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Goldman Advises Clients To Take Profits On "Long China" Trade

Tyler Durden's picture




 

After last night's completely unsurprising "beat" of Chinese annualized inflation of 4.4%, Goldman today has come out with a note which, however, is very surprising: Goldman's Robin Brooks and Dominic Wilson have decided to close out their "long China" recommendation, which was one of the firm's Top 2010 Trades presented previously on Zero Hedge. And while the profit on the trade of 11.3% is appealing, the reason for the unwind makes little sense. As everyone had been fully aware (see our note here) in advance, the inflation number would come out at 4.4% (and so it did). To use this as an argument for tightening expectations seems a little disingenuous. Which begs the question: why is Goldman truly no longer bullish on China? And does this mean that the firm no longer buys Jim O'Neill latest decoupling thesis? Lastly, as China has been a key dynamo for world growth, if there is little equity upside to be had in the one last capitalist country, what can we say about the less than capitalist America? This is further compounded by Jan Hatzius' suddenly rosy again outlook on the US economy (coupled with Goldman's ongoing demands for up to $2 trillion in QE, which with every passing day is becoming increasingly more improbable)...

From Goldman Sachs:

Following yesterday’s RRR hikes, overnight China’s CPI inflation came in at 4.4%, above consensus of 4.0%, while industrial production rose by 13.1%, slightly short of consensus expectations of 13.4%. Money growth remained robust at 19.3% yoy. These data reinforce our view that activity remains solid even as inflation is picking up, so that more tightening measures are likely on the way. Jobs data in Australia was stronger than the headline number suggests (5.4% vs consensus of 5.0%), with the rise in the unemployment rate due to a jump in labor force participation. The main even today and tomorrow will the G-20 summit of heads of state.

Yesterday we closed our long China (HSCEI) equities recommendation and long EEM/SPX recommendation with potential gains of roughly 11.3% and 2.3% respectively. With the US cyclical data (ISM and Payrolls) surprising on the upside last week, initial jobless claims continuing to trend lower, and inflation and policy tightening back squarely on the EM policy agenda, the near term outlook for this type of relative trade versus the US is more muddied than it has been for some time. The China (HSCEI) equities top trade too has moved up strongly in the last few months on the back of better cyclical data and easier policy. With successive inflation prints above the policymakers’ comfort zone, another hike in the reserve rate earlier today, and more policy tightening likely in the works, the near-term risk/reward for this position also looks unappealing as we approach the year-end ‘roll-off’. This “risk-management” aside, we continue to like the long-term outlook for EM equities: growth remains robust, and low interest rates in the majors should continue to exert downward pressure on the cost of funding for EM corporates. In the near term the inflation risk in some EM economies is growing and real, but as long as it is dealt with, equities should remain broadly well-supported, but after a strong run since September, it will be important to be more selective going forward.

As for how Goldman's top 9 trades of 2010 have fared so far, below is a summary - of the 9 original trades, 4 have been closed (2 at a loss, 2 at profit), and 5 remain still open.

  1. Stay short S&P 500 Dec10/Dec11 Forward Starting Variance Swap, opened at 28.20, with a target of 21, now at 25.466.
  2. Stay long Russian Equities (RDXUSD), opened at 1645.9 for a target of 2050, now at 1804.00.
  3. Stay long GBP/NZD, opened at 2.29, with a target of 2.60, now at 2.0531.
  4. Close short 2-yr GBP swap rates vs. long 2-yr AUD swap rates on a 1-yr forward basis, opened at -268.5 bp, for a potential loss of 24 bp (inclusive of carry).
  5. Close short 2-yr TRY rates through cross-currency swaps, opened at 8.77%, with a target of 12.0%, for a potential loss of 168 bp (inclusive of carry).
  6. Close long 5yr credit protection in Spain vs. short 5yr credit protection in Ireland at 13 bp, opened at 70 bp, with a target of 20 bp, for a potential profit of 2.9% (inclusive of carry).
  7. Stay long the GS FX Growth Current, opened at 103.5, with a target of 111.8, now at 104.1.
  8. Stay long PLN/JPY, opened at 32.1, with a target of 37.5, now at 28.9471.
  9. Close long Chinese Equities (HSCEI), opened at 12616.01 on 01 April 2010, with a target of 15000, for a potential profit of 11.3%.
 

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Thu, 11/11/2010 - 13:21 | 719715 TheGreatPonzi
TheGreatPonzi's picture

Then it's time to go long China.

Thu, 11/11/2010 - 15:18 | 719987 Bananamerican
Bananamerican's picture

"China has been a key dynamo for world growth"

er, no...China has been a key dynamo for the growth of CHINA and various quisling multinationals (easy to pull off when you don't give two flying fucks about the environment, human rights or the life expectancy of your citizenry.

Too many young 'uns here (multiculturalists?) think Globalization is a GOOD thing...

It aint. Globalization is simply modern feudalism on a "global" scale...a "race to the bottom" for humanity's labor force.

FUCK CHINA

 

Thu, 11/11/2010 - 13:21 | 719717 LongSoupLine
LongSoupLine's picture

ahh, Goldman...guiding the flock toward the sheering barn.

Thu, 11/11/2010 - 13:31 | 719742 Fraud-Esq
Fraud-Esq's picture

No way I'm closing out long china. Take some profits, sure, but not closing..

Thu, 11/11/2010 - 13:34 | 719749 carbonmutant
carbonmutant's picture

The BDI, which had a lower high last month, has been falling since. Today it broke a lower support level that has held since September. Next stop 2000...

Thu, 11/11/2010 - 14:38 | 719887 tmosley
tmosley's picture

Looks like it is dead in the middle of its recent trading range to me.  That's 2000-4500.  It would have to go significantly below 2000 to really be notable, at least to me.

Thu, 11/11/2010 - 13:35 | 719755 Careless Whisper
Careless Whisper's picture

goldman high frequency trading program that can "manipulate markets in unfair ways" deserves protection under the economic espionage act.

http://www.bloomberg.com/news/2010-11-10/u-s-says-closing-ex-goldman-pro...

 

Thu, 11/11/2010 - 13:36 | 719758 chinaguy
chinaguy's picture

AP:

Chinese President Hu Jintao assured Obama during talks Thursday (G20) that China has an unswerving commitment to pressing ahead with currency reform, said Ma Zhaoxu, spokesman for the Chinese delegation.

BITCH SLAPPED AGAIN!!

No resolution at G20 - status quo & the dollar will weaken further...EU melt down not withstanding.

Thu, 11/11/2010 - 13:40 | 719771 carbonmutant
carbonmutant's picture

The G20 is a Cartel. And the US is the Saudi Arabia of money. Ben's job is to keep the cartel members from pumping outside of approved guidelines.

Thu, 11/11/2010 - 13:41 | 719773 slaughterer
slaughterer's picture

Goldman wants to buy China cheaper.  So please get out, NOW... 

Thu, 11/11/2010 - 15:47 | 720092 Pez
Pez's picture

HA! More like: Take your hot monopory money and get the F out youse sons of bitchez!

Thu, 11/11/2010 - 13:48 | 719786 HelluvaEngineer
HelluvaEngineer's picture

Is this why BIDU is up like 40% today, pushing it's P/E to what 900:1?

Thu, 11/11/2010 - 13:50 | 719792 Plainview
Plainview's picture

Because they're going to have to break the peg due to QE pressure on inflation and US asset devaluation?

Thu, 11/11/2010 - 13:52 | 719799 Logans_Run
Logans_Run's picture

Goldman needs some 4th Quarter profit taking and is arranging the set-up?

Thu, 11/11/2010 - 14:12 | 719841 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

It's the trade gap stupid ...

"It's China that's the problem ..." -- John Taylor

"I'd sell the EUR ... but not because of currency wars, because of internal things going on" -- John Taylor

How long does China levitate and EM markets along with it?

Thu, 11/11/2010 - 14:33 | 719881 bugs_
bugs_'s picture

Could Goldman be right this time?

Thu, 11/11/2010 - 14:39 | 719895 trav7777
trav7777's picture

China is such a gigantic ponzi now that they cannot just "put on the brakes."  Much of what's happened there in the past 10 years is uneconomical.  It only "makes" money because the government makes edict that it has.

I mean, how profitable are idle factories or empty cities or toxic lakes and rivers? 

That said, I'd be longer S. America than China.  The consumption/production/resource ponzi globally has a LOT of addicts.  If it comes between accepting a cheaper dollar and outright deflationary USD and JPY carry trade unwind and concomitant collapse, they'll take the former.

Thu, 11/11/2010 - 14:48 | 719916 Whore_of_Babylon
Whore_of_Babylon's picture

Maybe they know there's not much future in a China financially bombed back into the Stone Age.

Thu, 11/11/2010 - 15:11 | 719954 Popo
Popo's picture

Riiight.  What's the record on Goldman's public guidance this year?  

Thu, 11/11/2010 - 15:29 | 720030 37FullHedge
37FullHedge's picture

Buy low sell high, Looking at the FX rates for the BRICs they have all shot up against the US $ Except China so all China needs to do to reduce inflation would be do what the US Govenment wants, Allow the Yuan to raise, It is now doing just that hence Today my position in China I have added too,  I accept China carrys risk but still looks like a no brainer to me.

I think its too risky to go all in but a few toes in China is a must.

Thu, 11/11/2010 - 16:14 | 720187 Plainview
Plainview's picture

yep, what I said in the comment above. QE is pressure on the peg.

So, best trade/proxy for a strengthening Renminbi?

Thu, 11/11/2010 - 16:24 | 720225 Lux Fiat
Lux Fiat's picture

Interesting comments on China last night by Diana Choyleva, who is bearish.  In a nutshell, her take was that real Chinese inflation is at least double the official rate, continued investment will fuel inflation further, and slowing growth and investment will result in lower growth on down the road, ceteris paribus.

http://www.cnbc.com/id/15840232/?video=1640423614&play=1

Thu, 11/11/2010 - 16:58 | 720321 Youri Carma
Youri Carma's picture

Hugh Hendry - bearish on China and gold, Jul 5 2009 (4m 48sec) http://video.ft.com/v/63002635001/Jul-5-Hugh-Hendry-bearish-on-China-and-gold

Hugh Hendry Sees Opportunities to `Short' Credit in Asia http://bizvid.tv/view/fz270b36u/hugh-hendry-sees-opportunities-to-short-credit-in-asia/

Hedge Fund Manager Hugh Hendry Brief Report on the state of the Chinese Economy in Early 2009 http://www.youtube.com/watch?v=ektMQGbW3wk

Goldman selling big chunk of its Industrial & Commercial Bank of China stake http://www.marketwatch.com/story/goldman-sachs-eyes-2-bln-icbc-stake-sale-wsj-2010-09-29

Thu, 11/11/2010 - 20:14 | 720747 Kina
Kina's picture

OK so does that mean we short Australia.

Thu, 11/11/2010 - 22:53 | 721071 The Real Fake E...
The Real Fake Economy's picture

i don't buy what goldman is selling.  as for inflation in China, i'll fill you in based on Shanghai prices which if things were to change anywhere, it'd be here:

mandarin oranges are cheaper now than 6 months ago, bottled water still 1.50RMB per bottle same as 6 months ago, bananas are up slightly, getting clothes hemmed/sewed is still the same, cab fares remain the same, tsingtao at the local bars is still 15RMB, keg is still 100RMB wholesale, KTV room rentals are unchanged, steamed buns from family mart are still 1RMB, guo tie or yang's famous fried dumplings are still 4 for 5RMB, metro and bus fares remain the same.

my point is everything I mentioned above are all things used and bought by the locals.  the one thing locals complain about is real estate, but that's being driven by the fact that parents and grandparents on both sides are contributing towards the purchase of a home for newly married couples in China.  The one child law has effectively allowed all adults to spoil the one child/grandchild.  It's true some commercial real estate properties remain vacant/partially vacant and some areas of retail i don't see performing very well.  I'd be long a company like GAP right now who just opened their first Shanghai store yesterday and already saw 2 local girls this morning wearing GAP denim bags.  I suspect they'll be very successful here.  I'm going to check out the store this weekend to see for myself but was definitely surprised.  I still think the China story has some very serious legs. 

Thu, 11/11/2010 - 23:09 | 721114 Youri Carma
Fri, 11/12/2010 - 01:45 | 721399 Lucius Corneliu...
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There will be no decoupling!

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