Investment Capitalist

It’s great to be a global macro equity trader right now for a couple of reasons I’ll get to in just a second. But first, it’s not often there are widespread global macro strategies being employed by various market participants. Whether you know it or not, there’s a good chance your portfolio has a little “B.R.I.C.” in it.

But I don’t mean that because your portfolio is sinking. On the contrary, if you have B.R.I.C. exposure, you’re riding the crest of the wave right now. The acronym stands for the Fantastic Four, otherwise known as “Brazil, Russia, India, China”.

I really doubt many readers on Investment Capitalist are unfamiliar with B.R.I.C, but there may be a few who don’t realize the importance of using hedge strategies to actually capture the momentum in moves like corn futures when you are long or short Ethanol producer stocks.

Depending on your leaning, even if you do not trade commodities, should corn experience a significant imbalance for example, resulting in a multiple day move with a few lock-limits thrown in for good measure, you can capture the alpha being generated by that move the same way you would try to hedge the damage if the commodity were spiking against you.

But I’m going to focus on Chinese equities for now because Russian equities are a closed market for individual investors and you have to be a dedicated investment capitalist if you want to actually gain valuable exposure to Russian stocks in their local markets. Find a Russian wife or girlfriend, and you’re set. Don’t just think you can show up with an American passport and find your way around. Try to hide your American passport actually. They hate Americans these days in Moscow, but in all fairness, it’s only inside Moscow and not in the country entirely, such as Sochi and Anapa.

I have mentioned Yanzhou Coal as being a great trading stock in the past. The present short-term volatility, which brought the stock from $115 last week to $98 on Monday, is generally what I look for in this stock (See Chart 1 below).

 

Chart 1 – Yanzhou Coal ADR (NYSE: YZC)

Yanzhou Coal (ADR: YZC) is by far one of the best Chinese stocks to be in a traders arsenal. Although more richly valued than China Southern (ADR: ZNH), which has a still very reasonable PE of 42, there is a similar backstop of institutional accumulation, which I mentioned in my previous post.

With less than 100 million shares floating and a market cap of almost $10 billion, institutional investors are engaged in a long term, macro accumulation of Yanzhou Coal. Because of the propensity to gap due to overnight trading in Asia, traders are wise to buy into multiple days of weakness. My preference with Yanzhou Coal is to buy on the third day of weakness, preferably into the close. But how often do we get “ideal situations” for any trade?

The point, especially in global macro strategies but in any long term trade, is to accumulate the stock on weakness, and a general rule is to start buying when the stock is offered 10% below the previous three day high if you are accumulating this stock with a long-term view, which shouldn’t preclude you from trading around your position nevertheless. In fact, global macro strategies need to juice their returns whenever possible. By capturing short-term volatility through the constant adjusting of position size, global macro traders will often be positioned very aggressively into a move like this and will then trade into this type of volatility with the objective of cutting position size temporarily.

For you fanatic stat arb traders, I know you hate hearing references to non evidence-based technical analysis but this little strategy picked up from my days trading the tape, allows you to have the safety of the momentum behind you and if a snap back rally fails to make a new high, you can bail with at least a small profit. It’s the poor man’s way of creating a “backstop” to his trading position, but it works.

In the case of this Chinese stock, Yanzhou Coal has PE of 31 and pays a dividend of 78 cents/share. You have an upward pointing chart with significant visible bid support, a dividend and single digit institutional ownership. So for the small fry, the 128000 share daily volume is of no concern, especially if you can trade the volatility in this Chinese stock. And a failure to close below $100 after an intraday low to $98 also tells me there are likely to be more than a few bears feeling trapped if this opens strong. I am definitely going to keep an eye on this one over the next few days to see how this shakeout plays itself out. I like this stock at these valuations, especially with the backstop of the falling dollar.

Moving on, Chart 2, which is another “industrial revolution company”, is Aluminum Corp of China, or Alcoch (ADR: ACH). This one sits very high on my list of Top Ten Chinese Stocks. This analysis of Alcoch is merely illustrating a point because it is far too late for a swing trade but in the next few days, this volatility and its small float will probably create a very large spread.

 

 

Chart 2 – Alcoch (ADR: ACH)

Spare me the references to 1999. With a trailing P/E of 22 and a forward P/E of 12.5, Aluminum Corp. of China has earnings momentum characteristic of an incredible growth stock, except in this case we’re referring to a borderline mega-cap stock at $36 billion. Chart 3 below is a monthly chart of ACH. Notice that it took almost three years to break above the 2006 high of $27, with the implication not being higher prices in the near term, but certainly putting the odds that way in the long term.

 

Chart 3 Aluminum Corp. of China ADR (NYSE: ACH) Monthly Chart

In the near term, I am very concerned about a potential incursion by the Turkish military, a NATO country, into another country currently occupied by a NATO ally but housing terrorist freedom fighters. This should be an overall risk aversion event which means a flight from equities. In these events, investors will throw the baby out with the bath water and we might see ACH dip below $50 again before continuing its long-term trend. If this Chinese stock offers anywhere between $46 and $49, it’s very cheap.

Again, the global macro environment is going to serve as a tremendous backstop for the foreseeable future. People fearing a sharp drop in export demand due to a rising Yuan are in for a surprise because the internal demand is there. In fact, internal demand is too much, and if the great infrastructure build-out of China is to continue, the massive importing of raw materials for export needs to adjust. This internal demand has reached a point where the country can actually withstand an appreciating currency because it will ease the pressure to import raw materials from the outside.

Can you say “managed appreciation”? For the global macro investor, all will be better when this debasing of the US Dollar is complete.

The raw materials will be redirected for internal consumption. The stronger Yuan will trigger a rise in imports to feed the growing middle class appetite for Big Mac’s and all things Capitalist. China is in the stages of building infrastructure, so there’s a lot of internal demand for materials to feed the expansion without hurting from an appreciating Yuan. Japan could only dream about that type of GDP growth.

Not all of my favorite Chinese stocks are long trades. In fact, because of the propensity of retail-triggered mania’s and panic’s in Chinese stocks, there are often great trades going against this herd but only when the stars line up or you have a “sell the fact” situation, such as we are seeing in PetroChina (ADR: PTR). The liquidation of Buffet’s position following this spike is a perfect example of what good execution can help you achieve in terms of selling large positions.

Chart 4 is a monthly chart of PetroChina but the scale is arithmetic rather than my usual logarithmic scale. I wanted to illustrate the effect of a parabolic spike accompanied by major turnover at two critical points. The first was when the move started in 2004. The second is the month of October, 2007 leading into the PetroChina A-share listing in Shanghai, which priced as I write this during the overnights in the US.

 

Chart 4 Petro China ADR (NYSE:ADR)

A parabolic spike in an oil major such as PetroChina is definitely unusual. Most importantly, the hype surrounding the IPO in Shanghai was the culmination of an IPO road show coupled with strategic bid support to trigger a breakout rally through that upper boundary trend-line dating back to the start of the move in 2004. This caused many system based Chinese Stock traders that are trying to arbitrage that trend to get squeezed. So bidding PetroChina above $170 was the trigger that broke the damn, creating a total rush right into Tuesday’s IPO of PetroChina A-shares in Shanghai.

How convenient. Where’s the near term trade?

I want to see how PetroChina opens in US trading in a few hours. Depending on the opening price, I would look to get a short position established between $260 and $270, using small increments and scaling to build the line.

 

At the same time, I would be keeping an eye on the geo-political situation to determine the odds of a Turkish military action. Any sign of sharp weakness in Crude futures is an indication that the emergency meeting in Iraq is making progress. That will be the catalyst to burst this post-IPO bubble in Petro China.

A stock mania in a communist country? If only Chairman Mao could see this! Long Live Capitalism!