Reprinted from MarketWatch
China bull is getting more frisky
Commentary: Despite last week’s setback, CCEMR keeps China confidence
By Peter Brimelow, MarketWatch October 5, 2009
NEW YORK (MarketWatch)—A China bull has been getting increasingly frisky. And it still is, despite last week’s setbacks.
Over the last few years, since it converted from an internet letter, Cabot’s China & Emerging Markets Report [CCEMR] has racked up one of the most remarkable records ever recorded by the Hulbert Financial Digest. I named it Letter of the Year in 2007. (See Dec. 30, 2007 column.)CCEMR weathered the Crash of 2008 and has rebounded strongly. Over the year to date through September, CCEMR is up 33.6% by Hulbert Financial Digest count, versus 29.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Over the past 12 months—i.e., counting the Crash of 2008—CCEMR is up 3.3%, versus negative 18.45% for the total return Wilshire 5000. And over the past five years, CCEMR is up a remarkable 22.8% annualized versus just 1.3% annualized for the total return Wilshire 5000. That’s pressing hard on the upper limit of what Mark Hulbert has found to be a long-run sustainable return, from thirty years of monitoring.
CCEMR has tried to diversify out of China , but the numbers make it difficult. It commented recently: “Although we continue to evaluate every American Depository Receipt, or ADR, of every company from every emerging market, China continues to present the best balance of risk and reward. India ‘s stocks are a little sedate and Russia’s political situation is too volatile. Brazil is coming along, but its best days are still ahead.”
Recently, CCEMR has been getting visibly relieved that China appears to have resumed its record-breaking growth. It wrote recently:
“After a couple of months of furious speculation about whether China might or would lead the world out of recession, the results are pretty clear. China has indeed provided leadership in the global economic arena.
“China and the emerging markets have lifted the rest of the world; now the U.S. and the other developed countries of the world must start to ramp up their buying....That’s exactly what has to happen for the global economy to stop the cycle of advancing and retreating by fits and starts. It’s a process that seldom moves forward with well-oiled precision, and it’s likely that there will be more volatility before another big advance can get underway. But move forward it will. Eventually.”
Reluctant
Still, the letter’s China-Timer, a moving average system focused on the Chinese stock markets which it uses as a gauge of overall market conditions, went negative after Thursday’s break.
CCEMR is obviously reluctant to accept this news. And the China-Timer has been prone to whipsawing recently. (See July 2, 2008 column.) So, despite its indicator’s signal, CCEMR counts itself as now fully invested with the purchase of its tenth security, Rino International Corporation (RINO), a Chinese pollutant remover.
The Hulbert Financial Digest won’t agree, however. CCEMR’s response to its system’s signal was rather complex: “The Cabot China-Timer’s new red light is sounding a note of caution. Our stocks aren’t acting badly as a group, but it’s always a good idea to take this technical shift seriously. Accordingly, we’re shifting the ratings of two of our stocks to hold while we keep an eye on the market.”
CCEMR downgraded Gafisa SA (GFA) and Sociedad Qufmica y Minera de Chile (SQM) to hold.
But the HFD’s long-standing methodology stresses clarity over complexity and doesn’t hold with “holds”. The stocks will be sold and the proceeds redistributed to the rest of the portfolio.
CCEMR is not being deliberately vague. On past form, it will act if the markets move.
It summed up its philosophy recently: “Investors don’t need to predict the future. We can wait until the future shows us what’s actually happening and then identify the stocks that are reacting positively.”
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