Six Things You Should Know About Investing in China

Steve's note: I'm currently in Beijing. Soon, we're heading to Hong Kong to meet up with my good friend Peter Churchouse.
 
Peter's the person you should turn to for advice on investing in China. He has been in Hong Kong for more than three decades. And he understands the Chinese market better than anyone I know. This is the main reason why I urge you to read his monthly letterThe Churchouse Letter.
 
Yesterday, Peter shared some of his earliest memories of investing in China. And today, he has agreed to share another great piece of insight… the six elements that make investing in China unique…
 
I've been riding the rollercoaster of the Chinese equity market for many, many years now.
 
And more than 25 years after my first hands-on experience with the market, it still has certain unique characteristics that set it apart from other large stock markets around the world…
 
1.  It is driven largely by internal events.
What is happening in the U.S., Europe, and other parts of Asia often has minimal impact on the Chinese domestic equity market. This is because the market is almost entirely driven by local investors. There is very little foreign involvement in China's equity markets (less than 2% of the equity market is owned by non-Chinese organizations).
 
2.  Fundamentals don't matter that much.
By this, I mean that company earnings, balance sheets, and all the other traditional stock-valuation metrics that drive most large markets are less important in China.
 
Retail investors account for around 80% of trading in the market. These investors are much less fundamentally driven when it comes to their stock selections. They thrive on rumors, tips, and social media.
 
3.  China's market is volatile, as it is dominated by speculators.
I've followed and been involved in the mainland Chinese equity market for decades now. It's been an extraordinary ride. There have been huge, rapid bull markets, followed by swift corrections – and then years where not much happened in between.
 
4.  Policy intervention happens frequently in Chinese markets.
The core of China's government culture holds a deep and constant propensity to tweak, direct, and otherwise control most aspects of economic life. The authorities can't resist the temptation to meddle. The stock market is no exception.
 
5.  China's population and its government are big savers.
The country as a whole saves around 45% of its GDP. This is more than twice the average savings in most of the Western world.
 
So what do people in China do with these savings?
 
In reality, people in China don't have many avenues to invest. There is not a big mutual-fund industry, widespread pension schemes, or other insurance-linked investment vehicles. Capital controls mean that people cannot buy foreign stocks or bonds. And bank deposits pay very low interest rates, almost always below the rate of inflation.
 
So what's left? There are two main avenues for investment: real estate and the local stock markets.
 
If the stock market is looking dull, real estate gets the savings dollars. If the real estate market is looking soft, people head for the stock market.
 
6.  China's markets have a number of different types of shares.
While China's domestic market was off limits to outside investors, the authorities encouraged lots of its big, high-profile companies to list on the Hong Kong Stock Exchange via "H" shares. These are shares of a company that is incorporated in China but listed in Hong Kong. Listing in Hong Kong requires approval from China's regulatory authorities.
 
And then there are the "red chips." These are Chinese companies that are incorporated outside of China, with shares listed in Hong Kong.
 
Both groups of companies are controlled by mainland China's government entities.
 
These two groups of companies now make up around 40% of the total market capitalization of the Hong Kong main board market, or about $1.41 trillion. Some 374 companies fall into these two categories.
 
Hong Kong also lists companies called "P chips." These are Chinese companies that are listed on the Hong Kong exchange and incorporated in the Cayman Islands, Bermuda, or the British Virgin Islands with operations in mainland China.
 
They are NOT controlled by Chinese government entities.
 
Adding this category onto the H-shares and red-chip list would take the Chinese-company component of the Hong Kong market to more than 50%. That is without including the China component of Hong Kong's own listed companies.
 
This all means that the Hong Kong market has increasingly become a proxy for Chinese exposure.
 
However, exposure to Chinese companies and markets via Hong Kong represents only a small part of the second-largest market in the world… a market where growth is almost endemic.
 
Given its size and growing role in equity markets as China's markets become more open, global investors simply cannot ignore mainland Chinese stocks anymore.
 
This is a market you should be exposed to.
 
Regards,
 
Peter Churchouse
 
Editor's note: Steve believes The Churchouse Letter is a must-read for anyone interested in Asia's markets – and in how to invest in the fastest-growing region of the world. Peter currently has a handful of recommendations in buy range. And for a short time, he's offering DailyWealth readers a special 50% discount on subscriptions. But hurry – this offer ends on June 8. You can learn more right here.

Source: DailyWealth

My Hands-On Experience With China's Market 25 Years Ago

Steve's note: My first "investing" trip to China was back in 1996. As I write, more than 20 years later, I'm in China again with my research team and a group of subscribers (many of whom are visiting for the first time).
 
The changes I've personally seen in 20 years are truly extraordinary… If I hadn't seen them myself, I wouldn't have believed they were possible. And for all these years, my biggest influence in understanding China has been investing legend Peter Churchouse.
 
Peter is once again bullish on local Chinese stocks… And the folks on our trip will get to meet him later this week. He recently shared some of his early stories about investing in China in his excellent publication, The Churchouse Letter. With his permission, I'm sharing one of them with you today…
 
Here's when it all began for me…
 
In 1993, my boss at the time – Morgan Stanley's legendary investment strategist Barton Biggs – and I led a tour of institutional investors (mainly from the U.S.) to China.
 
The investors included some of the largest and most well-known fund managers in the U.S. Many of these legends are still in the business, many times wealthier now than they were then.
 
But at the time, U.S. investors were far behind the curve when it came to investing in Asia, compared with their British and European counterparts. And Barton was a master of bringing Asian opportunities to U.S. investors…
 
Barton was truly a legend in the world of global investment strategy. He was Morgan Stanley's global investment strategist – a role he created for himself – for nearly 20 years. He was one of the earliest analysts to bring attention to the extraordinary opportunities arising in China and emerging markets in the 1980s and 1990s.
 
What I remember in particular about Barton was the amount of research he consumed. He read constantly – on the treadmill, or walking through the office.
 
He produced a two-page research article that he published nearly every week. We didn't have readership statistics in those days, but I believe it was the most widely read research piece on Wall Street, and deservedly so.
 
As an analyst, he was deeply skilled at distilling lots of complex ideas and presenting them in an easy-to-read format.
 
His reputation meant he could open any door in the U.S. funds-management industry. And in the early 1990s, when we walked through those doors, he talked about China and emerging markets.
 
As Morgan Stanley's regional strategist, I was co-leading the 1993 investing tour to China. My role was to fill in information gaps and provide color and personal insights from my years in China and Hong Kong. I'd been living in Hong Kong since 1980 and traveling to China since the mid-1980s.
 
So my job was to share my observations on the economy and emerging investment opportunities in a country that was just beginning to take its first steps on the global financial stage.
 
The tour's opening dinner was held at the Peace Hotel in Shanghai.
 
A group of Chinese government officials from various local and national authorities joined our investor group, along with various bank luminaries. This event was a big deal. I believe it was the first major delegation of foreign investors that had visited China like this. There had been industrial companies looking to build factories, or companies looking to crack the Chinese market for their businesses. But this group was different. They were financial market investors, and they collectively represented an enormous pool of capital.
 
I could tell the Chinese officials were intrigued to meet and rub shoulders with these titans of finance.
 
Before the first course was served, Barton asked each fund-management company to have a representative stand up and give a brief 30-second introduction about their company and what they did.
 
Around the room, there were some seriously heavy-hitting asset-management firms. We had Capital Group, Fidelity, Julian Robertson's Tiger Management, Trust Company of the West, Soros Fund Management… the list went on.
 
As each representative spoke, I tallied up the collective assets under management represented around the table. It was around $3 trillion.
 
I could tell that some of our Chinese officials were adding the numbers just like I was. But some element to their assessment was "lost in translation." Given the exuberance of their reactions, I think they had the impression that these guys had $3 trillion to invest just in China!
 
That was certainly not the case. And at the time, it was impossible for them to have any stock market investment there at all.
 
The Chinese stock market had only opened for business in Shanghai in 1991. And it certainly was not open for foreigners to invest in.
 
But that dinner at the Peace Hotel represented the beginning of a huge awakening in the American investment community to the gargantuan opportunities that were bubbling forth in China.
 
The events of the week included company visits, meetings with government bodies, and visits to sites, projects, and factories. These efforts were on a scale that was unthinkable in Western economies. Hundreds of residential tower blocks and vast offices were under construction. So were new railways, airports, roads, freeways, and factories.
 
At the end of the visit, everyone left impressed. Most were astonished at what they had seen. This was an epiphany for some of the most influential money managers in America.
 
On our return to the Hong Kong office, Barton wrote a research piece on China that included a line that became famous in the investment world:
 
"I'm tuned in, overfed, and maximum bullish."
 
He was right to be maximum bullish.
 
But there was still the problem of how to express this bullishness in the Chinese financial markets. The Chinese equity market was small, undeveloped, highly restricted, and completely illiquid. And as I mentioned, the Shanghai stock market had only opened in 1991. By 1993, it was still not open to foreign investors.
 
Even now, China's stock markets are still only partially open to foreign investors – despite the fact that their combined value is second only to the New York Stock Exchange.
 
At the time, the most obvious way to capture this remarkable opportunity was to invest in Hong Kong stocks. Hong Kong was, and still is, a major conduit for investment, business, and capital flowing into and out of China. It was, and still is, a totally open market. Investing in Hong Kong stocks was as close as one could get to investing in China.
 
Only a few Hong Kong-listed companies had significant direct investments in China itself. But many benefited from the rapid growth that China was going through.
 
So in his report, Barton recommended Hong Kong stocks as the best way to gain investment exposure to China's booming economy.
 
Barton's influence on the U.S. investment world was significant. Fund managers and brokers around the world eagerly digested his report on his China visit.
 
The Hong Kong market had been doing quite well. But following Barton's visit and his bullish report, the market took off…
 
The Hang Seng Index (Hong Kong's main stock index) soared by around 25% in the space of a few weeks.
 
Regards,
 
Peter Churchouse
 
Editor's note: Peter is the man to follow in Asia… And like Steve, Peter is bullish on Chinese stocks. Right now, DailyWealth readers can subscribe to The Churchouse Letter at a special 50% discount. But hurry – this offer ends June 8. Click here to learn more.

Source: DailyWealth

Here's Why the Bull Market Isn't Over Yet

 
Jeff Bezos lost $1.7 billion in a single day last month.
 
Mark Zuckerberg fared even worse… He lost $2 billion that same day.
 
What happened? It's simple… The stock market tanked.
 
The world's most famous stock market index (the Dow Jones Industrial Average) fell around 370 points on May 17. And it sent investors into a panic.
 
That's great news. Investors showed us their hands. They showed us they're nervous. And that fear ultimately means there's still plenty of upside potential in this market.
 
Let me explain…
 
Last month's one-day fall was extreme. But Bezos and Zuckerberg can handle the losses…
 
Bezos is the founder of Amazon (AMZN) and the third-richest man in the world. Zuckerberg is the founder of Facebook (FB) and the world's fifth-richest man. Between the two of them, their net worth is close to $150 billion.
 
Even if they lose a couple billion dollars, they can still put food on the table.
 
Most investors, on the other hand, couldn't handle it… They got scared. "Panic-based trading" from individual investors hit a record that day.
 
In technical terms, the move was "two standard deviations beyond normal." In plain English, it was a panic.
 
The move wasn't that big on paper… That 370-point fall was less than a 2% loss. But it shocked folks… Trading has been so sleepy lately that investors panicked. You can see it in their trading activity…
 
My good friend Jason Goepfert at SentimenTrader reported that on that day, "There was a monster spike in [panic-based exchange-traded fund ("ETF")] volume, accounting for nearly 8% of NYSE volume, by far the largest ever."
 
Jason defines a "panic-based ETF" as one of two types of funds:
 
1. An inverse ETF, or
   
2. A volatility-based ETF.
In short, these funds typically perform well when stocks fall. So when investors fear big downside risk or major volatility ahead, they rush to these kinds of funds.
 
And that's exactly what they did last month… During the one-day fall, people traded panic-based ETFs in record amounts. This tells me that investors are twitchy… And they don't trust this bull market.
 
Now, you're probably wondering why we think this fear is a sign of upside potential.
 
Consider this… What do you think of when you picture the top of a market? I think of unbridled optimism. Market tops happen when investors are no longer scared.
 
As an example, think about the real estate boom a decade ago… How many people were scared at the peak?
 
Nobody was scared. Everyone believed that prices could never go down. Everyone believed that house prices could go up 10% or more every year – even when population growth was less than 1% per year.
 
At the peak, everyone who wanted to buy a house had already done it. No one was left to buy. And so there was nowhere left for prices to go – but down.
 
That's what a market peak feels like. Is that what it feels like to you now?
 
Investors are fearful and twitchy. We don't have that feeling of euphoria in the stock market at all. Last month taught us that investors are ready to sell at the first sign of trouble.
 
History also shows that we likely have more upside ahead. Jason has studied other similar moments of panic-based selling going back to 1928… And he found that after panics like Wednesday's, stocks are typically up two months later, with solid gains and a high winning percentage.
 
In short, last month's panic tells us we're not at a top. Instead, the current bull market has plenty of room to run higher. That's why my long-term advice on stocks hasn't changed.
 
We want to continue owning U.S. stocks now.
 
Good investing,
 
Steve
 
Editor's note: Investors tipped their hands last month. They showed us they still don't trust this bull market – and that means the top still isn't in sight. Steve believes the Dow will more than double to 50,000 before it all ends… And many individual stocks will absolutely soar. Click here to learn more. (This does not lead to a long video.)

Source: DailyWealth

A Bullish Sign for Gold and Stocks

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 Our colleague Ben Morris has been keeping a close eye on gold.
 
Back in April, he noted that gold was close to breaking out of a multiyear chart pattern that could send prices much higher. But it wasn't yet official, so Ben recommended being patient and waiting for confirmation before getting too bullish on gold and precious metals.
 
That was good advice – gold reversed and moved lower for several weeks.
 
In the past month, gold has been moving higher again… And it's close to breaking out of this long-term pattern. As Ben noted in his DailyWealth Trader service this week…
 
I haven't recommended opening a new bullish position in gold stocks since mid-March. We've been waiting for a better trade setup… We've been waiting for gold to break out of its long-term "wedge"…
 
As Ben explained, when an asset trades within a wedge pattern, it becomes compressed like a spring. When it finally breaks out, it often makes a big, powerful move.
 
Today, gold is back near the top of the wedge. It's once again trading right around the level at which it could begin a big breakout to the upside…
 
 This is a bullish sign…
 
Still, Ben continues to recommend patience before getting too bullish on gold and precious metals again…
 
Now, we don't want to jump too soon. Trend lines like the ones in the charts above aren't exact… And they aren't foolproof. Sometimes assets will break out by a little bit and then fall right back down into their trading ranges.
 
I'd like to see gold trade above $1,300 per ounce before we make our move. And that could happen soon… On June 14, the Federal Open Market Committee ("FOMC") will announce its next interest rate decision. Futures traders are placing the odds of a rate hike at 100%… And they'll likely be right.
 
The common view is that higher rates are bad for gold. But… the last two times the FOMC raised rates, gold bottomed the following day… If that pattern continues, we could see gold prices drift lower before the decision and rally after it.
 
No matter what happens, though, our stance in DWT hasn't changed. We want to see gold break out (convincingly) before we buy. That's when we'll have the best trade setup… Our downside risk will be low. And our upside potential will be enormous.

 Meanwhile, we just got a rare bullish signal for stocks…
 
According to a recent note from Morgan Stanley strategists, an unusual indicator – based on the widely followed University of Michigan Consumer Sentiment Index – suggests the bull market will continue.
 
In short, the U.S. is currently in a bullish period of "elevated and stable" consumer sentiment. From the note…
 
We define elevated and stable consumer sentiment as: 10-month rolling average is above 90, and year-over-year change is not greater than 10% and not less than -10% for 10 straight months.
 The firm's analysis shows this situation is rare…
 
It has only occurred five other times in the last 40 years: in 1985, 1995, 1998, 2002, and 2005. And each time, it has been incredibly bullish for stocks…
 
According to the note, the benchmark S&P 500 Index produced a median return of 21% and 42%, respectively, over the one- and two-year periods following each positive signal.
 
The latest signal was triggered last June… And the S&P 500 has rallied about 17% in the 11 months since. This not only suggests the indicator still "works," but it also implies much more upside remains ahead.
 
We never recommend giving too much weight to any single indicator. But this is just one of several notable signs that suggest stocks could go higher – potentially much higher – before this long bull market finally ends.
 
In fact, our colleague Steve Sjuggerud believes we'll see a "Melt Up" – an explosive final stage of the rally – where the stodgy Dow Jones Industrial Average more than doubles to 50,000 before it all ends… and many individual stocks absolutely soar.
 
It sounds incredible, we know… But Steve's research suggests it's not only possible, it's highly likely. He has prepared a short presentation explaining it all. Click here to see it now. (This does not lead to a long video.)
 
Regards,
 
Justin Brill
 
Editor's note: Steve believes we're on the verge of a massive panic. But it's not the kind of panic most people expect. Long before stocks collapse, he thinks the Dow will soar to 50,000 – or higher – as people panic into the markets. Get the details here.

Source: DailyWealth

Here's the Strategy Most Gurus Keep to Themselves

 
The world's top investors and traders have a hidden strategy.
 
We can't see that they're doing it…
 
But they are… and probably far more than we know.
 
It's one of the best trading strategies in the world, especially during times like right now. The stock market is full of companies that trade at rich valuations… Yet share prices keep climbing.
 
At some point, a big move lower will hit the market. It will shock stockholders with its suddenness and severity. And many (or most) of them will take large losses. My friend and colleague Steve Sjuggerud calls this the "Melt Down" after the big "Melt Up."
 
We don't want to miss out as the bull market continues… But we recommend taking precautions. They include smart asset allocation, position sizing, stop losses, and a variety of other trading strategies.
 
Today, we'll talk about one of these strategies. If you're not already using it, consider doing so…
 
It allows you to profit in stocks whether the market rises or falls. It reduces your volatility and increases your peace of mind. And it may even allow you to ride out the next big drop in stocks without taking major losses.
 
Once a quarter, investors who manage at least $100 million are required to file forms called "13Fs" with the U.S. Securities and Exchange Commission (SEC). These forms detail which stocks they've bought and sold from one quarter to the next… and which stocks they held at the end of the most recent quarter. By reviewing their filings, we can "look over their shoulders" for ideas.
 
The thing is, we get a one-sided view. These stock market gurus are only required to reveal their long positions – the stocks that they own. They aren't required to disclose their short positions – their bets on falling stocks.
 
This doesn't mean that doing this kind of research is useless. Elite investors usually don't buy stocks they expect to go down… So 13Fs are still a great place to scout for new ideas. But we can't tell if their long positions stand alone or are part of a more complex strategy… like a "pairs trade."
 
A pairs trade is when you buy one asset (betting that it will go up), sell another asset short (betting that it will go down), and treat the two positions as one trade. This results in a pair of trades that is "market neutral"…
 
In other words, a pairs trade is equally likely to profit, whether the asset class rises or falls. For example, if you buy one stock and short another stock in the same industry, your profits aren't tied to how that market sector performs… or even how the stock market as a whole performs.
 
The pair of trades generates profits if the asset you buy performs better than the asset you short. This makes pairs trades a fantastic way to make money without taking any broad market risk.
 
Big money managers place pairs trades to reduce the risk in specific holdings. And they sell stocks short… both to profit and to reduce the risk of holding long positions in general. This all fits into how they allocate their assets…
 
But this guru activity is hidden from the public, unless they talk about it…
 
Jeff Gundlach is a great example. He's one of the world's top bond experts. And he manages more than $100 billion in his fund, DoubleLine Capital. Over the years, Gundlach has announced new pairs-trading ideas at big investment conferences like the Ira Sohn Conference last month.
 
In 2012, he recommended shorting Apple (AAPL) and buying natural gas. The pair of contrarian trades resulted in an enormous profit. Last year, Gundlach recommended shorting utilities and buying a mortgage real estate fund, also a winning trade. And earlier this month, he announced that he was shorting U.S. stocks and buying emerging markets.
 
Most gurus keep these ideas to themselves. We only know about Gundlach's pairs trades because he promoted them. Still, we can't know for sure that he followed his own advice. But we do know the effect of these trades… and that his ideas have been profitable.
 
Stansberry Research founder Porter Stansberry is also a fan of pairs trading. Last April, he explained…
 
Few individual investors use [pairs trading], but professionals have used it for years to profit in both bull and bear markets. It's an excellent strategy for bear market traders because it takes broader market movements out of the equation.

 
Consider how you can turn some of your upcoming (or even recent) long positions into pairs trades…

 
Are you going to buy a high-flying tech stock? You might consider shorting a fund that tracks the tech sector. Are you going to buy an energy stock you think will outperform? Consider pairing it with a short position in a fund that tracks energy stocks… or with a short position in an energy stock that you think will perform worse than the rest of the sector.
 
The stock market is in extreme territory. You don't want to be out of stocks completely because the bull market could continue for months, or years, with big gains to come. But you don't want to ignore the risk, either.
 
Pairs trading with a portion of your portfolio is an excellent solution. You can take part in the profits without increasing your overall risk. It's a hidden guru strategy that you should be using.
 
Good trading,
 
Ben Morris
 
Editor's note: Ben keeps his DailyWealth Trader subscribers up to date on what the world's elite money managers are doing with their money. Recently, he shared the name of one business that three of the world's best investors are betting on today. This profitable tech company is an industry powerhouse… and shares are cheap. Learn more about DailyWealth Trader – and how to access this trade – by clicking here.

Source: DailyWealth

Gold Stocks: Is It Time to Buy Yet?

 
"Are we there yet?"
 
I've heard this question about gold stocks so often, you'd think we were on a road trip to Grandma's house.
 
For the past year, the answer has been a resounding "NO."
 
Now – finally – the answer is, "We're getting close."
 
Let me explain why the outlook for gold stocks is finally changing…
 
In late 2015 and early last year, I personally loaded up on gold stocks. It was the only time in my life I've done so. Then, in late July, I sold them all. (This is a quick overview – regular readers know I've written about this many times.)
 
I bought because gold stocks were hated. I sold because they were loved.
 
It worked out great for me. You can see this in the price action of the leading junior gold-stock exchange-traded fund (ETF) over the past year or so. Take a look…
 
Since I sold my positions, gold stocks have gone down… As you can see, they're not far from new 12-month lows today.
 
So what makes me think we're finally getting close to another "buy" in gold stocks?
 
Let me explain…
 
I like to track the actions of individual gold-stock investors to know when it's safe to buy. Here's how I look at it…
 
Gold stocks peaked last summer. After a peak, individual investors usually give up on an asset class. They stop buying. Typically, they even start selling.
 
But gold-stock investors are not typical investors… They're a hardy bunch.
 
When gold stocks started falling in August, gold-stock investors didn't sell. Instead, they started buying more.
 
They didn't stop…
 
As gold stocks continued down, gold-stock investors continued buying, all the way down.
 
For me – as a contrarian investor – the lowest-risk time to buy is typically when even the hardiest investors in an asset have given up.
 
You can see when this happens by looking at an asset's shares outstanding. When the number of shares outstanding increases, it tells me that individual investors are not only refusing to give up, they're doubling down on their losers.
 
Take a look at the following chart. It shows the shares outstanding for the leading junior gold-stock ETF since the beginning of last year…
 
Gold-stock investors were adding to their losers for a long time. Then – finally – about two months ago, they started to give up. Shares outstanding started to fall. This is the signal I was waiting to see.
 
This change in movement tells me that gold stocks have now – finally – moved away from being "overly loved."
 
When gold stocks were "overly loved," I couldn't in good conscience tell you, "Gold stocks are a buy." I knew gold-stock investors were still determined to sink money into a failing trade. I couldn't be a part of that.
 
Now, we're finally seeing those investors give up. Since the shares outstanding have started to fall, I am no longer worried that gold-stock investor optimism is too high.
 
The next big issue is simply the uptrend… We don't have it yet.
 
Gold stocks' up-and-down price movements can be almost manic. Right now, we're in a "down" move.
 
I don't want to try to catch a falling knife. It can keep falling… and falling. How far it can fall is sometimes shocking.
 
Instead, I would rather wait for it to stop falling, hit the ground, and settle. Then I can safely grab it.
 
In plain English, I want to see gold stocks start to turn around. I want to see the start of an uptrend before I buy back in again.
 
The big thing that was holding me back since last summer is no longer a problem. When the uptrend returns to gold stocks, I will be a buyer again. We're not there yet, but we're getting close.
 
I'll let you know when it's time to buy.
 
Good investing,
 
Steve
 

Source: DailyWealth