The Investment Scientist

Archive for January 2016

It seems every other dchina market.jpgay or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?

In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.

What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.

For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.

But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.) Read the rest of this entry »

crazy-reader-business-planHere is the culprit of the global market selloff in the first week of 2016: The CSRC (China Securities Regulatory Commission) instituted a stock market circuit breaker in the new year: a 15 minute trading pause after a 5% drop in the main index, and the market closes for the day after a 7% drop.

The purpose of the circuit breaker was to temper the crazy volatility in the Chinese market. Talking about unintended consequence, it achieved the exact opposite effect. Retail investors there, fearful they couldn’t sell their shares fast enough, rushed for the exit, driving the main index down 7% (thereby triggering the circuit breaker) for 2 out of the first 4 trading days of the new year.

The CSRC did a quick about face and suspended the circuit breaker, basically telling investors now you could sell to your hearts’ content. You know what? The selling stopped, and the market came back about 2%.

This just shows how crazy and irrational Chinese investors can be. A circuit breaker should have no value impact on stocks whatsoever, and yet they brought their stocks down more than 17%. Read the rest of this entry »

tax loss.jpg

In the last two days I have been doing tax loss harvesting for my clients.

According to Google,

Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining the optimal asset allocation and expected returns.

That sounds simple enough, but actually I learned a few things doing tax loss harvest. 1) You can make money and still claim a tax loss. 2) The difference between TTM Yield vs 30 Day SEC Yield and how to use them to select a bond fund.

Take one high net worth client for example, he has about $500k of DWFIX, an international bond fund. I sold that to realize a $31k loss that he can use for tax deductions. But during the three years that the position was in his portfolio, it generated more than $100k in incomes. So he makes money in this position but still gets to claim a tax loss. How nice!

Read the rest of this entry »


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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