Reprinted from MarketWatch
Exchange rate ruckus doesn't stop charging China bull
Commentary: Successful China letter is bellowingly bullish despite yuan clash
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch)--China and Obama may be clashing on whether the yuan should be revalued. But one stunningly successful China letter has turned bellowingly bullish anyway.
China's exchange rate mercantilism, keeping the yuan artificially low against the U.S. dollar to boost its exports and manufacturing capacity, has finally gotten Washington's attention and prompted China's leader to defend his country's policy. At MarketWatch, we've been writing about this issue for years.
Cabot's China & Emerging Markets Reports [CCEMR] rarely gets involved in such grand issues. It just focuses on its "China-Timer"--a moving average timing system--and its fundamentalist (earnings, assets, leverage) stock picking. It's kind of sweet, really.
When I last looked, CCEMR was getting unusually worried about overall conditions, talking about a possible "traitor in the market." One of its candidates--a "trade war"--might arguably refer to the current exchange rate dispute.
Now, all those doubts are gone. CCEMR reports that its China-Timer has turned bullish and "the wind is at our backs." CCEMR writes:
"As usual, we won't spend much time speculating about the possibility that this new move might be a fakeout rally or that some new piece of bad news will result in a whipsaw move back to a negative reading. The purpose of the Cabot China-Timer is to provide a simple gauge of the intermediate-term trend of the market, giving us an objective guide to either put more money to work in the market or keep it on the sidelines.
"When you use a trailing indicator for market timing, you're on solid ground. While no-one can say what the market will do in the future, a trailing indicator will tell you with statistical certainty what it's doing right now. And that's vital, because knowing the trend means that you will never miss a major market upmove and that you'll never stay fully invested during a major market downmove. That's the principle that helped us to avoid the worst of the crash of 2008, and it's also how we got back in early on the huge rally of 2009."
Hulbert Financial Digest monitoring confirms CCEMR's account. In 2008, the letter was down negative 22.8% versus 37.2% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Over the past 12 months, CCEMR's is up just 10.87% by Hulbert Financial Digest count versus 55.65% for the total return Wilshire 5000. But over the longer run, CCEMR's performance has been amazing. Thus over the past five years, the letter was up an annualized 17.73%, versus just 0.99% annualized for the total return Wilshire 5000. I named it Letter of the Year in 2007. (See Dec. 30, 2007 column.)
CCEMR remains 40% in cash.
But recently it has been buying:
CTrip.com International Ltd.
Mindray Medical International Ltd.
China Agritech Inc.
CCEMR does struggle to diversify away from China. This it has also recently recommended India's Tata Motors Ltd.
Illustrating its focused approach, in a hotline on March 3, CCEMR wrote:
"Relatively mild news from closely watched markets can produce exaggerated reactions. That's what happened today when China reported that its Consumer Price Index (CPI) for February was up 2.7% (year-over-year). The January CPI increase was 1.5%. Investors see the higher inflation number as increasing the probability that the government will raise interest rates and move to tighten lending. And anything that threatens to slow down the Chinese economic engine is cause for alarm. On the upside, the inflation numbers may nudge the government toward allowing the yuan to appreciate against the U.S. dollar. "
"Taken as a whole, it doesn't amount to much, and today's correction is likely just a blip in the global markets' continuing recovery."
Reprinted from MarketWatch