Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Macroeconomics and the US Dollar (by David Kern)

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I have two charts for your perusal, dear readers – focused on the broader indexes.  Tonight my thoughts go to my TSP allocation, specifically: my over weighting of the international index (the EFA).  This international index will tend to have a bit more volatility than the S&P 500, similar to the Wilshire 4500 (EMW) – but decorrelated at times.  Lately, the EFA and EMW have been rather decorrelated.  Much of this is due to the economic worries in Europe, as the PIIGS national economies (Portugal, Ireland, Italy, Greece, and Spain) have really shown how shaky this debt/leverage house of cards can be.

Exchange rates also have much to do with the relative performance of the EFA and US indexes.  As the value of US currency goes down (and o-how-it-has since 2000), the EFA will get a corresponding tail wind due to the greater currency valuations it represents.  Now lest you think this whole post is just a bunch of hand waving and pie in the sky economic mumbo-jumbo, I offer my first chart: hard core technical analysis of the EFA point and figure chart.  What I’m showing here is an equity clearly being owned by increasing demand that overpowers supply.  Prices can not increase without more buying interest than selling interest – and this chart demonstrates that in spades.  Fair enough, we should expect higher prices on the EFA and I’m happy to hold my investment there.

The natural follow up question is, “will the EFA outperform domestic indexes?”  That question I hope to answer by means of my second chart, showing the value of the US dollar on a weekly candlestick chart.  This proves by observation my earlier premise – that declining value in US currency boosts the performance of the EFA vs the EMW or SPX.  Notice especially the blue outlined timespans: when the US greenback falls, the EFA was killing versus the domestics. Now granted, my chart note about a possible top forming is speculative – but it does fall in line with a descending channel.

I think the more compelling argument for decreasing value in the US dollar is in the headlines.  You may have heard of quantitative easing, which is how my government has chosen to try to stimulate the economy (it really just means printing more money that didn’t exist before – I wish I could do that).  Contrast that with the austerity measures being imposed overseas, and I think it’s a safe bet that there is room for the value of the dollar to fall further.  Bottom line – although the EFA has underperformed the domestic indexes lately, I expect that those roles will reverse.

Thanks for reading, I blog at AbjectAvarice.com where you can watch my stock portfolio in real time.

David Kern (@AbjectAvarice)

Big-Picture Pattern Still Bullish for China ETF

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From a big picture weekly chart perspective, the series of higher lows and higher highs off of the October 2008 bear market low at 19.35 is the dominant pattern that underpins the iShares FTSE/China 25 Equity Index (NYSE: FXI) right now. As long as the major up trendline from October 2008 to the present (26 months) remains intact, now at 42.00/05, we will be looking for another loop to the upside towards 49.00-50.00 next.

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Originally published on MPTrader.com.

Upside Pivot for China (by Mike Paulenoff)

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A comparison of the daily charts of the Shanghai Composite and the S&P 500 shows that each index turned up on Nov 29-30. The Shanghai turned up after a 50% correction of its Jul-Nov advance, and off of its 200 DMA at 2703, while the SPX turned up from its sharply rising 50 DMA after a 30% correction. Both indices are acting very "technical" into year end.

My proxy for the participation in the China equity market (Shanghai Composite) is the iShares FTSE/Xinhua China 25 Index (FXI) for the time being. The technical set-up in the FXI coupled with the very constructive intermediate term chart pattern in the Shanghai Composite argue strongly that the China equity index is on the verge of pivoting to the upside into another powerful upleg off of its July low.

If my work proves accurate, the FXI is emerging out of weakness (from last Thursday's peak at 45.18 to Monday's low at 43.67) and approaching a new upleg that should hurdle 45.18 on the way to the 47.50 vicinity.  Below is a chart on the FXI from yesterday that we posted for our subscribers before the start of the up move.

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Originally published on MPTrader.com.

Market Neutral Investing in China’s Fast Food Industry (by Dave Pinsen)

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Hey Fellow Slopers,

As I've mentioned in the comment threads here on occasion, I've essentially given up trying to predict market direction in the near term. My gut feeling is to lean toward the bearish side, but my gut hasn’t been that good at market timing. So I’ve started putting cash to work in market neutral trades every couple of weeks.

I’m borrowing a page here from a page here from Short Screen member Marc Mayor, who has run a market neutral portfolio with impressive returns for the last ten years: adding a paired long and short position every two weeks, and then eventually closing out old positions as I add new ones, to keep the portfolio capped at 52 positions (26 pairs). I may exit positions before I get up to that cap, but given the number of positions and the small relative size of each one, if I add stops they will be wide ones.

For today’s market neutral trade I shorted CCSC at $22.80 and bought an equivalent amount of YUM at $50.65. As I’ve done with the last few market neutral trades, I shared the trade idea with subscribers of the Market Neutral Notification List the night before I placed the trade.

CCSC is Country Style Cooking Restaurant Chain Co., Ltd., an upstart fast food chain serving Chinese cuisine in China. CCSC went public in the the U.S. at the end of September at $16.50 per share (above its expected offering range of $14-$16) and spiked up 47% on its first day of trading. It peaked at close to $35 per share toward the end of October, and has plummeted since then.

 

 

Even after this steep drop, CCSC looks pricey, trading at about 6x trailing sales, 57x trailing earnings, and 39x analysts’ average earnings estimate of 2011 earnings (58 cents), with a PEG ratio of 2.09.

CCSC may see additional selling pressure when the lock-up period for insiders ends and they can start unloading shares.

Yum! Brands, Inc. (YUM), operator of KFC, Pizza Hut, and other fast food brands, is the dominant fast food restaurant operator in China, and China is YUM’s largest market.

 

 

YUM breaks out its operating results by three divisions — China, U.S., and International, which covers all of its markets excluding the U.S. and Mainland China. In its most recent quarter, 46% of YUM’s operating profits came from its China division. Operating profits also grew the fastest in its China division, on a year-over-year basis: 24% versus 18% in YUM’s international (ex-China) division, and -2% in its U.S. division.

Of the 3,664 restaurants YUM had in China at the end of its Q3, 3,054 were KFCs and 575 were Pizza Huts. The handful of others were a new concept YUM is testing in China, “East Dawning”, which sounds like it would represent direct competition for CCSC’s restaurants. From YUM’s website:

East Dawning, the company’s Chinese quick-service restaurant brand to provide affordable, great-tasting, authentic Chinese food to the Chinese customer. The East Dawning menu is 100% Chinese and offers a wide range of options for all day parts including breakfast, lunch, dinner and snacks.

YUM isn’t exactly cheap here, but trades at a more reasonable valuation relative to its estimated growth and earnings, with a PEG Ratio of 1.63.

Disclosure: Long YUM, Short CCSC