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First with Financial Comment from Arabia

Is shorting China the ‘Trade of the Year’?

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ArabianMoney in Dubai has been following Bill Bonner and The Daily Reckoning crew and their decennial declaration of Japanese stocks as the ‘Trade of the Decade’.

Mr. Bonner’s London office has golden balls on the roof – and a red flag predicting a stock market crash very soon – but you really need balls of a stronger metal if you are thinking about investing in Japan.

Undervaluation

After a 20 year bear market Japanese companies are indeed incredibly undervalued on price-to-book but there is still the absence of the spark necessary to revive the market. It might well come within the next decade. That makes Japan a smart decennial pick but not necessarily for those with more immediate time horizons.

For the ‘Trade of the Year’ nearby China is looking much better as a short. Mr. Bonner’s MoneyWeek team in London have been goading the Chinese dragon as a bad case of hot air and monetary inflation.

They are in good company with the King of Shorts, Jim Chanos whose string of shorting hits includes Enron and sub-prime. For this sovereign to tilt his lance in the direction of the Chinese dragon is news indeed, and he is making no secret of what he clearly hopes might be a self-fulfilling prophesy (see this video).

ArabianMoney has been talking about how to short China with ETFs, and how did we do yesterday? FXP up 7.9 per cent, CZI up 7.5 per cent and EDZ up 6.44 per cent.

Friendly trends

They could reverse out again tonight. But if the trend is your friend – and if the shorts are right then we are talking about a six month or so bear correction for China – you could see these instruments compound to the upside at a ferocious speed.

Jim Chanos is not the only investor to note that shorting can be highly profitable. You just do have to get it right, for compounding works even more aggressively in reverse with these ETFs. This is not for widows or orphans or for anything more than the speculative portion of an investment portfolio.

So for a solid and reliable investment for 2010 ArabianMoney is still behind gold, and silver if you don’t mind a bumpy ride. But for something more exciting with greater upside shorting China looks the ‘Trade of the Year’. Perhaps Japan can wait another 12 months!

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Written by Peter Cooper

January 21, 2010 at 8:49 am

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