Sentiment and Market Timing
The Vision Thing
Hmmmm. Google vs. China. That seems like a fair match.
Google, with its corporate mantra "Don't Be Evil," has never been totally comfortable in China. The Chinese administration employs an army of censors (estimated to number more than 30,000 and growing) and spends monumental amounts of money to control what its people can and can't see on the Internet. Critical comments disappear from Internet forums and blogs almost as soon as they are posted, and searching for information on sensitive topics produces zero results.
Google complied with the government's requests for years, reasoning that being in China was a better position from which to try to promote openness than being outside. Google restricted the use of search terms like (among others) "Falun Gong," the religious movement that China considers a cult, "Dalai Lama," whom China sees as a dangerous Tibetan dissident, and "Tiananmen Square," which China believes is a rallying point for criticism and resistance.
The common wisdom is that China suppresses any searches for "The Three Ts" of Taiwan, Tibet and Tiananmen Square, but censors and software controls also suppress pornography, critical comments on corruption and coverage of disasters and social unrest in China. As an example, Chinese censors shut down many Web sites around the time of the 20th anniversary of the Tiananmen Square confrontation and put up this message:
"In order to improve the Internet content and provide a healthy environment for our netizens, we have designated 3 to 6 June as the national server maintenance day. This move is widely supported by the public."
Personally, I think the final comment that "This move is widely supported by the public" is especially bleak.
So, back to Google. Google detected a sophisticated hacker assault on its servers--probably not an uncommon occurrence--and investigated. It found that the attackers tried to determine the identities of the holders of certain Gmail accounts that were used by Chinese dissidents.
During their investigation, Google's sleuths found that about 20 other companies had come under similar attacks, and that the attacks were coming from China itself.
It seems that this was one insult too many for the people who run Google, and they decided to make some noise, including a fairly explicit threat to quit doing business in China completely if no modus vivendi can be found.
If you've pledged yourself to not being evil and open access to information is one of your core values, it's hard to see what else they could have done.
There's nothing simple about the confrontation between Google and the leaders of China, but there are lots of people who want to see it in simple terms.
[Full disclosure: Cabot China & Emerging Markets Report has Baidu (BIDU), often referred to as the Google of China, as one of its holdings. BIDU made double-digit percentage gains as investors considered the possibility that Google, a major rival, might pull out of China.]
Simple position #1: For many in the West, Google represents openness, unfettered access to information, entertainment and community. They see China's Internet censorship as oppressive, self-serving and hypocritical.
I would say that these people need a little perspective. The events in the U.S. in the 1950s are a good example of the extremes to which a ruling class can go when it feels threatened by political dissent. Plus, there are plenty of people in the U.S. today who would be quite happy to purge the Internet of all kinds of pornography, hate speech and other content. Just because China's rulers have the will, the skill and the resources to actually do the job doesn't make them uniquely evil.
Simple position #2: For many supporters of China, this incident is seen in nationalistic terms. Baidu, they say, has already kicked Google around the block in head-to-head competition and Google is using this excuse to slink out of China with its tail between its legs. The defeat of Google is emblematic of the superiority of China, and people in the West had better get used to it. As for the censorship, well, "My country, right or wrong!"
I would say that people holding this position also need some perspective. A national policy that puts a government in the position of denying information to its citizens is in very bad historical company. (Even making a list of the most control-minded nations in history would be inflammatory, so I won't do it. But state control of information has always been a dead end, and most such states are now part of infamous history. You can make the list yourself.)
I'm in the position of just wanting to help the subscribers to the Cabot China & Emerging Markets Report make money. Finger pointing and name-calling won't help me do that. But I've got to say that I'm with Google on this one.
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2009 is now in the books, and it was a year of high drama. Investors should have the date March 6, 2009, underlined in their diaries as the day U.S. stock markets completed the retest of their November 2008 lows and put in a definitive bottom. Since the S&P 500 bottomed at 667 on that date, the Index shot up as high as 1,130 (December 29) to register its 2009 high and roared to new highs on Monday, January 5.
It's worth noting (as I have read somewhere) that the sentiment index of the American Association of Individual Investors hit a record level of pessimism that week of March 6, with 70% of all respondents bearish about the market. It may seem odd that a record reading on pessimism would coincide with the beginning of a major, dramatic market rally, but it's really not. It's one of the commonplace ironies of the universe that things can only begin to improve when they are at their lowest.
It's also worth noting that the Cabot Market Letter's Cabot Tides, the Letter's intermediate-term trend indicator, turned positive in the March 25 issue and the long-term Cabot Trend Lines flashed a buy signal on April 8.
Cabot China & Emerging Markets Report got a buy signal on March 23, just a little over two weeks after the U.S. market hit bottom.
After remaining more than 70% in cash for months during the big decline, both publications used their buy signals to begin moving back into the market in a month or less after the market bottomed.
When these two publications produced their new buy signals, investor sentiment was a dark blend of pessimism, fear and anger. For most investors, the idea of putting money back into a market that had just taken a monster six-month bite out of their portfolios was totally insane.
But the buy signals were valid. They gave lots of people the confidence to get back into the market while sentiment was still dismal. And those people made money, which is ultimately what Cabot is all about.
With markets wobbling recently and China--the main engine for much of the world's growth in 2009--in a short-term correction, the value of Cabot's market-following timing indicators is especially important.
Investor sentiment is totally rosy right now, with nary a cloud in the sky.
In the contrary world of the stock market, that means a correction is currently possible, and eventually it's inevitable. When markets have been hot for long enough, a cool-off is always on the agenda.
It's the timing that's the problem.
Most investors remained pessimistic for months after the markets turned up last March. And they will remain optimistic for a long time after the anticipated correction begins, whenever that is.
But the Cabot market timing indicators are always totally objective. They don't get emotional; they don't know a thing about optimism or pessimism. They just tell us, and our subscribers, what the trend of the market is.
Cabot's market timing indicators get us into the market when it's heading up and out of the market when it's in a bearish mode. And given how long it takes investor sentiment to come around after either the bulls or bears have been in charge for a while, that's a genuinely valuable service.
For more on Cabot's market timing indicators, check out the Education section of our website
With what I think is a fine sense of irony, my investment idea today is VisionChina Media (VISN), a Chinese company that has over 82,000 video screens in buses and subway trains in 18 Chinese cities. What really sets its product apart from other out-of-home Chinese advertisers like Focus Media is that the broadcasts are digital, real-time programming that can be customized to show either local or national weather, sports and breaking stories.
Because content is local and fresh, viewership is increased, which allows VisionChina to charge for advertising time just like a broadcast TV station. The company forges alliances with local broadcast stations to supply content.
Financial results have been outstanding, especially for a company founded just in 2005. 2007 sales were up 659% over 2006, and 2008's gain hit 254%. Earnings turned positive in Q2 2007 and year-over-year growth has fallen in the last couple of quarters only because Q2 and Q3 2008 gains were insanely huge. After revenue of $104 million in 2008, analysts expect 2009 sales to hit $122 million with earnings of 37 cents a share.
VISN has been trading sideways since the beginning of December, which has created a nice base for further advances. The stock is a little too low-priced for inclusion in the Cabot China & Emerging Markets Report, but buying on any breakout above 12 should prove profitable, as that will bring the stock into range of the institutional investors who actually move the market.
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Editor's Note: Paul Goodwin has the Cabot China & Emerging Markets Report heavily invested in China right now, but the whole emerging markets universe is his oyster. Paul recommends profitable stocks from around the developing world in his search for good investment opportunities. As mentioned above with Baidu's double-digit one-day gain, this area is all about growth. So if you'd like to have that kind of advice and perspective--and profits--just click on the link below and we'll get you started with a no-risk trial subscription.