PROFIT CONFIDENTIAL
March 31, 2010
In Today's Issue: Singing a Tune for Stocks... Realistically, Large-
caps Are Tops... Not in China Yet? It Might Be Time to Look...
China and its Currency Under Pressure
** Singing a Tune for Stocks
-- by Michael Lombardi, CFP, MBA
Remember the famous lyric in Janis Joplin's song, "Oh lord, won't
you buy me a Mercedes Benz. My friends all drive Porsches. I must
make amends?"
There are probably quite a few investors this morning saying, "Oh
lord, won't you give me 93 points on the Dow Jones. I need to make
back all the money I lost in the stock market, I must make amends."
Well, I'm not a song writer, nor a philosopher. But I would be
surprised if the Dow Jones went all the way to 10,907 (yesterday's
close) and didn't continue for 93 more measly points to hit the
11,000 mark.
This week, I read the recent stock market newsletters/comments of
Bob Appel, Anthony Jasansky and Richard Russell. All three of
these well-known market analysts are either very bearish or
expecting a market correction. When I see this kind of bearish
consensus, especially with seasoned market analysts, I just see stocks
climb the wall of worry even higher.
Yes, stocks will eventually fall, as U.S. Treasuries become harder to
sell, as inflation sets in and as interest rates rise, but that could be
months away. And when the inevitable does happen to stocks, gold
will offer investors a once-in-a-lifetime profit opportunity. Hence,
there is money to be made now (as I have been saying since March
of last year), as the bear market rally continues, and there will be
money to be made when the bear market rally expires.
I turned bullish on stocks in March 2009, because stocks became
oversold too quickly. Fear set in and that's when you buy stocks. By
the time all the bears become bulls in the current stock market rally,
I'll likely have turned bearish again. The economic threats I
mentioned above (hard to sell U.S. Treasuries, rapid inflation and
higher interest rates) are all real threats to the stock market.
In fact, the rising rates on 10-year U.S. Treasuries are already
flashing a yellow light warning of higher interest rates ahead.
Michael's Personal Notes:
I tried to understand the new healthcare bill the U.S. government has
put forth, but I can't. The document is over 2,000 pages long. Call
me a dummy, call me a slow reader or a slow learner, but I don't
fully understand it. I will try to read it again this weekend.
From what I can put together, the government is becoming more
directly involved in the healthcare system in the U.S., which may not
be a bad thing (I'm a big fan of the Canadian healthcare system), but
my experience is that the more government involvement there is, the
more inefficient the process becomes. I'm also very concerned about
the cost of the new healthcare plan. Did we just add more billions to
our annual deficit?
The pharmaceutical stocks did not rally or contract on the passing of
the healthcare bill, hence, if you believe like me that the stock
market is a leading indicator, the pharmaceutical companies do not
see the healthcare reform making much of a difference to their
business.
Where the Market Stands:
It's been a great year so far. As I write my column this morning,
recognizing that it is the last day of the first quarter of 2010, there is
not much that investors can complain about.
The Dow Jones Industrial Average is up 4.6% for the year, the S&P
500 is up 5.2% so far in 2010, and the NASDAQ was the big winner
in the first quarter, up 6.2%. Only gold bullion has been
disappointing, trading today at about the same price today that the
yellow metal traded at the beginning of 2010.
What He Said:
"Home-building in the U.S. will enter a quasi depression state in
2008 and the construction industry will make 2008 a record year for
pink slips. I predict a major homebuilder will go bankrupt in 2008."
Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008.
WCI Communities, the largest U.S. luxury homebuilder, filed for
Chapter 11 protection on August 4, 2008.
** Realistically, Large-caps Are Tops
-- Ahead of the Street Column, by Mitchell Clark, B. Comm.
There's still a lot of financial reporting going on with smaller, U.S.-
listed Chinese stocks. A number of these companies are beating
consensus estimates for the fourth quarter and year-end 2009, but
visibility for 2010 isn't as robust as investors would like.
And so traders are jumping ship on any stock that does not handily
beat existing consensus estimates and on visibility. While a lot of
new Chinese listings are still taking place now, from my perspective,
there remain only a handful of companies that have the kind of
growth prospects worth paying for.
So, the trading action for equity speculators remains as tough as
ever. While owning the market right now seems like a decent
strategy, great speculative opportunities are scarce at the moment.
After about two decades of experience following the equity market
on a daily basis, I'm certain that investor enthusiasm for buying and
selling stocks occurs in waves. Right now, I think we're coming to
the end of another wave of enthusiasm and the broader market will
move incrementally higher. Dow 11,000 is a good thing, as would be
a consolidation around this level. We are quickly coming into
another earnings season and corporate visibility will be the most
important factor for investors. Still, the market looks tired to me and
I think it's reasonable to expect another pullback in the near future.
Realistically, the most attractive equity opportunities in this market
are large-caps. As we know, big companies are running lean
operations and they have some pricing power now that they can
translate right to the bottom line this year. But, nobody knows where
the economy is going to go when the artificial stimulus spending
ends. The economy could weaken again and so could the stock
market.
I would be long on large-caps at this time, but super picky about any
speculative positions. And if the speculative positions don't perform,
cash is much more attractive. I still believe that the best sectors for
risk-capital investors to focus on are U.S.-listed Chinese stocks and
junior miners. The pickings at this time, however, are quite slim.
** Not in China Yet? It Might Be Time to Look
-- The Leong Side of the Market, by George Leong, B. Comm.
China remains the top growth market in the world. That is why the
top technology and industrial companies are expanding aggressively
in China. Many technology companies are beginning to move more
of their research and development to China. Why? Just take a look at
the highly educated work force and the abundance of smart and
inexpensive labor.
The country's GDP is estimated to grow in the 9.0% to 10.0% range
this year. So, if you are not in China, it may be time for you to begin
to look. Yes, the stock market is faring better in the U.S. compared
to China this year, but you need to think long-term and have some
investment capital in China.
The benchmark Shanghai Composite Index (SCI) is holding above
the psychological level of 3,000 and just broke 3,100 on Tuesday.
This is important, as it could signal further gains. The index remains
down about seven percent this year, but we feel that, if it all pans
out, there will be excellent growth going forward, especially if the
country can control inflation. The current strategy to rein in some
easy lending by the banks makes sense, as long as it does not
continue.
A sector that I continue to like in China is the country's burgeoning
auto sector. The auto industry continues to look strong in China,
evidenced by the sales there and the influx of U.S., European, and
Japanese automakers. China is the world's top auto market, yet we
are seeing some slower growth there, as some of the government's
incentives to buy small cars are ending. However, despite this, the
auto market in China continues to fire on all cylinders, growing at
46.3% year-over-year in February, with about 1.2 million units sold.
The number is down from January, but the week-long Chinese New
Year likely impacted sales. Estimates peg the sales of autos to slow
to 10% to 15% this year, but we feel that this is somewhat
conservative.
Some small Chinese auto plays listed on U.S. exchanges include
Brilliance China Automotive Holdings (Pink Sheets/BCAHY.PK),
China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto
Technology, Inc. (NASDAQ/WATG), and SORL Auto Parts, Inc.
(NASDAQ/SORL).
Looking ahead, I continue to favor China for growth investors who
have a long-term view. I continue to like the longer-term situation in
China and believe you should have some capital invested in China
whether it is with large-cap, blue-chip Chinese companies or with
small, emerging, higher-risk stocks.