Reprinted from MarketWatch:
Long-time China bull is hopeful, but slowing down
By Peter Brimelow, MarketWatch 5/20/10
NEW YORK (MarketWatch) -- A long-time China bull has pulled in his horns. But he's not given up.
Over the last several years, Cabot's China & Emerging Markets Reports [CCEMR] has achieved one of the most remarkable records ever recorded by the Hulbert Financial Digest. I named it Letter of The Year in 2007. (See Dec. 30, 2007 column.)
Recently, CCEMR has slowed down. Over the past 12 months through April, the letter is up 9.10% by Hulbert Financial Digest count, versus 40.54% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. But over the year to date, CCEMR is down 16.1%, versus 8.3% for the total return Wilshire 5000. (That's as of the end of April. Currently, the total Wilshire's only up some 2.4%.)
Note, however, that over the past three years, the letter is still up 12.79% annualized versus negative 4.42% annualized for the Wilshire.
The obvious explanation: China's cookie is finally crumbling. Thus Dow Theory Letter's Richard Russell, who is back in his super-snarly bearish mode, went out of his way last night to growl:
"I particularly don't like the action of the Chinese stock market. Remember, China is supposed to save the world. The way the Chinese stock market is going, who's going to save China?"
Ironically, CCEMR editor Paul Goodwin has always been acutely aware of the dangers of being over-exposed to China. That's why he broadened his focus to include other emerging markets -- but his disciplined stock selection techniques kept forcing him back to China.
CCEMR rarely indulges in macro theorizing. It focuses instead on its equally disciplined moving average timing system, which it calls its "China Timer". (See Dec. 9, 2009 column.) The China-Timer went negative earlier this month, which will have saved CCEMR some pain, although HFD numbers aren't available yet.
Nevertheless, Goodwin did recently comment on China's recent critics:
"Does this mean that there's been a 'China Bubble?' Absolutely not. A bubble is a speculation that's based on absent or inadequate value, like tech stocks with no earnings or mortgage bonds based on feverishly overvalued housing values. Since China has both growth and earnings, this correction counts as a boil-over, not a bursting bubble."
He wrote hopefully but cautiously:
"It's worth noting, from a technical point of view, that the Halter Index USX China Index has repeatedly found support at 5,000 (August, October and November 2009 and February and May 2010). It's comforting to have that floor.
"But the Index also notched a textbook double top at 5,900 in January and April. And as we all know, double tops frequently mark the end of uptrends."
"So what's the bottom line for all this turmoil? Mostly it's that the global equity markets in general and China in particular need a period of correction to shake out some weak hands. The surge of optimism that brought the most recent wave of hot money into stocks needs to cool, which will let the hot money slosh back out. Then there will have to be a little more pain to discourage the enthusiasts and get them back on the sidelines."
Not for the first time, I don't see quite how Goodwin has reached this conclusion. But with his record, he's entitled to have instincts.
CCEMR is currently 60% in cash and ranks only two stocks as buys:
Baidu Inc. (BIDU)
CTrip.com International Ltd. (CTRP)
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