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Investors Turn To ETF Put Options To Short The Emerging Markets Bubble

February 24th, 2010

bubble“Which emerging markets are good short candidates right now? China is one big economic bubble waiting to burst, and it will take companies and markets down with it when it does (and not just its own). For the past two years, the Chinese government has poured fuel on the fire by prodding banks to lend even faster and looser than they normally do in China. Last year, some estimate bank lending tripled compared to 2008. The gluttonous lending has led to too many buildings, homes and factories being built. Distressed property specialist Jack Rodman said there are at least 55 completely empty office buildings in Beijing alone,”  Michael Shulman Reports From InvestorPlace.

Shulman goes on to say, “The situation has gotten so out of hand that the government not only raised capital requirements for state-owned banks in January, but actually forced some to temporarily halt lending altogether. The play here is to buy put options on the PowerShares Golden Dragon Halter USX China (PGJ), the ETF that mirrors the iShares FTSE/Xinhua China 25 Index (FXI). Recent data shows a good portion of Europe is headed for higher unemployment and perhaps a double-dip recession. The economies of Eastern Europe will be hit especially hard, as they are already struggling with their own credit crises. These nations are also feeling the effect of Greece’s euro troubles in their bond and equity markets.”

“I believe Eastern European markets will be a good place to stash your money in a few years, but for a year or two, the Eastern European nations are going to take a serious beating. They have way too much debt, their currencies and bonds are fragile, and, as with other emerging markets, one geopolitical crisis and their markets will take a savage hit. The play here is to buy put options on the SPDR S&P Emerging Europe (GUR). However, be careful because these puts are not very liquid. So if you decide to take a position, use limit orders. My final play is to short the emerging markets in general through put options on the iShares MSCI Emerging Markets Index (EEM). This ETF has just about doubled in the past year, as Wall Street is banking on serious growth in these markets. Bide your time on this trade. When the double-dip recession takes hold in the United States, world trade slows again, and China’s slide can bee seen by everyone including Stevie Wonder, companies in these markets will see their shares sell off as hot foreign money flows out. I also expect some sort of geopolitical event — a credit crisis much worse than the current one in Greece, Iran making a wrong move, or another terrorist attack on the United States. If anything along those lines happens, emerging markets could quickly lose 20% of their value,”  Shulman Reports.

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Here are some details on the ETFs mentioned:

The investment (PGJ) seeks results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Halter USX China index. The fund normally invests at least 80% of total assets in equity securities of companies deriving a majority of their revenues from the People’s Republic of China. It may invest at least 90% of total assets in equity securities that comprise the China index. The fund seeks to match the performance of the China index. It is nondiversified.

TOP 10 HOLDINGS ( 52.55% OF TOTAL ASSETS)  
 
Company Symbol % Assets
Aluminum Corp of China Ltd. (ACH) 4.49
Baidu Inc ADR N/A 4.36
China Life Insurance Co Ltd (LFC) 6.24
China Mobile Limited (CHL) 7.59
China Petroleum & Chemical Corp (SNP) 4.5
China Telecom Corp Ltd (CHA) 4.48
China Unicom (Hong Kong) Ltd (CHU) 4.57
Cnooc Ltd. (CEO) 4.51
PetroChina Co Ltd (PTR) 7.29
Yanzhou Coal Mining Company Limited ADR N/A 4.52

Chart for PowerShares Gldn Dragon Halter USX China (PGJ)

The investment (FXI) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 index. The fund generally invests at least 90% of assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The underlying index consists of 25 of the largest and most liquid Chinese companies. It may invest the remainder of assets in securities not included in its underlying index but which BGFA believes will help the fund track the underlying index. The fund is nondiversified.

TOP 10 HOLDINGS ( 61.29% OF TOTAL ASSETS)  
 
Company Symbol % Assets
Bank of China Ltd N/A 5.67
China Citic Bank Corporation Limited N/A 4.21
China Construction Bank Corporation N/A 8.92
China Life Insurance Company, Ltd. N/A 8.76
China Merchants Bank Co.,limited N/A 4.38
China Mobile Ltd. N/A 9.42
China Shenhua Energy Company Limited N/A 4.42
CNOOC, Ltd. N/A 4.11
Industrial & Commercial Bank of China N/A 7.31
Ping An Insurance (group) Company Of China, Ltd. N/A 4.09

Chart for iShares FTSE/Xinhua China 25 Index (FXI)

The investment (GUR) seeks to replicate as closely as possible, before fees and expenses, the total return performance of an equity index based upon the European emerging-markets. The fund uses a passive management strategy and sampling methodology designed to track the total return performance of the S&P/Citigroup BMI European Emerging Capped Index. The index is a market capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in developed Europe. As of December 31, 2007, the Europe Index was comprised of 2,340 securities. The fund is nondiversified.

TOP 10 HOLDINGS ( 55.74% OF TOTAL ASSETS)  
 
Company Symbol % Assets
CEZ N/A 2.37
Gazprom OAO (EDR) N/A 18.06
Lukoil Company ADR N/A 8.78
MMC Norilsk Nickel ADR N/A 3.81
Mobile Telesystems OJSC (MBT) 3.52
ROSNEFTEGAZ OJSC 144A N/A 5.2
Sberbank Cls Common Stock N/A 5.52
Surgutneftegaz OAO (GDR) N/A 2.97
Turkiye Garanti Bankasi N/A 2.8
Vtb Bk Jsc, Kiev N/A 2.71

Chart for SPDR S&P Emerging Europe (GUR)

The investment (EEM) seeks investment results that correspond generally to the price and yield performance of the MSCI Emerging Markets index. The fund generally invests at least 90% of assets in the securities of the underlying index or in ADRs and GDRs representing such securities. The index was developed by MSCI as an equity benchmark for international stock performance. It is nondiversified.

 

TOP 10 HOLDINGS ( 23.21% OF TOTAL ASSETS)  
 
Company Symbol % Assets
Bank Bradesco ADR N/A 1.7
Gazprom Oao N/A 1.72
HDFC Bank Ltd (HDB) 1.66
Itau Unibanco Holding S.A. (ITUB) 2.62
KB Financial Group, Inc. (KB) 1.67
Petroleo Brasileiro S.A. ADR N/A 2.5
Petroleo Brasileiro S.A. (PBR) 2.12
POSCO (South Korea) (PKX) 2.47
Samsung Electronics Co Ltd N/A 3.91
Taiwan Semiconductor Manufactur (TSM) 2.84

 Chart for iShares MSCI Emerging Markets Index (EEM)

 
 

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ETF BASIC NEWS, NYSE:EEM, NYSE:FXI, NYSE:GUR, NYSE:PGJ


 

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