When Calling the Market Bottom, Hindsight is 20/20

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Heading to China

Here’s a secret about investing in China.

You don’t have to go to China to do it.

The rules that govern investing in Chinese stocks (or any emerging markets stocks) are no different from those that apply to investing in any other market in the world. I’ve always believed that revenues are revenues, earnings are earnings and charts are charts, no matter what country a company calls home.

Eventually, though, even for a technical investor like me, curiosity kicks in and the desire to use the language that the U.S. Army taught me nearly 40 years ago becomes acute.

So, in the middle of March, my wife and I will be joining a group of professors and graduate students from the Whittemore School of Business & Economics at the University of New Hampshire to spend ten days in the Middle Kingdom.

Some of that time will be spent in Shanghai with the business types. We will be going on tours of this high-voltage business mecca and visiting a few factories. My travels will give me fresh insight into the ever-expanding Chinese market, and help with future China & Emerging Markets stock picks.

But while the young professionals are immersing themselves in the kind of research that will allow them to do business in China, we will be taking some side trips to experience the flavor and energy of this rapidly changing land.

I want to taste the food, drink in the history and talk to as many people as my rusty Chinese (and what I expect will be their excellent English) will allow.

It may be the touristy thing to do, but I feel a deep desire to see the Great Wall and the Forbidden City and the terra cotta warriors of Hsian. If we can manage it during our 10-day visit, my wife and I also want to see the fabled Yellow Mountain region that has been the subject of so much Chinese painting. And if there are any undeveloped Chinese towns around, I’d like to see one of those, too.

I’ll take a lot of pictures, a few of which I’m sure will show up on the Cabot Web site. I’ll also send back at least one report from the road letting CWA readers know what’s going on.

We have our visas, our immunizations and our guide books and I’m listening to Pimsleur Chinese language CDs on my way to work. I’m ready.

Stay tuned.

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If you’ve ever seen a kid on a grade school playground getting ready to start jumping rope while two friends swing the rope, you’ve probably noticed that some people just hop right in and start jumping. Others take a little more time.

These people sway forward and backward in sync with the rope, trying to figure out the exact right moment to jump in.

By a strange coincidence, that’s exactly what some investors do when trying to figure out when to get back into the stock market after a rough patch. I’m going to try to give them (and maybe you) some tips about how to do it right.

Intellectually, everyone knows that the right time to get into the market is at the bottom. Stocks are cheap and there are bargains galore.

Unfortunately, figuring out when a bear market is going to bottom is about as easy as knowing when a long-winded speaker is going to quit talking. It can’t be done. Speakers can always find something else to say … and markets can always go lower.

Maybe it’s fairer to say that you can’t see a market bottom by looking forward through the windshield. It’s something that can only be seen in the rear-view mirror.

That’s because, while neat, clean V-shaped recoveries have been know to occur, market bottoms are usually a messy process, with hopeful rallies followed by sickening dips and stocks that look like new leaders losing momentum quickly.

As the sage Yogi Berra taught us, “It ain’t over till it’s over.”

Market Timing Tells You When to Get Into the Market

But how do you tell if it’s over? The Cabot way is to follow a basket of indexes and wait until a majority of them rise above either their 25- or 50-day moving averages and those averages begin to trend up.

It’s a simple idea that uses the power of trailing averages to distinguish a true shift in market direction from the many exciting-yet-fleeting blips that occur during a downtrend. And it’s powerful enough to make the Cabot Market Letter–Cabot’s flagship publication–one of the most effective market-timing advisories in the newsletter business.

Market bottoms scare people and make them want to run away from stocks as fast as their legs will carry them. And when the fear is at its chilling peak and the maximum number of people have run away, that’s when the market bottoms.

That–as the craftiest investment veterans will tell you–is the absolute best time to be strolling in the front door of the market and reaching for your checkbook.

While no one can reliably call a market bottom, the Cabot Market Letter can give you a reliable green light to get back into the new bull market while most individual investors are still hiding under the covers and trying to heal up from the beating they took when the bears took over.

You’ve probably had the experience of talking to a growth stock investor–especially one with a taste for the more volatile end of the investment pool–who has a favorite stock story in his pocket. It’s a company with a market proposition that seems as if it can’t miss … and this investor just can’t shut up about it.

He tells you how many shares he owns and how much it’s gone up (or down) and how huge the potential market is. He assures you that the company is total cinch to go through the roof. But not yet.

China Digital TV

Today I have a stock with a great story and some strong numbers, but none of this has yet shown up in its chart.

It’s China Digital TV (STV), a company that makes the hardware and software that controls access to digital content on Chinese televisions.

Conditional Access (CA) is the technology that allows television network operators to restrict who gets digital content and who doesn’t. This is an essential step in monetizing the service, and 147 network carriers have installed CA systems.

China is an enormous country, and China Digital TV has a 44% market share of the Conditional Access system with more than 10 million smart cards shipped. The next biggest competitor has only 19%. The content protection, payment enforcement and value-added services made possible by China Digital TV’s technology is a powerful incentive for future adoptions.

China Digital TV’s sales have grown from a mere $3.6 million in 2004, the year of the company’s founding, to $13 million in 2005 and $30 million in 2006. After-tax profit margins hit a staggering 61.1% for Q3 2007.

The problem is that none of this strong performance has yet shown up in the stock’s chart. STV nominally came public at 16 in October 2007 (although it never traded below 26 at its IPO) and then rose as high as 55 in a week. But the end of the year was a rough patch for many stocks, and STV dropped as low as 19 in January before a February rally that has lifted it into the mid-20s.

The company will be reporting its Q4 results at 7 EST tonight, and that will likely set the tone for the stock’s performance in the coming weeks.

I don’t recommend putting any money into STV at this point. The market is too cranky and the stock is too volatile. But digital television is definitely the wave of the future, and the technology has only penetrated 3.5% of the enormous Chinese market. Compare that to 76% penetration in the U.K. and 57% in the U.S. and you get a notion of the potential gains to be made.

STV is a good stock to have on your watch list at this point, a fascinating opportunity with huge potential. It’s also a good reminder that story and numbers aren’t enough … you also need the chart.

Editor’s Note:

The Cabot China & Emerging Markets Report follows every emerging markets stock that trades on U.S. exchanges as an ADR. With strict adherence to market timing principles and a commitment to stocks with story, numbers and charts (the full SNaC), we’ve had excellent results, leading all investment newsletters in performance for both 2006 and 2007. A no-risk trial subscription will give you the inside track when markets turn bullish again. Just click the link below to give it a try.



Paul Goodwin For Cabot Wealth Advisory

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