. Are riots bullish? How about urban air pollution that's
10 times higher than the World Health Organization's recommended
levels? And you know what trumps that? The real time price action
of stocks, which in turn, determines the winners and losers.
History Lesson on "Cheap"
Six years ago, we got an ugly lesson in what cheap financial assets
smell like. Bear Stearns and Lehman Brothers - just before they
went extinct - were both undervalued. Both companies were also way
overdue for a technical bounce, according to leading chart readers
of the day. Even CNBC's Jim Cramer, who according to some accounts,
eats and sleeps ticker symbols, was thoroughly tricked.
On March 11, 2008, Cramer yelled at a national audience saying,
"Bearn Stearns is not in trouble" right when the stock was at
$62.97 per share. Less than a week later, JP Morgan Chase acquired
Bear for a renegotiated fire sale price $10 per share.
And so it is: During a crisis, as many emerging markets find
themselves in today (see Argentina, Brazil, Turkey, and Thailand)
cheap valuations can get cheaper. And buying too early is the wrong
strategy because the road to destruction is littered with carcasses
that paid attention to every piece of financial data they could
consume, but the irrevocable truth of price action. Buying the
right assets at the wrong prices is good for your ego, but not for
Fast Forward to Now
In just a matter of two months, Shanghai's Composite Stock Index
(Shanghai: 000001.SS) has already fallen almost 9% and has
surpassed 2013's entire annual decline of 6.75%.
Rather than buying into the propaganda du jour that emerging
market stocks (NYSEARCA:EDZ) are cheap and overdue for a technical
bounce, via our
from Dec. 5, 2013 we took a stark opposite opinion of Wall
Street's populist view by writing:
"While we respect the rally Chinese stocks have enjoyed
(7/3/13 to 12/1/13 run) , we're nonetheless suspicious about the
sustainability of the run. Aside from huge systematic risks, the
Federal Reserve's eventual scale back of QE is a threat to rising
asset prices. We're buying ProShares UltraShort FTSE China
ETF (NYSEARCA:FXP) at $14.65."
Since our Dec. 5 trading alert, FXP has jumped 26% and our
tandem options trade on iShares Large Cap China ETF (
) is already ahead by 41%. In our just published Feb. 2014
ETF Profit Strategy Newsletter we reiterated: "The counsel to 'be
careful with Chinese stocks' is bad advice. The prudent investor
has two better choices: 1) Aggressively short Chinese equities, or
2) Aggressively avoid them."
With Asia celebrating the Lunar New Year, China's leadership
will have time during the fiesta to come up with more Band-Aid
solutions to repair their mortal economic wounds. Curtailing
excessive credit expansion without curtailing economic growth is
like trying to achieve a slim physical build on a cheesecake diet.
Besides that, the People's Bank of China hasn't had much experience
with this kind of crisis stuff, as their infrequent and
devilishly opaque press releases show.
One of the few things Chinese equity bulls can celebrate is that
Shanghai's Stock Market will be officially closed through Feb.
Profit Strategy Newsletter
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