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Grid Petroleum (OTC BB: GRPR): Starts Strong, Then Fizzles

Grid Petroleum - last week's crazy penny stock idea, had an interesting day of trading activity. The stock started out very strong in the first 10 minutes of trading as high volume materialized, then took a beating for about 90 minutes before rebounding.

In the first 60 minutes, GRPR traded 500,000 shares, and traded to a low of $.50 before the volume quieted down and the start started to rebound. It closed at $.73, but still $.10 to $.15 below last week's entry level.

If today's sellers have now filled their coffers and have run out of shares, a rebound might be in order over the next several days. I certainly hope so.

These abrupt sell offs generally lead to some sort of rebound, either temporary or permanent. If this volatility (code for the stock going down) freaks you out, you must off load the position and take your small loss on this rebound. If you are of stronger stomach, then I guess just hang in there and hope this rebound holds and leads to higher levels.

The premise is unchanged, but I wasn't really interested in getting married here. I just wanted to date this one for a month or two. If it the trading doesn't improve over the next couple of days, it will be time to cut and run.
 

China Stocks: Shorts Shoveling Dirt on the Coffin Lid

China Stocks are still getting hammered as short sellers have recently engineered a well orchestrated campaign to shovel dirt on the coffin lids of many of these stocks. The whole China sector is known for its high beta personality- these stocks tend to have very high volatility. 

In the 2008 rout of the markets, the China Small Cap sector traded down into the neighborhood of 3x 2008 EPS, a level we are rapidly approaching and nearly at right now. Three companies I love come to mind right now- BioStar Pharma (BSPM) should earn at least $.50 in EPS this year- at the current print of $2.55 is about 5X this year's EPS with a 50% growth rate. China Media Express (CCME) is another- I believe the company could earn $2 in EPS this year with a 100% plus growth rate- at the current price of $9, the stock is trading at 4.5x 2010 EPS- how about Longwei Petroleum (LIPH)- might be the cheapest of all- based on their publicly stated forecast for FY '11` which got underway July 1 of last week, the company could earn $.70- the current $2 stock price suggests it could be trading at 2.8x FY'11 EPS.

I believe we are either at the bottom, or pretty darn close. All of us on the long side have gotten our brains beat out in the last 2 months as the market became universally obsessed with the global macro economic picture, and took all of its cues from anecdotal evidence out of Europe and the US Labor market. By those two metrics, it's now wonder the pessimism is as thick as an elephant's mid section.

The Bears have had their way, but starting next week things change. The market will turn its attention from the macro picture which has been blown completely out of proportion, and turn its attention back to corporate performance. The daily dearth of bad global news prominently featured on CNBC will be replaced with Q2 numbers, and the stated outlooks will be scrutinized for clues about the future.

Let's look at one chart before we push on - and, just for fun, let's look at small stocks. Here's a daily chart of the Russell 2000- the broadest measure of US small stocks. I've measured back to the bottom in March of 2009 when the markets finally bottomed and began a 14 month pilgrimage North until Europe spoiled the party.

Note this particular index has now given back almost exactly 38.2% of it's gains on that run- a perfect 3/8ths Fib retracement. You will find the exact same pattern if you look at all the other major indexes save the DOW, which needs to touch off 9436 to complete its journey. 

With earnings season upon us, some sort of rebound phase should begin either this week or next. It's not just the technical level that has me believing a turn around might be in the offing- its the behavior of the short sellers that also signals a bottom.

Here's a prime example. Last week, China stock watchers were treated to a heck of a show when Oriental Paper (NYSE AMEX: ONP) came under fire from a little known and recently launched web site- www.MuddyWaters.com. In their first publication, this site attacked the financial reporting of Oriental Paper (ONP), claiming their numbers were fraudulent and basing their claims on their subsidiaries filings with the Chinese government. If you want to read some interesting stuff on the situation, just check the news releases from Oriental Paper.

As you can see from the chart, the stock swooned from $8.50 to $4 in one day, and then rebounded as both the company rebutted the claims, and one author who had visited ONP from theStreet.com added his 2 cents on the situation to the positive.

Today, another hatchet job article appeared. This time it was published at Seeking Alpha- a compiler of content from any independent author. In this poison barb, the author claims to have done a lot of research and has learned BDO Siedman's international audit network is not to be trusted. He suggests any and all audits from the work of BDO International on a China company should be viewed as suspect.

His premise is the Chinese companies are filing one set of numbers with the Chinese gov't, and another set of numbers with the US Sec. He identifies one specific example where the numbers are markedly different, and cites a fraudulent example going back to 2007 from BDO's stable of clients. He also points to the PCAOB's absence in China- that's the government appointed regulatory board that oversees Auditors- this board was created by the severely flawed Sarbanes Oxley, and it's very existence was recently declared unconstitutional by the US Supreme Court. If you want to read this article, simply click here. 

It's also worth noting the author of today's indictment of auditor BDO choosing to remain anonymous. This throws a wet blanket on the whole premise. If he believes what he wrote, he shouldn't be afraid to stand behind it and accept the subpoenas from BDO's attorneys.

This all seems rather transparent to me. Steve Spurrier, former coach of the legendary Florida college football program was famous for running up the score against over matched components. He always wanted to "beat the spread" for the alumni- this means he wanted to make sure his benefactors always made money or their bets whenever possible.

While it's always possible there might be some validity to the claims of these undocumented authors, it seems very transparent to me. These stocks are all down, and short sellers are indeed enjoying a great two month run. These kinds of attacks strike me as evidence the shorts believe the bottom might be in sight, and investors might start piling back in as Q2 numbers start to come out. 

One last hurrah, get everyone to panic, then cover while blood runneth in the streets. A great game if you're on the right side of it.

I believe I'll stay on the other side of China for the next 5 years. The growth is too strong to be short for any length of time. It would appear GM is now selling more cars in China than anywhere else on Planet Earth. Global semiconductor sales are up a whopping 30% this year, fueled by growth in Cell Phones and computers. Demand is coming out of China. 

I believe we're very near the bottom, but I'll need more evidence from the charts to be sure.
 

The Next Crazy Penny Stock

Don't buy this stock. I'm on to idea #2, and I've been accumulating this one for my own account. I've watched it run from $.10 to $.25 in the last two weeks, and today it came back down to close at $.175, so the entry level might be more favorable.

I'm taking a wild gamble with my own money, but this company has never filed an audited financial statement, so there's no evidence they are doing the numbers. However, I have a report from a credible source showing incredible numbers, and I'll share the information with you- probably Thursday. 

According to my source, this $.175 stock did $33 million last year, and is on track to deliver $71 million this year. Don't buy it unless you're up for a real gamble. Stand by for more info later in the week.

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