Click here for Cup & Handle's Weekly Letter - August 12, 2014

Greetings,

       We have a strong contender for the best chart in financial markets right now. During the financial crisis of 2008, China implemented monetary stimulus that would make Paul Krugman blush and didn’t stop until M2 money supply expanded 30% Y/Y in late 2009. Since then, they’ve steadily reigned in credit and M2 growth is now a mere 14.7% Y/Y. The US, on the other hand, was slower to stimulate its economy during the crisis, but has kept the monetary spigots wide open ever since.

       The differing approach to economic recovery is evident when looking at the ratio of Chinese vs. US large-cap equities. The US has outperformed China very steadily since 2009. However, recently Chinese stocks have accelerated and it looks as though the bottom has been put in place. The position recently broke through its three year trend line, and there are fundamental reasons to believe it will move much higher.

 China Large-Cap ETF (ticker: FXI) / S&P 500 ETF (ticker: SPY)

       The Fed has made it exceedingly clear that QE3 will expire in October, and higher interest rates should be expected after that. Meanwhile, the Chinese have been engaging in a form of “stealth stimulus” since April. Some of the stimulus has been fiscal, including tax breaks for small enterprises, targeted infrastructure outlays and incentives to encourage lending in rural areas. In addition, Citigroup has described the PBOC’s approach to monetary policy as “qualitative easing,” where the central bank adds riskier assets to its balance sheet without increasing its size. The new measures are already starting to show up in economic data, notably China’s July manufacturing activity rising at its fastest pace in more than two years.

       We are not saying that Chinese stocks will rise while US equities decline, but rather that China should outperform given the forecasted policy environment going forward. In this case both the fundamentals and charts have aligned to create what should be a slow and steady appreciation higher. These are exactly the type of trades that we look to have in our portfolio.

       Of course, if you’ve been following our portfolio on Marketfy, you know that we already have some decent profits in Chinese stocks. However, the implications of a strengthening Chinese market are vast and will impact many markets, especially commodities. With that in mind, we’ve been restructuring our portfolio recently looking to add exposure in some attractive risk/reward positions. If you’d like to view our portfolio with real-time alerts and commentary or receive our monthly investment letter, we’re offering a 50% discount on both subscription packages for a limited time. Click on the link below to visit our new homepage for more information:

Cup & Handle on Marketfy

Today’s letter will cover several topics, including:

• High Yield Outflows
• How China is driving soft commodities
• QE Anomalies Part VI

With that, we give you this week's letter:

August 12, 2014

As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro