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Big Trouble in Asia

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11/23/2010

The big headlines pushing the equity markets lower right now are coming out of Asia. Last week, we saw China take yet another step to put the brakes on inflation, as that country’s central bank raised bank reserve requirement ratios for the second time in just over two weeks.

Unlike here in the United States, where our central bank is trying desperately to create more inflation, China’s big problem is too much inflation. In October, China’s Consumer Price Index (CPI) rose 4.4%, the biggest monthly surge in more than two years. Much of that jump in the inflation rate was due to rising food and energy prices, and that’s not a good sign for the world’s second-largest economy.

If China continues to have inflation problems, it could throw a big wrench into the wider global economic recovery. It also could continue to put pressure on stocks in both China and the other emerging markets in Asia. If you look at the chart below of the iShares FTSE/Xinhua China 25 Index (FXI), you’ll see that the measure of China’s top 25 equities has come way off of its recent 52-week high.

We have more on how investors potentially can benefit from the drop in the Chinese stock market in today’s ETF Talk segment (see below). But for now, you need to be aware that stocks in China are currently under duress -- both from a technical perspective, and from a fundamental, macroeconomic perspective.

As if China’s woes weren’t enough for the region to deal with, Asia now has to worry about renewed aggressive tensions between perennial enemies North Korea and South Korea.

Early Tuesday, news surfaced that North Korea had fired a flurry of artillery shells at a South Korean island, killing two soldiers and setting many homes on fire. The South Koreans reportedly returned fire, and the whole thing escalated into an international incident that caused traders to dump South Korean stocks.

The chart here of the iShares MSCI South Korea Index Fund (EWY) shows Tuesday’s plunge in the fund, which was down 5.4% midway through Tuesday’s trading.

As so often is the case with today’s global trading environment, tensions and worries in Asia also translate into declines in the U.S. stock market. That certainly was the case on Tuesday, as the S&P 500 slumped nearly 1.4% midway through the trading session.

The chart below of the S&P 500 clearly shows Tuesday’s drop, but it also shows how far the broad market measure has come back off of the 52-week high set right after the midterm election and the Fed’s latest quantitative-easing (QE2) announcement.

Now, keep in mind that this week’s trading is on relatively light volume, with many traders taking time off in front of the Thanksgiving holiday. Light volume tends to exacerbate the market’s price swings in both directions, so we have to be careful not to read too much into Tuesday’s selling.

My thinking here is that the current bull market is still intact, and that we’d have to see stocks break below the 1,173 mark before we likely would see any significant technical selling that could take stocks substantively lower. In the days and weeks ahead, I’ll be keeping close tabs on this market to see if, in fact, a turning of the proverbial tide has indeed hit the market’s shores.

The Fed Gets Skewered by a Cartoon

Every once in a while, a humorist or satirist hits the proverbial nail on the head. This is certainly the case with a viral video posted on YouTube titled, “Quantitative Easing Explained.”

This animated video features two cartoon bears discussing the Fed’s recent QE2 bond-buying plan and the motivation behind it. The video is one of the cleverest, most insightful and funniest things that you will ever see. I strongly recommend that you watch this short, six-minute-plus video as soon as you can. (Warning: there is some very mild adult language at the end of the video, so if you are extremely sensitive to this kind of thing, you may not want to watch it.)

I think what makes this video so important is that it skewers the Fed for being right about “nothing” over the years. The unknown authors of the video also point out how bizarre it is that “The Ben Bernak” has “no business experience… no policy experience (and) … has never run in an election.”

The last time I looked, this video had been viewed nearly 1.2 million (yes, million) times. Fox Business Network financial reporter extraordinaire Charles Gasparino even wrote an article for The Daily Beast about this video. In the piece, he says that a spokesman on Mr. Bernanke’s senior staff has seen the video, although that spokesman wouldn’t say whether the chairman also has seen the video.

I think that after you watch this video, you’ll know more about the Fed’s QE2 than you did before. You’ll also likely laugh really hard at both the absurdity of the QE2, and the computerized voice delivery of the two cartoon bears.

ETF Talk: China Offers a Tempting Short Trade

If you think that the Chinese government’s recent moves to cool its economy will persist and cause stocks there to drop further, you may want to short the Chinese market through an exchange-traded fund (ETF). The ProShares UltraShort FTSE/Xinhua China 25 (FXP) offers just such a fund.

The ETF seeks daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. The index, consisting of 25 of the largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange (HKEX), caps the weight of any constituent stock at 10% to ensure broad representation of the Chinese market.

For the past two years, China has pumped money into its economy to spur economic growth. However, trying to manage a major economy carries risks. Chinese government officials now are concerned that the economy is overheating, so they are taking action to fight ever-growing inflation that has put tremendous pressure on its poor. Indeed, China had a gross domestic product per capita of just $6,700 in 2009, ranking 130th in the world, just behind El Salvador and the island nation of Saint Pierre and Miquelon, according to the Central Intelligence Agency (CIA). 

Concerns about the potential for civil unrest reportedly led the Chinese government to take steps to impose price controls recently for certain basic necessities such as food and energy. In addition, the country’s central bank, the People’s Bank of China, raised interest rates and forced banks to hold more reserves starting Nov. 16. Such measures typically curb economic growth.

However, I have my doubts about whether these steps alone will slow the country’s economic growth sufficiently. It would not surprise me if the Chinese government took additional action to rein in the nation’s economic growth. The chart below shows how FXP has risen lately in the face of a Chinese stock market pullback.

Of course, the combination of holiday cheer and the equity market’s traditional rise in December has me reluctant to take any new short positions right now, even if China seems to be a prime candidate. For those reasons, I am holding off on recommending FXP to my subscribers -- but I am watching the fund closely.

For advice about which ETFs to buy and to sell, I urge you to sign up for my ETF Trader service by clicking here. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.

The Most Important Teleconference of the Year

On Saturday, Nov. 6, I hosted what I think was the most important investor teleconference of the year. The title of this presentation was “The Election’s Over -- Now What Do I Do with My Money.” As the title suggests, we talked about the new makeup of the next Congress, but more importantly, we talked about how this new divided government will affect your investments.

In addition to the new power mix on Capitol Hill, we also talked about the ramifications of the Federal Reserve’s latest efforts to stimulate the economy, and what kinds of opportunities are ahead for investors based on the Fed’s recent action.

Among the topics discussed in this call were:

If you want to get my latest take on all of the huge news events, and how investors can take advantage of the current and future conditions in Washington and Wall Street, you simply have to listen to a replay of this call ASAP. To listen to a replay of the call, simply click here now.

The Hands of an Artist

“A man who works with his hands is a laborer; a man who works with his hands and his brain is a craftsman; but a man who works with his hands and his brain and his heart is an artist.”

-- Louis Nizer

The British-born lawyer and author provides us a very clear verbal picture of the essence of what it is to be an artist. But you don’t have to be an artist in the traditional sense to benefit from this wisdom. If you act with your hands, brain and heart in whatever you choose to do in life, you’ll be that much closer to experiencing the passion, joy and success that you truly deserve.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.

P.S. I encourage you to watch my recent webinar where I was a guest speaker with another publishing company, Profits Run, to discuss how to invest your money following the Nov. 2 midterm Congressional election. To listen, please click here.

P.P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.

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