To OTC Journal Members: 
 

The Beginning of the End: News Out Of China

I have been convinced for some time US investors have a unique window of opportunity to invest in China based businesses with a great deal of ease. The Beginning of the End of this unique opportunity was announced in China this past week, and it's worth noting.

Fear not- it will be a long way out before the window closes, and there will be at least one if not several more major bull surges in these stocks before our window shuts altogether. Here's what's going on.

While companies and businesses are growing like crazy in China, their Investment Banking industry is very immature and has little capability. Their markets are volatile, and there are various measures in place that make it difficult for non Chinese investors to invest directly in China based companies trading on China exchanges.

Many China based companies have chosen to come to the US for capital- and in the US, capital comes with the requirement of a US listing and all its responsibities- including the expensive demands of following SEC regs and investor awareness efforts. Hence- there are now about 600 China based companies trading with US listings- about 200 of them have senior listings of AMEX, NASDAQ, or NYSE.

Therefore, we US investors have easy access to have direct ownership of these fabulous businesses in China with the protection and liquidity of a US listing. These stocks are easy to buy and sell. At present, the valuations are frustrating, but this will correct itself once the market stops confusing the US macro picture with the fundamentals performance of China based companies.

This past week, China's State Counsel issued 20 directives- all of which are designed to make it easier for foreign investment directly in China. The directives allow foreign investors to sponsor stock and bond offerings on behalf of companies within the country, and provide for more foreign involvement in corporate governance and rule making.

This news comes on the heels of the very first bond offering in China by a Foreign entity. This new generation, known as "Panda Bonds", allows foreign companies to raise money from Chinese investors for their China operations. The first bond, in the amount of $30 million, was offered by McDonalds- the bonds are denominated in Yuan, thereby taking a step towards making the Yuan more international in nature.

As China continues to make foreign investment more accessible, the need to look for capital to fuel growth outside the country will diminish, and these wonderful opportunities for US investors to buy with US listings will become more scarce. Chinese companies will simply go public in China.

I have spent a lot of the summer looking at many new ideas in the China space, and I have to say I have found some phenomenal ideas producing numbers that would make any US CEO green with envy.

I don't plan to wait until the market tells me its ok to present these ideas. I'm going for it right after Labor Day as I believe it's time to get on record. Even if the current market climate has you afraid to act, at least you will have the 411 for the future. I believe there's a fortune to be made right now.
 

Faith Based Investing

It's not religion, but it's close. For today's purposes, I'll define Faith as follows: "Belief in the Absence of Data". It's not far from religion. There is no scientific proof God exists or can be defined. People of Faith simply believe in God. Today, there's no data to prove these highly profitable and absurdly undervalued small cap China stocks will ever trade well again, but faith based investing can pay off big time.

In 2009, Faith Based investing turned out to be very profitable for me. It was June of '09. Based on what happened in the back half of '08, I figured it was time to look for another way to make a living. I was on the verge of assuming the concept of taking long positions in publicly traded US listed equities had finally come to an end- it was a nice run 312 year run from Jonathan's Coffee House in 1698 London, but all good things come to an end.

Nevertheless, I had faith. In June of 2009 I was approached by a contact- a former Goldman Sachs investment banker who was running around in China looking for opportunities. Remember, the DOW bottomed at around 6,000 in March of '09, and the cataclysmic effects of the debt melt down were just beginning to be understood. Stocks were absolutely decimated.

He came to me and suggested I invest along side him in completely unknown and underfollwed NF Energy (NFEC)- at the time a $.20 stock trading zero volume. We had the opportunity to buy in at $.20 with about $.20 in trailing EPS- another words- 1x EPS. Wow.

At the time there was no data to suggest a stock would ever trade up again. Nevertheless, based on pure faith alone, I took the plunge. After a 3 for 1 reverse, my cost basis was $.60. Unfortunately, lack of capital and fear led to a smaller position than I would have liked.

It was the buy of a lifetime. Over the ensuing 9 months the stock traded to about $6 for a 10 bagger, and today languishes in the $2.50 range. NFEC is likely to have very substantial earnings this year suggesting the stock should go back to $6. Today, I'm still holding about 25,000 shares. Over the last 15 months, I've taken some profits, and re bought shares as well.

The second opportunity came along a couple of months later in the form of an opportunity to buy into China Recycling Energy (CREG) at $1.30. Again, no there was no data to suggest the stock would ever trade up again, but this stock also found its way to a high of $6, got a NASDAQ listing, and provided me with a substantial return.

Over the course of June 2009 through March of 2010 faith based investing paid off very handsomely for me. There was no "Data" to suggest I was going to make money, but I had the faith, and these two investments alone put my portfolio back on stronger legs- shaky, but stronger.

Since March we've get getting our brains blown out in this sector despite a number of companies coming through with mind blowing Q2 earnings. At present, the market cannot distinguish between a bleak macro picture for the US, vs and exciting growth picture for China based companies.

I have faith the next bull market for the China stocks is just around the corner, and by the end of the year, it will be raging. Have faith. It pays off. It certainly paid off for me.
 

A Sneak Peak

It's like Christmas morning. I'm the kid who can't decide which present to open first. I've been looking at some small cap, under followed China stocks, and the numbers I'm seeing would leave any value investor with drool running down their chin.

The following sectors remain important in my view- Retail and consumer, energy savings and management, infrastructure build out, and health care. In addition to the ones I already cover, there's at least 4 more with very strong top and bottom line growth, strong balance sheets, good cap structures, and valuations that will make you drool. I don't plan to suggest any companies that manufacture for export- I'm betting on the largest emerging consumer class in the history of the world within China's borders.

This is a whole new slate of ideas for the next China Bull market. This train will be leaving the station between now and the end of this year, but there's still plenty of time to get a first class ticket.

Sometime next week I'll start the party off with a first look at an unknown and under followed pharmaceutical company specializing in the unique field of Traditional Chinese Medicine. I'm already a shareholder because I have faith that when the market prices this one properly, it will trade 3 to 4 times higher than where it is today.

These are arbitrage situations where investors can take advantage of ineffciencies in markets to establish positions at low risk entry points. With a little patience, you'll make a fortune.

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