Reprinted from MarketWatch
China bull defensive but not despairing
Commentary: Cabot’s China report falters, turns cautious
By Peter Brimelow, MarketWatch July 7, 2011NEW YORK (MarketWatch)—China raises rates, and sends out other alarming signs. A top letter is indeed alarmed, but defensive rather than despairing.
Yesterday, MarketWatch published an important article, “China’s market-oriented reforms in retreat; Market forces in China have regressed, says economist Wu Jinglian," By Yu Hairong.
It read in part: “China’s ‘market forces have regressed’ as government agencies have started to play a more obstructive role in resource allocation, Wu Jinglian, one of China’s foremost economists, said on July 4.”
“China still lacks a legal foundation that is indispensable for a modern market economy. Government officials intervene in the market at their will through administrative means, said Wu.”
I naturally think this is important because I’ve been muttering for years that I don’t think anyone really knows what’s going on in China.
But—and there is definitely a moral here—that hasn’t stopped people making money in the interim. And none more than the subscribers to Cabot’s China and Emerging Market Report (CCEMR), which racked up one of the most remarkable performances ever recorded by the Hulbert Financial Digest.
CCEMR converted to following China (it had previously been an Internet stock letter and a multi-sector stock picker) in March of 2004. Since then through June 2011, a model portfolio based on its recommendations has appreciated 10.3% annualized by Hulbert Financial Digest count, vs. just 1.07% annualized for the dividend-reinvested Wilshire 5000. I named it Letter of the Year in 2007. (See “Cabot’s formidable performance best in 2007” December 30, 2007)
But more recently, CCEMR’s performance has been faltering—finally—causing me to speculate that it was being affected (at last!) by problems developing in China’s record-breaking boom, although the letter professed to be still optimistic (while quietly reducing its exposure—See “China canary still chirping” March 30, 2011).
Over the year to date through June, CCEMR is down 0.37%, vs. a 6.09% gain for the total-return Wilshire 5000.
I don’t think CCEMR really knows what’s going on in China either. Some of its comments have struck me as startlingly superficial. (See “Is China the key?” November 18, 2010)
But that doesn’t matter—because the letter has a very disciplined system, committing to stocks only if its “China-Timer” moving average timing system based on the Halter USX China Index is positive, and selecting stocks only if it likes both the fundamentals and the chart action. CCEMR has also made sensible efforts to diversify out of China, but it ruefully admits that its system keeps drawing it back.Currently, CCEMR’s system is bearish, so it is only 55% invested. Its most recent issue broods over revelations of accounting apparent fraud at Sino-Forest Corp. (See! See!)
I don’t know how reassuring its conclusions are: “Since we don’t recommend OTC stocks, our danger was non-existent. But the anxiety, resentment and suspicion surrounding all Chinese stocks have certainly tended to push Chinese ADRs, as a group, toward the deep end of the pool.”
“The experience of [hedge fund owner] Paulson & Co. [a major holder of Sino-Forest] is also interesting because many investors (including us) rely on the sponsorship of deep-pocketed hedge and mutual funds as a certification of good accounting and reporting. Big investors have the resources (and the statutory responsibility) to do the kind of due diligence that can often uncover irregularities in bookkeeping, reporting and guidance. Apparently that didn’t happen here.”
In its most recent update, on June 30, CCEMR said: “If the Halter manages to hold above 6,000, it will be a good sign. … It’s likely that the market will need to retest its recent lows, although predictions like this are generally given free and are worth exactly what they cost. It’s best to stay defensive until we get an unequivocal buy signal from the Cabot China-Timer.”
The only stock CCEMR has bought recently is Chilean: Sociedad Quimica y Minera De Chile S.A. (SQM) American Depositary Shares.Link to MarketWatch story
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