Reprinted from MarketWatch:
Last bull abandons China
Top-performing newsletter turns bearish on Beijing
By Peter Brimelow, MarketWatch November 19, 2007
Correction: An earlier version of this column incorrectly described the advice of Cabot China & Emerging Markets Report about Gafisa S.A. The newsletter recommends that this stock be watched.
NEW YORK (MarketWatch)—The old market adage that things that can’t last don’t, has finally caught up with China. The top-performing investment letter finally has turned decisively bearish on the Middle Kingdom.
Cabot China & Emerging Markets Report, which I’ll call CCEMR, is currently the top-performing letter according to the Hulbert Financial Digest, up an astonishing 90.29% over the past 12 months vs. a mere 15.06% (phooey!) for the dividend-reinvested Dow Jones Wilshire 5000.
Equally amazing, CCEMR’s performance has been sustained. Over the past five years, for example, it’s up 27.57% annualized vs. 15.23% annualized for the total-return DJ Wilshire 5000.
But editor Paul Goodwin has (very sensibly) been worrying for some time about the China craze he’s been riding. He consciously tried to diversify into Brazil, Russia and China earlier in the year. (See Aug 12 column of Market Watch.)
Nevertheless, Goodwin’s investing system (the “best combination of strong story, sound fundamentals and positive momentum”) kept drawing him back to China. This fall, he wrote ruefully: “We’re a little self-conscious about calling ourselves BRIC (Brazil, Russia India, China) investors when all of our current recommendations are based in China...A buying panic! That’s exactly what’s been unfolding.” (See Oct. 14 column of Market Watch.)
Now, in his issue dated Nov. 15, Goodwin writes: “The bears have taken control! After a tremendously profitable run from the August lows, the Halter USX China Index (HXC) finally gave way to selling pressures, decisively breaking down through its 50-day moving average last week.
This turns our China-Timer negative ...”
Goodwin recommended not panic, but prudence: “It’s no use guessing what comes next your best move is to respect the China-Timer’s new bearish signal by selling your losers and poorest performers, holding plenty of cash, and holding off most new buying until the bulls retake control. Just remember that corrections are a normal course of business; the current weakness should eventually pave the way for a new crop of winners, which we plan on uncovering in the weeks to come.”
But Goodwin is serious about his bearishness. In his latest issue, he notes that two issues he sold in a recent Hotline, E-House China Holdings Ltd. (EJ) and China Security & Surveillance Technology Inc. (CSR) promptly rebounded. He writes: “Our advice? Get over it. If you have followed the best sell rules available, your sell was a good one. The quality of the sell really doesn’t depend on what happens to the stock after you get out. The quality of a sell is a matter of how well you protected your capital from further risk. There will always be other stocks to put your money in when the trend turns up. But if you lose your money, you can’t invest in any of them. Thus, it’s better to err on the side of caution and endure the occasional bout of seller’s remorse than it is to hold on like grim death to a declining stock and watch it make off with your capital.”
CCEMR doesn’t offer any big-think explanations for what’s going on in China. It seems to be driven by technical and stock-specific indicators.
Right now, it ranks only one Chinese stock a buy: Suntech Power Holdings Co. Ltd. (STP) , which it says is reporting very good results and has made favorable silicon supply deals which will expand its capacity ahead of schedule.
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