Bookkeeping: Beginning Morgan Stanley China A Share Fund (CAF)

As mentioned last week the Chinese large caps (as laid out in ETF FXI) were lagging the market and signaling a tired story. I've long thought China would be among the first tranche of countries to bring on the recovery - I still believe that, but believe traders are way too early on this thesis based on the China government essentially pulling an Alan Greenspan [Feb 16: Is China Pulling an Alan Greenspan?] or in this case a Ben Bernanke. Money is flowing in all directions, and economic data will skew higher, as will stocks. As always the market is not about what is correct or what I believe in, but what the herd believes in.

There are two main ways to play the "Chinese non speculative" arena - i.e. mid and large caps stocks

1. FXI as mentioned above is an ETF for US listed Chinese stocks of quite large size.
2. CAF is the closest thing we have to investing in the Shanghai market itself

I am using the latter, details can be found here but again these are not companies listed on US exchanges - essentially this is a way to play the homeland index.

Technically the ETF has had a huge run and in a bull market is exactly the type of chart we love. After topping at mid $36 range, the ETF has pulled back to mid $32s filling a gap from April 8th/9th - so I am going to start a 2% position here just above the 20 day moving average. I'd like to snag some down around the 50 day moving average below $30 if we continue to weaken in the market.


As an aside, it appears Van Eck is coming out with an ETF as a pure play on Chinese A shares

• Van Eck Global Advisors has filed to launch the Market Vectors China A-Shares ETF on the New York Stock Exchange. The proposed ETF would start by dealing in swaps and derivatives to mimic its underlying index.
• As noted in the filing, so-called A-shares in China are largely only made available to local investors. But there are some cracks opening in China's wall to outside investors: Namely, the Qualified Foreign Institutional Investor program, a special license granting foreign investment groups access to local markets. As a result, Van Eck says it'll apply for QFII certification.
• "There is no assurance that the adviser will be able to obtain a QFII license and, if so, when such license would be granted," said Van Eck in its filing, which is dated March 30. In the meantime, Van Eck will seek other ways to gain exposure to what it describes as a sometimes volatile and illiquid marketplace. "Therefore, unless and until the fund is able to invest directly in A-shares, the fund intends to invest in China A-share Access Products (CAAPs), swaps and other types of derivative instruments that have economic characteristics that are substantially identical to the economic characteristics of A-shares in order to gain access to the A-share market," the filing states.
  

As stated late last week, I was positioning for a moderate correction [Bookkeeping: Positioning for Correction] - mostly by selling long positions (raising cash) rather than outright shorting since my head has been handed to me the better part of 3 weeks shorting anything. I'd like to deploy those funds slowly on the long side as the market retreats, with initial support in the S&P at 840, 830, and 820. Below S&P 820 the case for the bulls becomes more troublesome. As long as we hold S&P 780 I am willing to continue my case for a wide trading range and would like to have both long and short positions. It's been very difficult to execute this strategy because most days everything is either to be sold, or bought - no happy mediums of calmness.

I wrote the past week or two I am now of belief that industries not under the government's arms and facing the "real economy" rather than Nanny State economy could be the disappointers - Eaton (ETN), an industrial we tagged in the earnings preview for Mon-Tue did just that. Further, Bank of America (BAC) despite "shockingly good" results, was sold off - as I said in that same piece anyone still surprised by banks results has been living in a cave for 2 weeks and at some point all the "good news" is baked in.

Long Morgan Stanley China A Share in fund; no personal position