Ways to Play China

Some of the longer term members may remember when we first spotted trouble in China back in 2011, we spotted it through commodity prices and a few weeks later we saw the first recessionary print in manufacturing.

There are quite a few problems in China from real estate to credit, but the recent default of Chaori Solar on a very reasonably easy to handle interest payment showed that China who has been bailing these companies out to avoid the first ever default, has changed tactics, as a result the banks aren't lending, new deals are being cancelled left and right and it's not that the banks don't have the money, SHIBOR shows they do, they simply aren't lending which is similar to the US credit freeze/liquidity lock up of 2008, albeit for different reasons, that was a problem of trust between party and counter-party as to how much exposure one had to subprime.

The effect however is the same, that's why I specifically refer to this moment as China's "Bear Stearns Moment". Worse yet, China's economy has transitioned to a credit creation driven economy (they look at economics over a much longer span than we do, say 20 years vs a couple). In any case, the commodity (collateral) for cash that has been the norm in the shadow banking system in China has hit a brick wall and cash calls have been coming in since before the first ever default of Chaori, the cash calls have been rolling in and one of the chief commodities put up for cash has been copper as well as iron ore, but this is going to hit all throughout the commodity sector.

Look at Copper today, it just broke MAJOR support...

You know we don't chase assets, but try to let the trade come to us so right now copper is a no go play on China, however, the same volatility shakeout that is applied to H&S tops is VERY likely going to be seen in copper in which a massive short squeeze will send copper back above former support (now resistance) and that's where we can take a look at copper short as the trade would be coming to us.

However I'd rather get out in front of this a bit further, you know I've been looking at FXP for a good long time, but haven't found a decent way or place to enter, I doubt that changes.

So I figure we have a couple of options that look interesting, one would be a global commodity tracking ETF/ETN, DBC is a possibility, most others have volume that's too thin.

More specifically I think we can target aluminum directly as it was on a recovery, but as I said last night, the market is dynamic.  A few names I'm looking at this morning would include AA of course because of their global reach and volume, ACH would be my preferred asset to target, but it doesn't have the upside momentum I'd like to short in to, it's still on the list though, imagine catching them in default!

CENX is another, I need to look a bit more in to their operations, they don't need to be China specific, I think this hits commodities globally, but I would prefer some Asian exposure. CSTM is another, but volume is a bit low.

So as I have time between what we normally do, I think this is a really interesting area if we can find the next area to start seeing trouble, Aluminum seems like a good start, it's just copper and iron ore were the major collateral and thus they got hit first and the hardest.

Of course if you have ideas on another front, I'm all ears, but AA does have a bullish ascending triangle, I'm not sure if retail will bite, I doubt they understand the situation in China so it's a possibility that we can hit a possible head fake move in AA, assuming there's enough distribution and we can see smart money is moving out because of the exposure, I'll be looking much more closely at that.

I just wanted to put the idea out there because we have a lot of very smart people in the group from all over the world with different perspectives and information so I want to tap that and see what we come up with as this looks to be a major 2008 type play , except China.