Reprinted from MarketWatch
Top letter fears there’s a ‘traitor’ in the stock market
Commentary: China focused-letter offers striking insight into overall market
By Peter Brimelow, MarketWatch 12/3/09
NEW YORK (MarketWatch) — Stocks stall again, and a top letter is getting tense about what it calls a “traitor” in the market.
Cabot’s China & Emerging Markets Reports [CCEMR] has one of the most remarkable records of recent years. I named it Letter of the Year in 2007. ( See Dec. 30, 2007 column.)
I sometimes wonder whether editor Paul Goodwin really knows much about China, and the other markets he dutifully tries to diversify into from time to time, or whether he is just benefiting from an extremely disciplined, well-thought-out combination of market timing and fundamental analysis of individual stocks.
This matters to me because of my repeated worry that no-one really knows what’s going on in China. ( See Feb. 11, 2007 column.) But it doesn’t matter to CCEMR’s results, which are strong.
Over the past 12 months through November, CCEMR is up 33.25% by Hulbert Financial Digest count, versus 27.10% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past three years, the letter is up an annualized 21.5%, versus negative 5.73% annualized for the total return Wilshire 5000. Over the past five years, the letter is up an annualized 22.98%, versus just 1.11% annualized for the total return Wilshire 5000.
Like I said — remarkable.
As usual, CCEMR’s most recent issue doesn’t bother itself much about Chinese conditions. However, it does offer this striking insight into the overall market:
“Many of our stocks continue to act well, which is the point of the whole exercise. But this is also a very tricky market and investors are nervous. (If the soaring price of gold isn’t a perfect barometer for heightened anxiety, then one doesn’t exist.)
“For investors, these unsettling market conditions are like watching a movie in which our hero is on a very important and dangerous mission. What he doesn’t know is that there’s a traitor on his team who’s working for the other side. We know there’s a traitor, but we don’t know who it is. So every time our hero has to trust someone, we keep waiting for the rope to break, the gun to go off or some other disaster.
“Investors don’t know whether the culprit will be inflation (the leading candidate), a trade war or a collapse of the global economy, but they keep holding their collective breath every time the market corrects.”
Note that, despite my wittering, CCEMR’s suspected “traitor” is not anything to do particularly with China.
Notwithstanding its fears, CCEMR is 75% invested. It reports that its “China-Timer” — its medium-term moving average market timing system — is positive, while noting unhappily that it has been volatile recently.
CCEMR’s most recent purchase: A-Power Energy Generation Systems Ltd. /quotes/comstock/15*!apwr/quotes/nls/apwr (APWR 16.15, +0.76, +4.94%) , which makes power plants and micro-power grids that enable Chinese firms to avoid reliance on the national grid (hmm!) and also, of all things, is building a wind turbine factory in the U.S.
CCEMR notes that the stock’s price has reached the point at which it meets institutional investors’ portfolio guidelines, and that “it’s institutional investors who do the big-volume buying that produces monster price appreciation.” CCEMR notes that six institutional investors are now involved.
Previous most recent purchase: AsiaInfo Holdings Inc. /quotes/comstock/15*!asia/quotes/nls/asia (ASIA 26.34, -1.21, -4.40%) , a provider of high-quality telecommunications software solutions and information technology security products and services in China.
In its last issue, CCEMR said the stock “remains under strong accumulation, with buyers stepping in quickly if the stock pulls back for a couple of days. We think anything under 25 is a good place to start a position.” But the stock closed Wednesday at 27.81.