How to Short the CAC 40 (French Stock Market)

After an initial sell-off around the world, the market have slightly recovered. However the crisis is far from over. Let's see how we can short the CAC 40 (French Index) and try to time the short.

There are several ETF and funds to short the CAC 40 including:

• Lyxor Etf Short Cac 40INSHC:PAR (in the US)
  
• ELAN FRANCE INDICE BEAR (FR0000400434) (in France)

Let's see how both products fared against the CAC 40.

Lyxor ETF only started its quotation in March 2010. Between that time and today, the CAC 40 lost 17.62% while the ETF gained 1.93% (Source: Google Finance). Not really what we should expect. Bear in mind that this ETF is denominated in US dollar, so the exchange rate should also be taken into account.

ELAN FRANCE INDICE BEAR is older having started in 2002. After 9 years, the CAC 40 gained 3.19% where the mutual fund lost 44.49% (Source: Boursorama). Again not such a good performance, but decay over time is expected for such products. This is even worse if we take dividends into account.


So we should only use those products for relatively short period of time (a few months to 1-2 years) and timing is very critical.

Let's assume a 50% retracement (Fibonacci) of the recent fall.

The top was reached around 4160 (18 February 2011) and the bottom around 2780 (22 September 2011), so a 50% retracement would be around 3470. If we reach this level within1 or 2 months, the RSI-14 could also indicate the CAC 40 is overbought and could be a good starting point to start to short the French stock market.

Shorting (even through via ETF) is quite dangerous in the current environment since politicians always seem to find reasons to stimulate. So I may or may not start a position once the target level is reached.

Marc Faber October 2011 Market Commentary Highlights

As I blogged on the 1st of October, Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom market commentary entitled "They are Ill Investors that think there is no Treasure Island, When They can See Nothing but a Sea of Problems".

A summary has been released by Nathaniel Crawford on Seeking Alpha:

• Stocks: Yes, stocks are very oversold, but that does not mean they cannot go lower. The dreadful price action in both Copper and the Shanghai Composite points to new lows for the equity markets. After US stocks make a new low below 1100 on the S&P 500, there could be a year-end rally followed by a more meaningful decline into 2012. Investors should use any bounce in stocks as an opportunity to reduce their equity exposure. At this point, Faber advises no more than 25% of your portfolio be in stocks.

• Gold: At $1900 gold was extremely overbought, and a correction was necessary. However, Faber now believes that gold could undergo a significant correction similar to what happened between 1974-1976, when gold fell 40%. Faber notes that a large decline in gold is now a distinct possibility. The first support level for gold is at the 200 day moving average around $1500. Despite the potential for a pullback, Faber still likes gold and believes it will trade significantly higher.

• Dollar: It's true that the dollar has no intrinsic value and is being printed into infinity, but the US dollar will be your best friend for the next few months. As global liquidity contracts on EU debt concerns and a possible hard landing in China, Faber advises investors to be long the dollar. Note this is a short-term call; longer term the dollar is going to zero.

• Treasuries: Despite being bullish on the US dollar, Faber does not recommend treasuries, noting that they are overbought and susceptible to a large correction.

• China and Copper: If you think the market is falling because of incompetent EU bureaucrats you are behind the curve. According to Faber, the price of copper is signaling a very serious slowdown (if not complete collapse) in China. This is what is really behind the move down in all commodities. A hard landing in China would be devastating for the global economy. The Shanghai composite is making new lows along with copper, which is very bearish. Also stay away from the Australian and Canadian currencies. If China crashes, these markets will get massacred.

• Emerging Markets: Stay away from these at all costs. All emerging markets are falling and making new lows. Even though Faber likes these longer term, they could still fall another 20%-30% before they would be good buys. These markets could even fall to their 2009 lows. However, this will represent a good buying opportunity because these markets will be the first to bottom.

• Short Opportunities: There is no doubt about it; shorting in this kind of manipulated market is dangerous, but if you must, here are a few ideas: Apple (APPL), Amazon (AMZN), and Salesforce.com (CRM). Only short these with very tight stops.

Jim Chanos: China Debt Worse than Europe Debt

James Chanos is interviewed by Bloomberg on the 20th of September at Clinton Global Initiative Annual Meeting.

During the first 3 minutes (up to 3:30), he talks about the European debt crisis and the shorting ban on European bank stocks. He says that regulators do not understand how markets work, as major short sellers are other financial institutions that edge their bets. If they can not meet those edging needs, they also run into troubles.

His view is that the austerity measures in Europe will lead to less growth, and that government spending in Europe is a larger part of GDP than in the USA (25% for the US vs. 35 to 50% for European countries).

Then they discuss about China in the middle of the interview (3:30 to about 9:40).
Chinese growth is beginning to sputter and property stocks and real estate developers are leading the declining. Sales of real estate are down 50% in major Chinese cities this year.

The Chinese government balance looks good on paper. But if we look at state enterprise (that are implicitly backed by the government), the debt to GDP ratio went from 100% to 200% that is the same or even worse than European countries, especially the PIIGS.

Jim Chanos explains that most people will be surprised (on the downside) by the Chinese growth by the end of this year and/or beginning of next year. He even quoted the CEO of Japanese company who said he had trouble getting paid for his escalators.

Even if the Chinese government tries to reign in the increase in debt, many real estate developers turn to the black market, and that experts expect 50% of new loans to go bad, that kind of issue could wipe out the Chinese GDP growth this year. A Chinese slowdown of that scale would negatively affect the global economy (remove 1% of global GDP growth).

In order to play the Chinese crash, Jim Chanos is short Chinese banks, Rel Estate developers, commodities and any company that sells to China. He is however long Macau casinos.

At the end of the interview, he gives his views on the US. He agrees with the Buffett rule as taxes are now a small part of the GDP and says he is still short healthcare stocks (as the US government needs to reign in Medicare costs) and Netflix (as the DVD business is dying).