Who's the pickpocket's most intimate accomplice?
Distraction.
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News of a clampdown in China over the possibility that street protests there might lead to a Tunisian or Egyptian style revolution strikes us as surreal. The last great bastion of the communist cause battling with millions of its own citizens looking for a way out of socialist hell is more than we ever imagined seeing in our lifetimes.
Nor is it clear that anything will come of this latest of national sports – at least not in that country. While the Arab world was never so worried about inflicting suffering upon its own citizens in order to maintain the status quo, the Chinese always struck us as masters of the model of iron rule.
That's why we find it hard to fathom the masses defying the police (and the internet censor) and gathering en masse to vent their spleen over the merciless empire that Mao built.
All the same, we admit we were caught by surprise by events in the Middle East. And that leads us to ponder whether this – the beginnings of a broad, public Chinese dissent – might be that black swan moment that changes both the character of a society and the course of the global financial tides that swirl about it.
We also wonder whether the more immediate effect might be a loss of confidence in the current rise in equities, which, in terms of swans, certainly qualifies as one of the longest-necked we've ever seen.
The Walls of China Bear a Warning
In a land where walls are built with the full scope of history in mind, China's internet firewall, separating potential dissidents from the social networks that proved so subversive in the Middle East, may prove effective. And, of course, where that doesn't work, 'official' kidnappings, incarcerations, and good old fashioned beatings and intimidation might also do the trick. There's nothing Beijing fears more than a million restless citizens (a mere 1% of its population) taking to the streets.
The decisive, swift and early action of the People's Party clearly shows how scared it is of civil unrest. It's also as sure a sign that there are no plans to yield power as readily as Egypt's Mubarak did.
Meantime, there are likely plenty of multinationals dreading the thought of anything but the cheapest of labor pools now organizing itself and becoming 'competitive' with neighboring states like Taiwan, Korea and Japan. Too many a profit margin has been built on that cheapest of foreign proletarians, the Chinese factory worker.
The other great fear, as mentioned, is that production delays from any lengthy grassroots uprising might send markets to the tank – and put a significant dent in global growth projections.
Here's the Chinese market ETF, the iShares FTSE/Xinhua China 25 Index Fund (NYSE:FXI), for the last three years. The picture includes all the action since the Lehman Bros. bear market low:
Interesting to note that in the last three weeks – the period that coincides precisely with Tunisia's Ur-revolution and the subsequent soufflés in Egypt, Jordan, Algeria, Yemen, Qatar, Bahrain, Libya, Iran, et al. – the Chinese market dropped below a two and a half year rising trendline. Perfect cover, really. Did anyone else notice?
Some Distraction!
Note also the four month, down-sloping trendline (in black) that's now converging with all the major moving averages. From here they either unwind up or down, and which way they ultimately do go depends in large part on how the price action copes with that $43 resistance level over the next few days.
Will there be more downside for the FXI? Ask the average disgruntled Chinese if he's ready to risk life and limb for the prospect of greater freedom, and you'll be closer to having your answer.
From the land of the (exploited) worker
To the home of the (impoverished) capitalist
A survey of the action across U.S. markets reveals some interesting (though not revolutionary) developments.
Let's go straight to the charts.
Our first stop is the consumer discretionary sector of the market, which has been rallying longer and stronger than just about everything else not energy related. Here is the SPDR Consumer Discretionary Select Sector ETF (NYSE:XLY), the largest and most liquid of the sector's proxies, for the last twelve months:
Technically speaking, there's concern whenever a 38% rise in seven months is driven by diminishing volumes.
Equally troubling, the sector now sits more than two standard deviations above its 50 day moving average, making it the most overbought segment of the U.S. equity universe bar none.
See here:
Compared with telecoms, it's clear just how heady the move in the discretionaries has been. And telecom has been no slouch since bottoming this summer. The sector's proxy, the iShares Dow Jones U.S. Telecommunications Sector Index Fund (NYSE:IYZ), has put on 27% since its own summer bottom. But as the above chart shows, the telecoms are nowhere near as overbought in terms of their own 50 DMA.
Our view is that this pair is now tradable. In the event of a general market downturn, we believe the consumer discretionaries, as represented by the SPDR XLY shares, will fall faster (or rise slower) than the iShares telco, IYZ.
To that end, we are buying the XLY June 34 PUTS at $0.45 and selling the IYZ MAY 23 PUTS for the same price. The trade is a zero premium initiative that stands to profit as the spread between the two options widens.
Should the markets rise and both options expire out-of-the-money at expiration, you will be out commission costs only.
For those who noted the different expiration dates, this is simply the result of a lack of available options, but actually works in our favour. With the short PUT expiring one month before the long, the opportunity for theoretically unlimited upside gains will obtain for that final month.
Wall Street Elite recommends the simultaneous purchase of XLY June 34 PUTS for $0.45 and the sale of IYZ May 23 PUTS in equal numbers.
And see if we can steal a big one.
With kind regards,
Hugh L. O'Haynew,
Analyst, Oakshire Financial
