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Friday, July 21, 2006

IBD will be ruled by China!!!

A timely stock recommendation after hearing from the "smartest man" in our previous post, who said that India and China will be the forces to be reckoned with in the next ten years. The stock is BBC and it produces and distributes fertilizers in China. It was recommended in the chinastockblog and by Steve Halpern, one of the players in MSN's strategy lab. It's a small stock and it's not too liquid so it can go up or down 5% in a day... it once fell 36% in a day because of rumors that a key executive is sick and road construction will delay product deliveries, both of which turned out erroneous. A risky stock but it will fit in nicely with a well-balanced portfolio of defensive stocks (given the market today) looking for some growth dimension. Earnings for 06 are expected to grow 97.9% and the stock is trading at 13x P/E. Assuming 07 earnings growth is just half of what is expected this year or 48.9%, the P/E will drop to 8.7x which is even cheaper! If it reaches $15, the stock should easily rank no.1 in IBD in terms of growth! But only take a SMALL position in this RISKY stock. What follows is Mr. Halpern's take on the stock.


The company is Bodisen Biotech, which is slightly misleading as it really has nothing to do with biotechnology. Rather, the company sells organic fertilizer in China. With some 900 million farmers in China and a total fertilizer market in China estimated at $17 billion, this strikes me as an intriguing opportunity.

The idea for this stock originally came from Ian Wyatt, editor of The Growth Report and SuperNova Stocks, and a specialist in uncovering smaller, undiscovered growth stocks that do not yet appear in the financial press, among other newsletters, or on Wall Street's radar screens.

Says Wyatt, "Bodisen, based in China's agricultural hub, produces environmentally-friendly fertilizers designed to increase crop yields and decrease China's dependency on imports, as mandated by the government.

"Chinese officials are actively pushing for the farming sector to implement organic methods that will increase production and decrease soil toxicity. We believe the company's financial results and the possibility of stellar growth offers investors a rare opportunity at an outstanding valuation. Its growth potential appears immense."

And while the stock price has not yet reflected the company's positive news, the developments in recent months appear very favorable. In its last quarter, income rose 181% on a revenue gain of 124%. The company also recently reaffirmed "record guidance" for the soon-to-be released quarterly numbers.

In addition, to date the firm has been the leading player in western China and recently announced its first venture into the northern province of Xinjiang, the largest agricultural province in China. The shares were also recently added to the Russell Microcap Index.

Meanwhile, the stock is down from a high in February of nearly $22 a share.

I'd add that with a float of under 11 million shares, there are nearly a million shares sold short. However, a second consecutive quarter of triple-digit growth in earnings and revenues may very well be the catalyst to force shorts to cover.

Although this probably goes far beyond what is needed for fair disclosure, I would note that I often suggest stocks to friends, family and associates and some bought these shares in recent months on my advice, at prices both above and below current levels. Meanwhile, with my portfolio currently very heavily focused on portfolio hedges and more defensive larger cap stocks, I clearly have some room for a few high-risk speculations with the potential for significant upside gains. For those willing to incur high risk in exchange for high potential reward, add Bodisen Biotech to your list.

Thursday, July 20, 2006

Insights from the Smartest Man

Just a summary of interesting commentary from Byron Wien of Pequot Capital Management (published by Morgan Stanley), on his interview with the so-called "smartest man". The smartest man supposedly was one of the earliest to recognize the enormous profit opportunities of emerging markets, unmistakably the best investment to be made in the past few years.

The smartest man basically has these thoughts:
1) World economic power is shifting from US/Europe to Asia/Middle East.
2) US is entering a period of stagflation, thus a cautious US equity outlook.
3) However he is not bearish on the US market, he thinks the US$ will go down and US assets will look cheap.
4) The US market will run into trouble in the short term but it won't be a classical bear market, maybe only a 10% decline. The cause will be an economic slowdown, but no recession.
5) The Fed is either done tightening or close to it. To prevent a recession the Fed may have to cut rates to 2%-3%. The Bush administration will do anything to prevent a recession, because if the Republicans lose in 2008, they can be out of power for 15 years.
6) Russian, Indian and Chinese companies are becoming global powers, taking over companies globally.
7) Asia and Middle East economic power will threaten US and European political dominance, eventually the former will look to their own political ambitions. US and Europe will have to form an alliance.
8) Growth and technological advances will drive China's power, but India is also to be reckoned with, since he thinks India can grow faster, its judicial and banking systems are more stable and its doing something about infrastructure weaknesses.
9) The most interesting point by the smartest man is that "we should realize, however, that ten years from now there will be one billion Islamic people who have awakened. They believe they have been taken advantage of by Western powers for centuries, and they will have the economic power to develop a meaningful military capability." Thus all these potential conflicts makes the smartest man BULLISH ON GOLD. People who are distrustful of financial markets, especially unsophisticated investors from developing markets, will only trust this hard asset which will never lose its intrinsic value when all else is in chaos.


Market Breadth Update

This is interesting (click on the chart). I've been tracking down the number of stocks in the S&P, Nasdaq COMP, and Russell indices that are still trading above their 200 day moving averages. (You'll be surprised how much time I can kill with this kind of market.) I started last June 16 when the markets were falling like rocks. To clearly summarize the numbers:

Number of stocks above 200 day MA
Index..........June 16........Rally.........July 20

A lot of stocks went back above their 200 day moving averages when the rally occurred. But a lot also went back and the number of stocks below 200 MA went into new lows except for the Russell index (probably because of volatility). There is reason for this exercise. If the market is really going to be weak in the coming months, then the weakness will be reflected in most of the stocks, and not in a select few which I think is what happened last night - rallies on heavily weighted stocks in the indices.


What to Buy?

What to buy on this rally? Given that we believe this will be a relief rally up until after the August 8 Fed meeting, we believe cyclicals like consumer discretionary, materials and industrials will lead the way. Another sector that we like is the financials, as a pause by the Fed will certainly reduce the pressure on their margins, and M&A in this sector is also helping profits. But remember this is only a relief rally, and once the reality of slowing economic growth becomes a reality, these sectors will fade. Our long-term picks are still in consumer staples, utilities and healthcare. Still stay away from technology except for the secular stories. Internet is a good secular play that we believe is still intact, and valuations have come down quite a bit. Stocks we would buy on this rally include TRLG, CAT, BUCY, JOYG, PCP, BA, BAC, STI, GOOG and AKAM. Bonds are an excellent pick. We still like EWJ, and in emerging markets we like EWZ and FXI as long-term stories.


The Flip-Flopper

Our assumptions were correct. Ben Bernanke wants to be loved. After the stock market was dragged in the past weeks by poor corporate results as economic growth slows down, we had expected dovish talk from Mr. Bernanke and even a pause in the August Fed meeting, which will allow the market to rally strongly from oversold conditions. Last night it happened. Despite previous testimony from our beloved Fed chairman that he will be data dependent, he flip-flopped yet again. Last night's June CPI figures were worse than expected... economists expected a 0.2% mom increase in the core figure, and it turned out to be 0.3%. A lock for more hawkish comments from the Fed right? Nope... instead he turned out with more dovish talk, that economic growth was slowing and that alone was enough to deal with the higher than expected inflation figures. How's that for data dependent?! The market might rally some more when the Fed actually pauses in August but take note corporate profits are still slowing down, so we don't expect the market to go new highs. Instead the market will stumble once again.. and maybe who knows... some rate CUT talk from Mr. Bernanke? Take note that by allowing the stock market to consolidate in a range, and put a halt to the momentum market (maybe install some interest rate hike fears from time to time), the Fed takes out some of the steam in the inflated asset market in place of further rate hikes. But Mr. Bernanke won't allow a stock market crash, he won't want to be remembered for that. Happy range trading guys.


Fill In the Blank

Before everybody fills in the blank on the right column, fill in the blank the left. What could be the next crisis that will befall us?

Chart by Ritholtz Research and Analytics


Wednesday, July 19, 2006

State of the Markets

Right now: Stagflation refers to a situation with rising inflation in a slowing economy. Data points that this is where the US markets are at the moment.

FED: If two monthly inflation figures between now and Sept 22 show lower and trending numbers with slowing economy -- pause in rate hikes. But with economy slowing and inflation spiking, FED will raise. No one is sure because both camps have valid arguments for tightening further or pausing.

Thus FED's future policy will be determined by DATA that will come out in between meetings. Therefore: WATCH out for key economic indicators as they come out as these will determine market direction. Keep positions relatively flat on these periods.

Key Points showing a Slowdown:

Leading Economic Index

The Leading Economic Index, as compiled by the Conference Board, has now contracted over the past six months. As compiled by Van Hoisington and Hunt (Quarterly Review and Outlook) this has happened 13 times since the Korean War, and the US had outright recession after 9 of those periods and serious economic slowdowns followed the other 4 episodes.

Leading Indicators Point to Employment Slowdown

Two other key leading indicators of employment, the temporary employment index and the help wanted index are heading down. As the chart shows, when that happens, a recession or slowdown in the economy (shaded area) shortly follows.

Thus, this blog can:

Keep close tabs when economic announcements come out. And since a slowdown will show up in the 4thQ 2006 or 1stQ 2007, then stocks will probably be better played on the short side on any rallies. Bonds are poised to be a good investment.


Tuesday, July 18, 2006

Searching for Returns

I just came back from a short trip to Bantayan Island. It was a perfect place to get away from all the rain, noise, and traffic in Manila. The sand is close to our Boracay standard texture. The food is great particularly in White Sands restaurant (as recommended by Lonely Planet). The owner of White Sands is a Franco-German steel importer turned chef who leased his beach front for 50 years (with an extension!) from a local Adventist. He used to own one of the biggest companies that traded steel from Japan to Europe. He sold his company about 5 years ago and looked for an island where he could share his hobby of cooking. What a way to get away from it all!

The beaches can really clear one’s mind. It’s a perfect medicine for a trader so confused of all the noise in the markets. In the early articles that we had in this blog, we talked about cycles and how our markets today is hovering at the peak. We talked about the yield curve and how it is obviously artificially influenced by the Fed. We had talks of a possible war that can disrupt global oil supplies, talks of the end of the Japanese free meal, the coming earnings season in the US, and many other news and data that can shake up any investors’ analysis of the market.

From a three year up cycle in the US, it is really easy to deny that it is reversing and going towards a down cycle. We can always say that new economies like India, China, Eastern Europe, have opened up so how can the party be over so soon? There is Russia opening up again, Vietnam standing up on its own, South Africa is getting it, and Brazil taking care of business step by step. It is easy to revert back to being bullish because of all these stories, all these bottom-up approach in a country scale.

And in the same way, with all these economies humming at the same time, how much money does it need to supply such growth? With Japan and other central banks tightening, how can such diverse growth be funded? Can we still say that there is still too much money in the system? Could this be the time that the Arabs and their petrodollars can save the world?

I believe that it is at this critical juncture of the market that a lot of mistakes, most of which will be expensive, can be made. Any way one participates in the market is risky enough, and with such risk a bigger return must be demanded which is sad to say nowhere available. And if it is, where can it be?

Watch your step and good luck!


Monday, July 17, 2006

Sector Rotation Update

Here is the weekly update on our sector rotation model courtesy of stockcharts.com. This week we see consumer discretionary, industrials and materials reversing from about 1% gains to a loss, and technology further extending their laggard status. Energy, consumer staples and utilities extend their leadership while health care goes into positive. Financials are stable with about a 2% gain. The trend towards defensives continue. Stay away from technology and consumer discretionary.


The Bear Market Excuse

That's odd? Last time I checked, there is no crude oil in Gaza and Syria.

The Xs on the map are the countries that Bush had declared (back when there was enough thugs recruited from the projects and sent to Iraq) as among the Axis of Evil. The other country is North Korea.

There is definitely going to be war. Until Iran isn't reigned in, there is no stopping the Messianic tendencies of Geroge W. The question is, at who's expense? No matter how this war goes, it will be the excuse that the market will use in the coming bear market until we get used to it. When that time comes, refer back to the cycle.


Inflation Watch

On Wednesday at 8:30 am ET, inflation numbers for June will be released. Economists are all expecting a tame inflation number of 0.2% in June, compared to 0.4%, 0.6% and 0.4% the past three months. In terms of core inflation, they are looking at 0.2% in June, compared to 0.3% the past three months. The main reason for the tamer expectations is flat oil prices in June.. but with oil prices going new highs this month, will this be the calm before the storm? Also to be widely scrunitized is the owner's equivalent rent, which could easily push core inflation to 0.3%. With the lagged effect of interest rates and weakening demand for housing, demand for rental properties could go higher. Expect more volatility in markets this week.