Robert Hsu and SH

March 5th 2009

U.S. Stock Market in Freefall

The bloodbath continued this week as more bad news sent the global stock markets reeling. As a result of deepened economic recession and financial crisis, the U.S. stock market traded off early this week with the Dow plunging below 7,000 on Monday for the first time since 1997 and falling closer to my low-end target of 6,500 at today's close. In addition, the S&P 500 dipped to its first close below 700 since October 1996.Year to date, both the Dow and S&P 500 have dropped more than 20%.

The freefall in U.S.-traded shares is a direct result of the deteriorating economy in the U.S. In the fourth quarter, the U.S. economy contracted far more than previous estimate of 3.8%. U.S. GDP shrank at a 6.2% annual pace from the third quarter, which is the fastest contraction since 1982. This slowing in GDP was greatly due to the 4.3% drop in consumer spending in the fourth quarter -- the most since 1980.

I expect the economic picture in the U.S. will grow darker before things get better. That's because many U.S. companies continue to lay off employees, U.S. banks continue to tighten their lending and housing prices continue to fall. And consumers are feeling the pain, as well as many U.S. corporations. According to Bloomberg, fourth-quarter earnings declined 58% on average for the 465 companies in the S&P 500 that have reported results since January 12.

This is a vicious cycle. The U.S. is suffering from a much deeper recession than originally thought, and President Barack Obama's $787 billion stimulus package won't have a much of an impact until the end of 2009 -- at the earliest. That's why I expect more economic deterioration in the U.S., and for U.S. stocks to face an even bigger downside risk this year.

New Buy: ProShares Short S&P 500

So this week, I want to provide you with a way to hedge our China Strategy portfolio by shorting U.S. market. The option available to investors like us is the ProShares Short S&P 500 (NYSE: SH). This ETF "shorts" the market -- betting that U.S. stock prices will fall -- by using combinations of stocks, index futures and other derivatives that increase in value when stock prices tumble. It tracks daily investment results that correspond to the inverse of the daily performance of the S&P 500 Index -- that means when the S&P declines, the ETF moves higher.

I want you to buy a large position in SH, enough to offset most of your exposure in Chinese stocks. Buy half of the position right away and the other half under $88. I expect to sell it at much higher level as the U.S. stock market continues to deteriorate.

March 12th

ProShares Short S&P 500 (NYSE: SH) shares dropped slightly this week as the S&P 500 rallied strongly on Tuesday. SH dropped below $88 yesterday, giving you a chance to buy the second half of your position. If you don't have a full position yet, take the opportunity to buy SH now under $88, while the U.S. markets are in the midst of a bear market rally.
As I discussed above, I expect the S&P to trade between 670 and 750 until this summer. And I wouldn't be surprised to see it break the 670 level and head lower. That's why I recommend that you hedge your China positions with SH. Buy SH under $88.

March 19th

Question: With regards to your comment "to buy a large position in ProShares Short S&P 500 (NYSE: SH), enough to offset your exposure in Chinese stocks", do you mean if an individual has "X" dollars in Chinese stocks, he should buy "X" dollars in SH?
Answer: As an investor, if you are bearish on U.S. stocks but bullish on China that is exactly what you should do. And even if you are not bearish on U.S. stocks, I still think that you should buy have a position in SH, but in much smaller amount. My recommendation meant that I wanted you to buy more SH than a typical China Strategy position, but not to put the position on all at once. That's why I recommended purchasing your first half at current levels, and the second half below $88.
After recommending SH, though, the bounce in U.S. stocks this past week was more powerful than I had expected. Because of this, I recommend placing a stop loss on your SH holding. I normally don't give out stop loss levels in China Strategy, but because of the trading nature of index hedging, I am today. Place a stop loss to sell half of you SH position if it closes below $73.50.

March 23rd

We've seen the mindset of U.S. government leaders change sharply in the past three weeks. Three weeks ago, Washington's focus was on nationalizing banks, which would have been disastrous for the U.S. economy. Today, the focus is on encouraging private sector investments, which was the right thing to do all along. So, at this point in time, I don't think that its prudent to be hedging our portfolios so aggressively with the markets showing strength right now. I expect the S&P 500 to rally back up to the 900 level by summer, and then likely pullback again in the fall. That's why I'm recommending that you lift half of your portfolio hedge in ProShares Short S&P 500 (SH). I recommend that you sell half of your position in SH, and sell the other half if it closes below $73.50.