A Chinese Bubble Trade

It combines a country that is in the midst of a bubble, China, with a sector that is going through the roof, natural resources. How best to combine the two? With Aluminum Corporation of China Ltd. (ACH).

Even as I write this, Chinese ADRs in Hong Kong are skyrocketing. On Thursday, the China Banking Regulatory Commission effectively allowed domestic banks to invest in overseas equity markets for the first time. The majority of this money is destined for the Hong Kong market — in particular, the H-Shares.

Why? Domestic Chinese banks are familiar with the H-share companies and very aware of the steep discounts that Hong Kong-listed H-shares are trading at now, compared with their A-Share (domestic Chinese) counterparts. By allowing domestic banks to invest overseas, the Chinese government is trying to let some of the steam out of the domestic Chinese stock bubble.

Why China Aluminum? First, the Hong Kong market is where China Aluminum is primarily traded — although you will be buying in ADR form in New York. Second, the stock is a blue chip, which will become a core holding for Chinese banks. Third, it has the most solid fundamentals of any Chinese company out there — not that it matters for the purposes of this trade. Finally, as I write this, the stock is up 10% in Hong Kong.

A couple of things to consider before you take this trade.

First, the exit is as important as the entry. This will likely be a very volatile trade. I will send out a special report indicating when we should sell, but as the market will move very fast, you should take profits as soon as you feel comfortable in doing so.

Second, this trade is purely speculative. Even Goldman Sachs issued a report last Thursday on the dangers of the China stock mania in Shanghai. So don’t risk too much of your capital on this one idea. The risks are higher than a normal trade — but the rewards could come quicker as well.

So buy Aluminum Corporation of China (ACH) today at market. Place your sell stop at $27.50. If you want to play the options, buy the June $35 call options (ACH-FG). Let’s see if we can make some short-term profits from the China mania.

PORTFOLIO UPDATE

To make room for this week’s pick, let’s sell Icon Plc for a solid 12% gain over the past seven weeks. For those of you keeping track, that’s an annualized rate of 109%.

With our June calls nearing expiration, take profits of 96.1% on our options in CVRD (RIO). But since I’m still bullish on the stock and the sector, those of you playing the options should buy the September $45 calls (RIO-II).