Brimelow Reports Cabot China & Emerging Markets Report Still Bullish

Reprinted from MarketWatch:

Is China the key?

Commentary: Cabot’s still bullish on the Middle Kingdom

By Peter Brimelow, MarketWatch November 18, 2010

NEW YORK (MarketWatch) — Is China the key? One letter is still bullish — at least at press time.

Cabot’s China and Emerging Markets Reports is fascinating to me, both because of its extraordinarily successful multi-year record and because its hiccup this year reflects possibly ominous murmurings from within the Middle Kingdom. (See Oct. 27 column.)

I’ve been complaining for years that the China craze gives me the creeps. (See March 15 column.)

Of course, while I’ve been complaining, a lot of money has been made off it.

But, for example, look at the reason now generally being given for Hong Kong stock’s current rebound: China’s government is taking steps to cool inflation. And what are these steps? Price controls!

We’re supposed to be happy about price controls? They have been retired to the U.S. policy museum since the Nixon Administration. Even the allegedly socialist Obama Administration hasn’t dared bring them out. (Except for health care, of course.)

This is yet another sign of the Chinese government’s pervasive involvement with the country’s economy and financial markets. Not for the first time, I wonder if anyone really knows what’s going on there.

None of this seems to bother CCEMR. About as close as it gets to macro concerns in its most recent issue, published in early November before the recent G-20 meeting, is to say: “China and many other nations regard the U.S. Fed’s actions as a form of currency manipulation, and are expected to argue strenuously to that effect. As commentators have been pointing out, that easing program will make it hard for the current administration to criticize China for its more direct program of keeping the yuan conveniently weak.”

“Hard”? This so’s-your-own-central-bank argument is close to childish. Regardless of the wisdom of the Fed’s quantitative easing, the plain fact is that China and the U.S. are already in fundamental disequilibrium — hence China’s massive trade surpluses. That’s why, under normal circumstances, China’s currency would be appreciating against the dollar. It is because the Chinese government refuses to let this happen that it stands accused of exchange-rate mercantilism.

But, putting the big picture aside, you have to respect CCEMR’s disciplined approach. It focuses on what it calls its “China-Timer,” a moving average system. As of Nov. 11, it was bullish and CCEMR was essentially fully invested. Beyond that, it specializes in detailed fundamental analysis of its small portfolio, which gets up to 10 or so stocks when the China-Timer is bullish.

Over the years, CCEMR has made valiant efforts to diversify away from China, but its system has always brought it back. Still, its featured stock for November was Indian: Dr. Reddys Laboratories Ltd. (RDY), a generic drug manufacturer which CCEMR frankly says got its start ripping off Western patents. But by the time India agreed to enforce Western patents in 2005, Dr. Reddy’s was established as a vertically integrated pharmaceutical firm.

Presstime note: Last night, CCEMR put out a special hotline saying its China-Timer has reached a critical level — “positive, although the next couple of days could go either way.”

And it is selling JinkoSolar Holding Co. (JKS), which it complains is “continuing its decline on no news at all.”

CCEMR’S interesting conclusion: “JKS is dropping in company with pretty much the entire solar industry. … Simply put, it looks like the sector has fallen out of favor.”

Indicative of its systematic method, CCEMR says it “isn’t quite down 20% in JinkoSolar, but the trend is clear and selling volume is rising, so we’ll cut our loss short and sell.”

Link to article on MarketWatch


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