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Closed our long Chinese equities (CAF) position in our Virtual Portfolio.
Earlier today, Keith took advantage of higher prices to book a 15% gain by selling our long Chinese equities Virtual Portfolio exposure. The Shanghai Composite appears to be failing at our intermediate-term TREND line of resistance, a key signal to us that China is not yet out of the woods from an intermediate-term growth and inflation perspective.
As far as the “woods” are concerned, we continue to believe that as long as inflation remains elevated – as evidenced by the CPI accelerating in JAN to +4.5% YoY – the scope for Chinese policymakers to ease monetary and fiscal policy in support of economic growth dissipates on the margin. Look no further than to Chinese interest rate markets to see how our view is being priced-in real-time:
We continue to like the long-term mean reversion opportunity t of Chinese equities, which are down -28.1% since the start of 2010 (Shanghai Composite Index) and at historically low valuations. That said, we remain price sensitive and are looking for strength in the U.S. Dollar Index/a deflation of global food and energy prices to get us back into Chinese equities on the long side at better [i.e. lower] prices. In effect, we continue to view ~$100+ Brent oil as a tax on global consumption, industrial production, and fixed investment.
We are concerned that that an additional round of quantitative easing out of the Federal Reserve is a risk to Chinese economic growth over the intermediate term. China (an most other economies) spent much of 2011 in the “penalty box” from a growth/inflation/policy perspective. China’s trailing G.I.P. dynamics are highlighted in the chart below; Qe3 has the power to force China (and other economies) back into Quadrant #3.
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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.