Chinese Markets Dip, Taking ETFs With Them

BY ALAN R. ELLIOTT

INVESTOR'S BUSINESS DAILY

Posted 2/1/2007

A two-day tumble in China's benchmark Shanghai composite index this week heightened prior concerns among researchers and investors that Chinese markets and the stocks that drive them may be headed for a correction.

Leading Chinese ETFs reflected the move. IShares FTSE/Xinhua China (FXI) and PowerShares Golden Dragon (PGJ) funds both dropped about 3% Tuesday through Thursday. Such blips were not unusual as the funds recorded six-month climbs through early January. Golden Dragon gained 62%, while FTSE/Xinhua China rose 81%.

But both funds remain well below their Jan. 3 peaks. The funds' prices are tied to many of the largest internationally traded companies in China.

Growth Pace

Outlooks for China's economic growth average about 9% for 2007 and 2008. That's high, but down significantly from the 10%-plus pace set in recent years. That growth has fueled some of the hottest stocks traded on U.S. markets.

The Shanghai and Shenzhen 300 index, which tracks leading issues on China's two exchanges, gained more than 130% during 2006. It dropped 6.5% Tuesday, its largest one-day decline since its April 2005 initiation. The Shanghai Stock Exchange issued a warning that trading volume was approaching the exchange platform's technical limits. Haitong Securities, one of China's largest equity research firms, reported Wednesday that the "market has already moved into a correction."

A Jan. 5 analysis by Mark Arbeter, chief technical strategist for Standard & Poor's Equity Research, called Xinhua China's chart "downright scary."

Climax Run

An increasingly steep run-up on abnormal volume, punctuated by a high-volume sell-off, threw down all the signs of what Arbeter described as "blow-off top behavior."

If the market has slipped into a correction, how much backtracking would technical analysis suggest the Xinhua China fund is in for?

"If the ETF were to pull back to meaningful chart support it would have to fall all the way to the mid-'80s level," Arbeter said.

Technical components of the Golden Dragon fund suggest a similar correction, Arbeter said.

But the view is not universal. China's markets have so far trumped traditional analysis on numerous counts. Michael Woods is chief executive of XTF Advisors of New York, which builds and manages portfolios of ETFs. He said his firm closely monitors liquidity in companies tied to China-based ETFs, but that those companies' stocks have room to run.

"We do see a trading market. We do see volatility and we do see specific geographic risk inherent in those markets," Woods said, "but we do not see a dramatic correction at this point."

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New to Investing? Join an Investment Club!

By Tina Dressel, University of Indiana

Whether you are still in college or starting your career, getting into the markets early is crucial to your financial success. One way to get your feet wet and learn more about investing is to take part in an investment club.

There are two prevalent types of investment clubs that exist today - those that are purely about teaching investment principles and use simulations rather than real money, and those that invest cold hard cash into the markets. Whether it is in a college classroom or with a group of friends or family, a club is a great way to start investing!

An investment club is a group of people who learn about investing and, sometimes, actively invest their money in a pool combined with the other members. Most clubs that invest real money form a legal partnership.

Starting an Investment Club

Members should fill out a partnership agreement (which is available from the non profit organization called National Association of Investors Corporation, or NAIC). A club that uses real money will open a brokerage account and a treasurer for the club will maintain and report tax information to each member. This allows the members to report and pay their portion of the club's realized gains at the end of each year.

What makes investment clubs better than investing on your own is that investing as part of a club allows you to get different perspectives as you discuss different stocks and why certain stocks appeal to different people. Benefiting from the variety of experiences and knowledge of the group members, you will be a better and more educated investor.< /p>

Being a part of an investment club also allows you to invest a bigger chunk of money in more stocks. Similar to a mini-mutual fund, you can spread out your money and still own a portion of many different stocks. Besides, it is fun!

Being a part of NAIC is often a good way to start because of the specialized services it provides to members and clubs. For a club, it costs $40 plus $14 per member per year for membership, $159 for NAIC Club Accounting Software to keep accurate financial records, and about $30 for a partnership registration through your state.

Investment clubs typically include 12 to 16 members and each person assumes a position in the club. Usually there is a secretary to keep minutes, a president to plan meetings, a vice president to help run the meetings, a treasurer to maintain financial records and buy stocks after they are chosen, and other members responsible for researching and presenting studies on different stocks. Most investment clubs meet monthly to discuss investments, but this can vary.

Virtual Stock Market

Virtual reality investment clubs learn investing fundamentals by simulating actual trades and tracking stocks. It is a great way to learn the ropes without as much risk of losing your hard earned money. MarketWatch's Virtual Stock Exchange is a great website for performing market simulations.

[Editor note: - you may also want to checkout YOUNG MONEY's free Fantasy Stock Market Game]

"Although our club does not invest real money, the benefit of learning financial terms, and becoming familiar with the institutions out there gives students a head start when they graduate into the work force," says Justin Chandler, president of the University of Vermont Investment Club.

"The best advice that I can give to starting an investment club, is just to get a couple of people together that are interested in investment and sit down with the Wall Street Journal," he says.

There are many things besides investing in stocks that an investment club can do to learn about securities. Inviting investment relations representatives from companies to attend and present at meetings or having brokers come to talk about how their business works are great opportunities to network, and provide a great chance to learn about the industry.

The UVI club learns as they discuss current events in the markets, careers, and prevalent companies as well as taking trips to New York City to visit different brokerage houses. Its basic goals are to teach students to be informed investors, to know what vehicles are available to expand wealth, be aware of various investment aids, and learn how to create and manage an investment portfolio.

You can visit the University of Vermont investment club's website to learn more about starting your own college club.