Monday, June 29, 2015

Story about a hockey player

Once upon a time there was a young hockey player, whose parents really wanted him to make it to the big leagues. Not only to feel proud but also to make the family prosper. They knew he didn't quite have the game, but they came up with a good plan of sending the NHL agents some exaggerated statistics of his last games and skating speed etc. The NHL team had good luck with earlier drafts, and they were positive that the trend was going to continue, so they decided to draft him.

Then started the long and weary season. At first they thought that it would just take a bit of time for him to get used to the adult games, that's all. He really became part of the team, as the more experienced players were supporting him. As the time went by, the team slowly noticed that he was not gonna get any faster or better with the puck anymore. After a bit of snooping around, they also found out that he never skated as fast as the parents originally claimed. He also got a bad knee injury during the season, which the insurance did not quite cover, and turned out to be very expensive for the team as a whole. The bad knees run in the family, but he had ignored the fact since he was a kid, so far with no consequences.

The team was naturally thinking what would be the next step to take. One of the managers had read Malcolm Gladwell's book Outliers, which claims that 10 000 hours of practice can make you a master in any field. So they thought, what the heck, let's put the guy into some serious training to simply refine the rough edges. It turned out that even though the intention was good, it only ended up making the earlier injuries worse. The parents were also getting mad. How in the earth are they treating their son.

The team knew that if he continued playing, it would end up being expensive, as the injuries he got were the recurring kind. He was still a team player, and some of the other team players really seemed to like him. He also delivered a good fight every now and then, but the real value was not nearly as good as what they would have to pay for him in the future. The parents were already blaming the team for abandonment, even after the team had provided significant financial aid for the family to cover the consequences of the injury. The family should have known in the first place it would not end happily. The team was however worried that if he left, the team spirit could significantly suffer, and they might end up losing so many players that the team would have a hard time playing in the first place. Still, the correct decision was clear, but it wasn't easy, as he had grown to be a big part of the organisation. But deep within, everyone knew, that even though it would hurt him pretty bad in the short term, in long term it would be better for everyone. He would get back on his feet.


Yes, as you probably noticed on the way, the story was about Greece and included some metaphors. I let you guys use your imagination, but I have to reveal that with "a good fight every now and then" I was referring to feta. Kind of proud about that one.

But okay, back to business. Wouldn't it be time to face the reality, even though the decision is extremely hard. Should have done it a long time ago. However, it does seem that the rest of the Europe has given the ball to the Greeks now. It is still a little bit unclear, what the Greeks are voting for next weekend, but it looks like that at least if you ask Juncker, they are voting on whether they want to stay in the euro or not. Looking at google trends, the Greeks are already checking out drachma again:

The rise of Syriza was a sign of anti-euro movement, but it seems like the people of Greece are starting to see behind the Syriza populism. In long term I truly believe it would be more beneficial for them as well to get out of the euro, but it is hard to see the people voting NO when the weekend arrives. And it seems like I am not the only one.

-Emerging Chap

Sunday, June 28, 2015

China rampage

Chinese domestic equity investors were biting their finger nails last week, as the A-shares jumped off the cliff yet again after earlier hitting a half landing, while the mainland bears (if you wrote that with capitalized first letters, it would sound like a legit baseball team) were merely enjoying the ride. If you are not too familiar with how Chinese equity is traded, get the quick basics from here. The tumble that started on Thursday picked up some speed on Friday and left even the Chinese state media speechless. Eventhough the YTD return figures still make you smile, everyone is wondering what the hell is going on. An average chinese investor might just explain what is going on.

I ran into this graph couple months ago and it just made me smile:

Unsophisticated retail investors entering the market, when they hear that their neighbour bought a new Beamer with their successful investments. Sounds like a familiar story right? This article about a Chinese housewife buying the penny stocks because they are the cheapest and hence have the most upside, made me already more worried than amused. If you cannot read, I do not think you should be trading on your own. Like Malkiel claimed, it doesn't necessarily take a genius to be able to beat the experts in the equity markets, but investing is not only about choosing companies. That is why this graph can explain what is happening:

Even if I would let a monkey build my portfolio by throwing darts, I would not use that approach to define how much leverage I take. How can an illiterate investor understand, what happens once he buys on margin and the market starts tumbling. It is a washing machine, as a surfer would say. Huge margin debt and a greater fool theory -driven market is a horrible combination.

Next you naturally ask, how is this gonna fold out? If you think about it with a common sense, this should end when the local big guys start seeing the value again, while the retail guys just have to enjoy the ride. The A-shares have been trading with a premium to H-shares since late last year (according to HSAHP index) as the retail investors have been rushing in to the mainland equity market. It hit an all-time high at 142.88 on June 10th. Just about when the current bear started showing its claws. It is currently at 124.53, but you can argue there is still room for further correction. The P/Es were almost double compared to the H-shares in the beginning of June. Eventhough the market structure makes it a bit complicated to compare, the differences should certainly not be that big. Especially, when China wants to eventually open up their economy to take their power to the next level. Once this happens, the HSAHP should be steady at 100, or so you would think.

So what do the Chinese think right now? Some retail investors are probably discovering what investor protection means, that is if they know how to spell it. The Chinese government on the other hand is probably wondering how to get more traditional cash from under the mattresses into the equity markets to replace some leverage. They might also be bummed, as this further shows MSCI that China is simply not ready to get into the game yet. Despite the China representing a large proportion of worlds GDP, the representation in security indices is still minimal. An argument the china bulls often bring forward.

So eventhough the China consumers' huge cash positions and the possible massive inflow of passive dumb money after an inclusion in the indices create interesting potential in long term, these kinds of market developments do not help matters. Therefore, if you decide to stay in China, you have to keep buckled up, and maybe even start holding your seat. If you like the story long term, it just makes more sense to look at the ETFs that stay in H-shares, since the premium should not be sustainable in long term any way.

And when you're feeling like a Monday tomorrow, remember that simultaneuosly there is a Greek not getting money from his ATM to buy morning coffee. You might still have that privilege.

-Emerging Chap