Tuesday, January 3, 2012

The Tao of XIN

Why has Xinyuan Real Estate not recovered along with the general market since the lows of early October?  The answer may be found in the TAO, the Claymore/AlphaShares China Real Estate ETF.  Here is a chart comparing  the percentage changes in XIN, TAO, and the DOW over the last few months.

As you can see, as US markets stabilized in September ($SPY, $DIA, $QQQ, $IWM), Chinese housing stocks tanked as the reality of price declines and sales volume declines began to hit home ($TAO, $HAO, $XIN, $CHLN).  While XIN is still massively oversold compared to other Chinese real estate stocks, it is not immune to the pressures facing this larger market. 

It should be noted, however, that even though XIN's recovery since early October is weaker than TAO's, this chart overstates the relative weakness.  Looking at a candlestick chart you can see why XIN's recovery is understated, because XIN reached a very low price of 1.55 on October 4th but closed at 1.78 by the end of the day, and is now up 14% from the 1.55 low, whereas TAO is now up about 21% from its October 4th intraday low of 12.37.  So TAO has been stronger than XIN.

However, it is still puzzling why there remains such a large disparity between XIN's share price as a function of its earnings and balance sheet as compared with other Chinese real estate stocks.  We have covered this issue previously (see here and here), and there seems to be a massive arbitrage ripe for exploiting (short TAO/long XIN or some other form of this strategy).  That the arbitrage has not yet been exploited is puzzling indeed. 

Disclosure: Long $XIN

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