Reprinted from MarketWatch:
Bear in the China Shop
Commentary: Not even a downturn can deter Cabot emerging-markets letter
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch)—There’s a bear in the China shop. But neither that nor anything else seems to stop the top-performing investment letter.
The Shanghai Composite Index has plunged more than 40% since October. Chinese investors are apparently angry that the government isn’t protecting them. See story
Naturally, this confirms my uneasy feeling that no one really knows what has been going on in China. See Feb. 11, 2007 column.
But Cabot China & Emerging Markets Report (CCEMR) was the top-performing letter of 2007 and I named it Investment letter of the Year. See Dec. 30, 2007 column.
It remains the top performing investment letter over the past 12 months according to the Hulbert Financial Digest, up a remarkable 61.45% vs. negative 2.63% for the dividend-reinvested Dow Jones Wilshire 5000. Even more remarkably, over the past five years, CCEMR has achieved a 32.71% annualized gain, vs. 13.74% annualized for the total return DJ-Wilshire 5000.
Editor Paul Goodwin seems to have performed this feat by relying on a simple indicator and by a very disciplined approach to stock selection. He’s been bearish on China basically since November. He wrote recently: “The downtrend remains in place. Our China-Timer isn’t overly complicated -- it uses just one index, the Halter USX China Index (HXC), as well as its 25-day and 50-day moving averages, to determine the intermediate-term trend of BRIC (Brazil, Russia, India, China) stocks. But simple is often better, and one glance at the chart above tells you that the trend remains down, and thus you should remain in a defensive stance.”
“We know that sitting mostly on the sideline can be trying, but that’s part of the investing ballgame. The big money is made early in a new bull market, and that’s the time we’re looking forward to -- it will come, but more patience is needed before the bulls take control. There is a chance that today’s horrible news environment could help put a bottom in place (lows usually happen in times of panic), but we want to see our China-Timer turn positive before putting much money to work.”
More recently, CCEMR has noted that the USX China Index has climbed above its 25-day moving average and, “a rally is in the works.”
But it hasn’t happened yet. CCEMR’s response to market adversity is not to recommend an explicit cash level in its model portfolio but to prune back its stocks, reducing many to “hold” and selling some.
It appears to be recommending only two buys at the moment. One is America Movil Sab De Cv. (AMX), the Latin American mobile phone company. The other is Companhia Siderurgica Nacion, (SID), the Brazilian steelmaker.
So CCEMR’s stock selection technique has carried out of China. Almost. One new stock on its “watch” list is Perfect World Co Ltd. (PWRD), the Chinese online game operator and designer.
However, CCEMR cautions, “Right now, because our China-Timer is negative and PWRD itself is flopping around, we don’t advise buying. But we believe there’s big potential for the stock during the next bull market, especially given the firm’s triple-digit growth and positive volume ...”
One sign of CCEMR’s disciplined approach: The service employs a 20% loss limit. It writes: “If any stock gives you a 20% loss from your initial investment, at the close of any day, we recommend you sell.”
Pursuant to this policy, CCEMR just sold Petroleo Brasileiro Sa Petro (PBR) , the Brazilian oil company, which it bought in February. It writes: “This is a big, well-run firm, but our loss has exceeded our limit with this week’s drop. It’s disappointing, but we know the value of cutting losses, especially when an industry group is turning down.”
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