Stockscom Report for Sunday May 13 2007
Publisher: Colin Alexander
Editor: Ken Wilson (450-691-4617)
Subscriptions and Administration: Pierre Fichaud (toll-free: 866-487-9711)
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The bull in the China shop
Market Synopsis
“Be careful what you wish for…” is evidently the maxim that best
represents the Chinese about-face. On Friday, the China Banking Regulatory
Commission decreed that Chinese banks would be permitted to use up to 50% of
their Qualified Domestic Institutional Investor (QDII) quotas already existing
for equity investments outside of mainland China.
This historical decision marks an important move forward in Chinese market
liberalization and could have wide-ranging ramifications in equity markets here
in North America. Despite the steady rise of market indexes since the momentous
fall in late February/early March, there is a now an even greater potential for
inflated P/E ratios as these new participants eagerly compete for shares both
here and, perhaps more significantly, in Hong Kong where H-shares trade at a
discount to companies’ similar stock in the A-shares traded on the mainland.
This abrupt change of Chinese policy was driven by two factors. The first is the
mercurial rise in stock prices in those markets comprising China's A-share
market. The Shanghai A-share index is up more than 50% year to date (ytd), while
the Shenzhen A-share index is up close to 75% ytd. Since the second half of
2006, the rise in A-shares has exceeded 150%. The second factor is the
extraordinary doubling of trade surpluses so far in 2007 as Friday’s
announcement that April’s trade surplus amounted to $16.9 billion pushed the
four-month total to $63.3 billion, an astounding increase of 88% over the same
months in 2006. A report published on Friday suggests that China’s current
account surplus will top $400 billion this year with the US portion alone rising
by 23.5% to $178 billion or approximately 45% of the total and this excess
capital threatens to create its own asset inflation.
One might logically ask where does this money go and the answer is quite often,
cash in the bank. The vast majority of Chinese households' financial assets are
in the form of cash and bank deposits and this totals a massive $2.5 trillion or
roughly 88% of GDP. But rapid change is occurring as Chinese of all stripes
become addicted to playing the stock market. Every day of the week now, around
300,000 people in China open a brokerage account as dreams of making it rich
filter through the masses.
While the policy change will no doubt relieve some of the upward pressure on
A-shares, there is little political will to allow the Chinese currency, the
renminbi, to appreciate. Were the currency allowed to appreciate, a normal
process of higher prices for exported goods would deter sales at the margin and
under normal economic conditions, the process would cause an easing in the
remarkable growth of the trade surplus. Chinese officials fear that a rising
currency would trigger economic hardship and indeed an internal report this week
forecasted that a 5-10% appreciation in the currency would cause 3.5 million
urbanites to lose their jobs and negatively impact 10 million farmers.
Technically Speaking
Three of the four major indexes continued to push higher this week with the only
exception being the Nasdaq Composite. This turn of events is mildly ironic given
that the Nasdaq-100 was often the laggard of the two tech indexes over the past
several months. Nonetheless, stocks cannot continue to climb incessantly and we
would expect some retracement over the near term. Working in their favor though,
is the change in Chinese policy explained above and therefore investors should
be careful anticipating a market decline.
One key element of the daily charts was the significant drop in volume on Friday
even as markets rebounded from the loss on Thursday however one should not judge
too quickly market moves such as this and be patient enough to examine what
develops over the coming days.
Still there appears to be a mismatch between the mediocre economic news and
announcements and rising stock prices. Technically, stocks are very strong and
from that point of view, investors who are long should remain long and in the
market since there is no good reason to ignore the tale of the tape but given
this action, it is imperative that we remain vigilant to technical patterns of
weakness that may develop.
New Buy Recommendations (in order of preference):
Titanium Metals Corp (TIE) We return to titanium for this recommendation, which
closed at a new 2007 high on Friday. More importantly, visible on the weekly
chart, TIE has progressed to the point that a break from its trading range of
the past twelve months is now imminent. The sharp rise in price on heavy volume
this week was due to positive surprise over its quarterly results and this rise
included closing an open downward gap from late February. On the weekly chart,
the aforementioned break higher was the culmination of a bounce from its 25-week
moving average and accomplished on heavier than normal volume.
N. American Galvanizing and Coatings (NGA) Note: This stock has a
very small float as insiders and institutions hold most shares. Despite that
drawback, there are good reasons to buy shares of this company. Fundamentally,
with its latest quarterly earnings of 28 cents per share, one could argue that
it trades at a low P/E. Technically, since those results were unveiled, the
stock has ridden the upward pressure higher but Friday’s large closing reversal
on heavy volume signifies that there is more upward movement to come.
New Short Sales
None.
Stock Positions to Sell/Exit:
None.
Portfolio Comments:
New stops have been added to the list while others have been modified. Those
that have blanks are being carried unstopped for now. Please see our complete
list of stops in the table below.
List of Current Stock Recommendations:
Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S
where positions should be retained. S+ and S++ indicate stocks for which there
is a technical case to add to the positions with plusses adding weight similar
to long positions. The maximum number of plus signs is 2.
N.B. There are no longer restrictions on foreign stocks held in Canadian
retirement savings accounts.
| Date of Entry
|
Name |
Symbol |
Entry Price |
Current Price |
Stop |
Action Rating |
| 04/30/07
|
Allied Waste Ind. |
AW |
13.37 |
13.46 |
12.00 |
B |
| 03/19/07
|
Ameri Supercond. |
AMSC |
14.19 |
14.70 |
12.95 |
SOLD |
| 04/09/07
|
Cameco Corp. |
CCJ |
46.22 |
50.48 |
42.00 |
B |
| 12/26/06
|
Cheniere Energy |
LNG |
29.15 |
34.56 |
31.90 |
B+ |
| 01/16/07
|
Echostar Comm |
DISH |
40.36 |
49.13 |
44.00 |
B |
| 03/26/07
|
Fronteer Dev’t Grp |
FRG |
12.40 |
13.74 |
11.00 |
B |
| 11/13/06
|
Goodyear Tire |
GT |
18.00 |
32.96 |
30.00 |
B |
| 03/12/07
|
Grant Prideco |
GRP |
46.75 |
54.50 |
48.00 |
B |
| 05/07/07
|
Intercont Exch Inc. |
ICE |
138.48 |
140.55 |
120.00 |
B |
| 03/26/07
|
Ipsco |
IPS |
116.23 |
157.25 |
130.00 |
SOLD |
| 04/09/07
|
Matrix Service Co. |
MTRX |
24.28 |
27.19 |
23.00 |
B |
| 04/16/07
|
Merck & Co. |
MRK |
50.01 |
52.00 |
46.00 |
B |
| 04/30/07
|
Portfolio Rec. Ass. |
PRAA |
56.17 |
53.84 |
49.00 |
H |
| 04/23/07
|
Regeneron Pharm |
REGN |
25.75 |
28.35 |
23.45 |
B+ |
| 04/23/07
|
Synalloy Corp. |
SYNL |
36.39 |
39.81 |
30.00 |
B |
| 03/19/07
|
Tsakos Energy Nav |
TNP |
49.50 |
57.79 |
50.00 |
B |
| 03/26/07
|
Vasco Data Sec’y |
VDSI |
17.92 |
21.74 |
18.00 |
B |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price
*** Split-adjusted price