To OTC Journal Members: 
 

The Hot China Party Is Just Starting

Once in a century. That's how I would describe both the economy and the markets in Q4'08 and Q1'09. 

That sixth months was as ugly as you will ever see short of nuclear war. That last six months was the ultimate melt down after one of the most turbulent decades in stock market history. March of '09 marked the turning point to a massive bull market that will go on for some time- if you know where to go to find growth- BTW- don't look too hard in the US.

The first decade of the 21st Century was one of the worst in stock market history. Look at the S&P 500 for this turbulent time. 

On January 1, 2000 the S&P 500 opened at 1469.25. If you had bought the S&P 500 at the open on January 1, 2000, and simply held it to the close on December 31, 2009, you would have sold at 1115.10. Net loss- 24%. That's right- ten years of capital in the "you can't lose over the long term" S&P 500 yielded a net loss of 24%. 

It was an interesting decade fraught with all sorts of economic challenges. Looking back, here's a few events that loom large- the collapse of the "Dot-Com" bubble, followed by the massive corporate fraud I call "Enronitis", followed by 911, followed by a few years of prosperity thanks to ridiculously low interest rates and absurdly lax credit standards, followed by the bursting of the real estate bubble and the global credit implosion. Did I forget to mention oil ran to nearly $150 per barrel and poured gasoline on the global credit implosion? 

All of these disasters have occurred against the back drop of funding a constant state of War since September of 2001. When you look back, it was a pretty brutal decade to be an investor.

In my view, the definition of insanity is doing the same thing over and over again, and expecting a different result. Here's what the global markets will continue to do over and over again- find an area of growth and or inflating prices, pile investment dollars in that direction, then inflate until the bubble bursts. 

Here's my definition of a Bubble- a shared, mass speculative hallucination. If the recent bubble in US housing isn't the perfect example, I don't know what is. Zero down mortgages to unqualified buyers with homes 40% over valued- what could be more absurd? Nevertheless, if you had some skills for participating in bubbles, all you had to do was get out before it burst.

So, let's look at an under inflated balloon.
 

China Stocks- Your Window Of Opportunity

Here's the good news- China stocks aren't even remotely close to becoming bubblicious yet. Here's the bad news- you're only going to have a couple more years to invest in China companies on US listed exchanges. They are going to be leaving our shores in the next few years as China's investment banking industry grows from the current toddler levels to more mature industry. The US will lose that business.

Here's what will happen- The Chinese won't require our capital or investment banking expertise any longer. Their markets are opening up. There are only two exchanges in China- the Shanghai Exchange, which is the equivalent of our NYSE. All of the government owned and sponsored behemoths can be found on the Shanghai. 

The Shanghai has about 900 companies, and is closed to foreign investment. With 1.3 billion potential investors, there's too much money chasing too few stocks. Hence, stocks tend to be a bit overvalued here.

Then there's the new Shenzhen Exchange. This exchange is only a few months old, and is the equivalent of our NASDAQ- but with only 30 companies at last count. It's new. Money poured into these 30 stocks the first couple of days. This exchange is where hi tech companies without government ownership are raising capital and going public. 

Chinese companies are currently encouraged by their government to raise capital off shore. It's simply another way of having our capital flow to China. The ideas I've been sharing have US listings- either on the NYSE, NASDAQ, or BB. 

Investment banking skills are lacking in China, but I believe in the next few years the Chinese will get a quick education in corporate finance. They have the capital, so it's inevitable many of the companies will be able to find capital and trading markets at home. The US, and others like it will lose the business.

China recently announced it would start allowing trading on margin, and open a futures and options market. In a few years, we'll all have to learn how to buy China companies in China. For now, we can still participate in some real bargains.
 

OTC Journal Ideas Maturing? Not Even Close

As I pointed out yesterday, my China ideas are just running up the charts. CEU, CREG, NFEC, TPI- with one exception (XSEL) all my China ideas have made multi month or all time highs in the last week.

NF Energy (OTC BB: NFEC): $2.07 to $5 since last June for a net return of 142%. China Recycling Energy (OTC BB: CREG)- $2.40 to $4 since October for a net return of 66% in a few months. China Education Alliance (AMEX: CEU): $5.60 to $7.25 since October 14. Net return 30%. Tianyin Pharm (AMEX: TPI): $3.60 to $5 since October 5. Net return 38%.

These are all very strong ideas, and if you've been paying attention you should be making an excellent return on OTC Journal ideas. If you've been paying attention you should have learned something from the December editions.

For starters, let's look back at the December 7th edition entitled "We're Just Digesting". In that edition, I likened many China stocks to someone who has over eaten. There have been some huge gains in these stocks this year, and the market needed to go through a multi month period of sideways trading in order to digest the gains, get hungry again, start eating.

With the breakouts I've seen of late, we're past the digesting stage, and we're ready to move higher again. Remember- stocks make 90% of their gains in 10% of the time they trade. You need to be in them when the moves start.

Take China Education Alliance (AMEX: CEU) for example. In my December 9th edition entitled "The Most Important Edition of 2010", I listed the stocks I liked for '10 in order of upside potential; in my view.

CEU was my #1 pick for 2010, and I still believe the stock is going to $15. Note the first leg up. The stock appreciated from $1 to $5 between March and June. Then it consolidated between $5 and $6 for 5 months. The stock is in break out mode right now, and could easily appreciate another 4 points on this leg- it would end up at $10. It's going there- sooner or later.

Is there a bubble forming here? Far from it. A bubble is a shared, mass speculative hallucination. This company's growth and profits are no hallucination. Sporting a 45% annual growth rate last quarter, CEU delivered $4.1 million in net profits on revenues of $10.2 million. Their business is highly scalable, and they have over $50 million in cash against zero debt. EPS was $.16 per share- $.64 annually if there were no growth. But, there is growth. 

This company could earn $1 per share in 2010 on a 45% growth rate. Why couldn't it trade at 20x EPS with a growth rate like that? If so, we'd be looking for $20 as an upside target.

Stocks trading at $7 with the potential to earn $1 in EPS on a 45% growth rate are far from bubblicious. They are undervalued, and there's still lots of upside.

NF Energy (NFEC)- likely to earn $.40 in '09, and a lot more in '10. At $4.50, it's still a bargain. China Recycling Energy (CREG) earned $.10 in EPS on recurring revenues last quarter with mega growth. Why couldn't this stock trade at 20 x trailing, which would give us an $8 price target. Both of these stocks are going to get upgraded listings to AMEX or NASDAQ- it's just a question of time. TPI is another one- this company will get to $100 million within two years.

It's breakout time, but there's lots of upside here, and more ideas to come. My must owns continue to be CEU, CREG, and NFEC with a little TPI sprinkled in. Lots more upside in all of them. If you see pullbacks, pounce.

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