Name That Trade – $ASHR: Fine China

by Dan October 8, 2015 3:28 pm • Commentary

I’ve said it before, and I’ll say it again, there is a distinct possibility that whatever is going on in China as it relates to their slowing economy is not nearly as bad as we generally un-informed westerners think.

It is a fact that Chinese GDP has been cut in half from its 2007 highs above 14%, and doing its best to stabilize around 7% for the last couple years.  I have no idea if 7% is really 5% as some suggest, but I think it is safe to say that even with ever so slight decelerating growth from here on out, the ripple effects are being felt the world over.

Just this morning Germany reported its largest month decline in exports since August 2009.  Oh and for those of you who don’t think that China’s weakness is affecting our economy in the U.S., look no further than the Aug and Sept jobs data, it would make little sense to not blame U.S. multi-nationals profit struggles abroad from weaker demand from emerging markets, specifically China, causing them to reduce spending as they also book less profit given the weakness from currencies like the Chinese yuan.  

After the FOMC’s Sept meeting they told us there were monitoring developments overseas, and that is why they have not yet raised interest rates.  There have been few if any data points overseas that show an improvement in economic data here or abroad which suggests that we could see a worsening outlook for global growth as we head into 2016.  Which would keep the Fed on hold.  Investors have taken this as bullish for equities. I think not.  If the Fed goes from the one inch line of raising interest rates for the first time in 9 years to once again implementing QE then it is my belief that global equities will get smoked as we will be on the precipice of a global profit recession.  Which was the other way around when QE started 7 years ago.  This weakness will be lead by emerging markets, and call me old fashioned, but I suspect developed stock markets like the U.S. will follow China.

Its also been my view that the Shanghai Composite will round-trip its entire move of the last year, and the index’s recent hold at important technical support at 3000 is nothing more than it taking a breather:

[caption id="attachment_57507" align="aligncenter" width="600"]Shanghai Composite 1 year chart from Bloomberg Shanghai Composite 1 year chart from Bloomberg[/caption]

Last night’s 3% bounce in the Shanghai Composite, after being closed for the last week, while the SPX rallied 5% is fairly weak in my opinion. Let’s see what they have over night, but at some point soon the $30 strike will be a very good own in the ASHR (Deutsche X-trackers Harvest CSI 300 China A-Shares ETF).

Despite the etf’s precipitous few month decline, that had seen options prices spike this summer, they have come in hard of late, making the use of options to express directional views far more attractive:

[caption id="attachment_57508" align="aligncenter" width="600"]ASHR 1yr chart of 30 day at the money IV from Bloomberg ASHR 1yr chart of 30 day at the money IV from Bloomberg[/caption]

Let’s see how ASHR trades over night, but I am inclined to take a shot on legging into December puts by opening a put calendar, selling shorter dated puts to buy Dec.