Fly markets, FLY!!! 

Sure it doesn’t look all that impressive on the Big Chart, but what a turnaround we’re having this month as China drops $236Bn into their market, boosting the Shanghai back to barely a 35% drop from their highs, back at 3,243 at the day’s close.  Only 50% more and we’re back to 5,000!  

It sure isn’t for lack of trying as China just lowered the tax-rate on dividends to ZERO for stocks that are held 12 months or longer but, silly China, this will have the unintended consequences of halting all investment and expansion in Chinese companies as investors demand all the profits be returned as dividends, which then become a problem for the Government and their tax revenues sink.  

Of course China may realize this mistake and change the policy even before the year is up but then they would seem fickle and out of control and that will spook investors out of the market so, in short, we’re really just kicking the crash down the road – one way or another.  The government also intends to cut taxes for small businesses and allocate more funds for infrastructure projects, with two railway projects worth almost 70B yuan ($11B) being approved.  

The Matthews China Dividend Investor (MCDFX) should do quite well if you’re looking for a way to partake ($13.09 at the close) and CHN should do well as well, as should our long-time favorite Chinese stocks, China Mobile (CHL), which already pays a hefty 3.5% dividend ($1.97) in what is now a $59.45 share (down from $70s in May).  To play this one I like:

  • Selling 5 2017 $50 puts for $5 ($2,500 credit)
  • Buying 10 2017 $55 calls for $9.80 ($4,900 debit) 
  • Selling 10 2017 $65 calls for $5.60 ($2,800 credit)
  • That nets out to a $400 credit and returns up to $10,400 if CHL is over $65 in Jan 2017 for a very nice 2,600% return on cash.  The worst-case would be owning 500 shares of CHL at $50 ($25,000) less the $400 credit, so $24,600 or $49.20 a share is your “worst case” and that’s a 15.5% discount off the current price (see this weekend’s “Buying Stocks for a Discount”).  

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