Why I Sold Taiwan

May 1, 2009 by  
Filed under Commentary, ETFs

I have a bullish bias when it comes to Taiwan.  I was once a computer memory subsystem designer, DRAM analyst, and procurement specialist, a skill set that allowed me to spend many months in Taiwan over a five-year period in the early 1980s.  During those visits, I developed a deep fondness for Taiwan – its people are friendly and have a strong entrepreneurial spirit, the food is outstanding, and the environment could best be described as “bustling.”  In short, I became bullish on Taiwan.

In my All Star Fund Trader subscription service I have been recommending iShares MSCI Taiwan (EWT), but on Thursday I changed that stance.  The recent performance of EWT has been outstanding: +26.6% in the month of April and +34.6% year-to-date.  It always makes me nervous when performance starts to turn parabolic, and with the huge pop on Wednesday, I decided it was time to start taking profits.

One of the great things about ETFs is that they have both a price at which they are traded and an indicative value (IV) of the underlying shares.  I must point out that indicative values are only valid when the underlying markets are open.  In the case of Taiwan, there is no overlap between their market hours and U.S. market hours.  However, on any given day, the published indicative value is an excellent representation of where Taiwanese markets closed.  Any premium or discount of the price to the indicative value is a result of new events – currency fluctuations, news, and other changes in expectations.

On Tuesday, the indicative value (IV) for EWT was $8.47 and shares closed at $8.74.  On Wednesday, the IV was $8.74 and shares closed at $9.81 (a +12.2% premium).  By Thursday, the IV was $9.49 and shares closed at $10.31 (a +8.6% premium).  At the time of this writing on Friday, the IV is $9.47 and the price is $10.35 (a +9.3% premium).

What happened?  A couple of things.  First, Taiwan and China recently signed agreements allowing mainland investors to buy stock in Taiwan.  On Wednesday came the announcement that China Mobile (CHL) planned to buy 12 percent of Far EasTone Telecommunications, the first investment by a Chinese state-owned company in Taiwan since 1949.  This is turn kicked off a rally in Taiwan Semiconductor Manufacturing (TSM) and other Taiwan equities on U.S. exchanges.  The strong rally in the U.S. made some believe that the Taiwan stock market could be facing a limit-up day of 7% between the Wednesday and Thursday U.S. sessions.

According to a Bloomberg article, that’s when iShares halted trading in EWT and suspended the creation of new shares.  We all know what happens when share creation stops;  the ETF begins acting like a closed-end fund and may trade at extreme premiums thanks to unaware investors.

I’m still bullish on Taiwan, but when presented with an opportunity to sell my shares at a hefty premium, I took it.  That premium still exists today if you want to take advantage of it, too.

Disclosure:  No position.

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