What to Do About the 'Crash' in China
Eisman is super-bullish on banks... More bad news for the 'short vol' trade... What to do about the 'crash' in China... 'Volatility is a two-way street'...
The Stansberry NewsWire is in great company...
Regular Digest readers know our colleague C. Scott Garliss and the NewsWire team have been bullish on the financial sector for months.
In short, they believe the combination of deregulation, lower taxes, and higher interest rates will be a massive tailwind for the shares of banks and other financial firms.
But they aren't alone...
Renowned fund manager Steve Eisman agrees. As you may remember, he was the subject of the bestselling novel and Oscar-winning film, The Big Short, who made a fortune betting against the banks during the 2008 financial crisis.
Eisman originally became bullish on financials following President Donald Trump's election victory in late 2016. And that was a great call. As you can see in the following chart, the financial sector – as tracked by the Financial Select Sector SPDR Fund (XLF) – has significantly outperformed the broad market since the election...
Despite the recent rally, Eisman remains bullish today...
In fact, as he explained in an interview this morning, he's even more bullish than he was 14 months ago. As Bloomberg reported...
"I have not been this positive on banks since the 1990s," Eisman said in an interview with Bloomberg Television, citing higher interest rates and deregulation. "We're going to go through for the next several years a massive deregulation of the financial services sector... From a stock perspective this is very positive for the sector."
This week brought more bad news for 'short vol' traders...
Earlier this month, we detailed the implosion of the so-called "short volatility" trade.
For the past several years, folks made billions betting that the CBOE's Volatility Index ("VIX") would move lower as central banks flooded the world with liquidity. But that all changed on February 5.
The VIX surged more than 100% that day, causing the two most-popular "short vol" trading vehicles – the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY) – to crater. Anyone holding them lost six years' worth of gains overnight.
As we discussed, the first of these vehicles, XIV, has already been liquidated...
SVXY continues to trade. But anyone still hanging on to shares received some upsetting news this week. As financial-news network CNBC reported yesterday...
ProShare Capital Management late Monday night announced it was reducing leverage on the ProShares Short VIX Short-Term Futures ETF (SVXY)... effective at the close of trading Tuesday.
Buying the SVXY was a bet that volatility would go down. The fund's value has dropped nearly 90% this month as volatility exploded. A competitor fund, the VelocityShares Daily Inverse VIX (XIV), also was decimated and has since closed.
The SVXY was based on a simple concept: It would react in the opposite direction of volatility. So, if volatility went down 10%, the fund was designed to gain 10%. But the opposite would also hold true: If volatility rose 10%, the fund would drop 10%.
ProShares is now reducing the amount of leverage involved. The SVXY will now seek results that are half as much as the reverse of the index in a single day. So if volatility rises 10% on a given day, the fund will only drop 5%, not 10% as it would have dropped before.
In other words, the move appears to be a thinly veiled attempt to keep SVXY from following XIV into oblivion. Unfortunately, it also means that the fund's investors have even less hope of recovering their losses even if volatility trends lower again.
Finally, we've heard from several Digest readers who are worried about the recent correction in Chinese stocks...
Steve Sjuggerud addressed these concerns in detail in the most recent issue of his True Wealth China Opportunities advisory last week. Because we know many of you are likely worried as well, Steve has graciously allowed us to share a portion of the issue with Digest readers today. From the issue...
When U.S. stocks fell last month, China-related stocks fell, too. It might have been the worst stretch of performance in the history of this publication. Here's the thing... This isn't the worst performance we could ever see from our China portfolio.
I'm not kidding. Our model portfolio holdings are volatile. That's just the nature of investing in China.
You might not want to hear this from me. But if the downturn in our China-related stocks last month kept you awake at night, you're doing something wrong. Specifically, you have too much of your portfolio in China-related stocks.
The solution is simple: Reduce the size of some of your holdings.
Don't think, "Yeah, I hear ya, Steve. You're probably right"... and then do nothing about it. Make the change. Now. Sell down to "the sleeping point," meaning sell any investment that's keeping you up at night.
As he explained, it's not unusual to see a significant pullback after the gains of the past couple years...
Several of the stocks in the True Wealth China Opportunities portfolio are up more than 100% in the last year alone. These are incredible returns.
But you can't expect to make triple-digit gains in a year without a sharp pullback from time to time. And that's particularly true in China. More from Steve...
Volatility is a two-way street. For example, the Shanghai Stock Exchange Composite Index rose around 500% in two years, from late 2005 to late 2007. Then it lost two-thirds of its value in 2008, peak to trough. (Ouch!) It soared roughly 160% from June 2014 to June 2015. By mid-August – just two months later – it was down 45%. (Ouch again!)
Massive booms and busts are a simple fact of life with China-related stocks. I'm confident we will capture at least one of these great booms. And we will avoid the big busts by following our exit strategies. By remaining disciplined, we will never get caught losing two-thirds of our value.
But along the way, triple-digit gains and double-digit falls are normal... If you couldn't handle seeing double-digit losses on your China-related stocks last month, you need to make some changes...
- Recalibrate your thinking on what's possible (because big losses come with the territory), or
- Reduce your China holdings down to the sleeping point.
Despite the recent volatility, Steve remains as bullish as ever...
Yes, corrections are painful. But he says there's no question the bull market is still in place...
Looking at the big picture again... China is doing much better than it might feel right now. But to succeed, you must understand that downside is possible. And if it happens, it can be dramatic.
If you were scared in recent weeks, you probably own too much China right now. Consider trimming back your exposure. Find the "sleep at night" level, and don't look back.
New 52-week highs (as of 2/27/18): Boeing (BA), CBRE Group (CBG), and Okta (OKTA).
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February 28, 2018