To OTC Journal Members: 

There was a little relief rally on Friday after a fairly wicked week in the markets. Thursday's giant sell down felt like a "cash at any cost" down draft, with almost no regard for value. That's fine with me. These kinds of emotional, momentum driven markets present opportunities for those with the ability to look at the real numbers, and filter out the overblown media hype.  If you're capable of filtering out the noise, and remembering the past, you should recognize the opportunities created by these sorts of markets. You should be salivating for the bottom right now.

There's a number of developments from the past week that are worth reviewing- mostly to the slightly negative side. It's also worth noting Friday's tape was interesting. You might have noticed the stocks on the "OTC Journal" list with the strongest growth, profits, and balance sheets were the ones that started rebounding.

Looking at the markets on a go forward basis, I don't think it's going to get a lot uglier. It simply doesn't feel like 2008 to me. On the headline front, it's going to take a unified effort by the European Union to get the global financial community to believe they are capable of dealing with their issues. That's going to be a tough nut to crack. Getting a handful of smaller, nearly socialist governments with their own agendas and viewpoints to agree on anything is a tall order. This bunch probably couldn't get unified on what toppings to order on a pizza.

Nevertheless, some sort of modification to the worst case scenario the market is pricing right now is likely over the next month or two.

I believe the markets could see lower levels before the next major upleg begins. The DOW might want to visit 9500, and the S&P 500 might want to take a trip down to 1050. The higher beta stocks (far more volatile than the S&P 500) have already taken quite a beating, so I don't perceive a lot of downside risk in those names. The hot money has pretty much come out, but you never know for sure. 

Fear runs the markets right now, but greed is going to come back as sure as the sun rises every day. You need to be ready and positioned.

Here's some news on individual ideas from this past week- these are the problematic situations:

• Xinhua Sports (NASDAQ: XSEL): Finally announced annual audited numbers, and the company took a giant write down related to all of its divested businesses. Nearly impossible to gauge the health of this business, and the market hates what's going on. With so many good companies to follow in China, it makes sense to wait for the smoke to clear and see if they have a viable business. I'm taking it off the list for now, and reserving the right to come back to it down the road.
• China Energy Recovery (OTC Pink: CGYV): My largest personal embarrassment in the China space. This company doubled in size every year from '06 t0 '08. Just about one year ago today when the company announced unexpectedly bad Q1 '09 numbers I simply should have dumped it and moved on. I don't have any idea how the company did in Q4 of '09 because they haven't filed their audited numbers. Their investor relations people tell me there's a disagreement between their new auditors and their old auditors, and hence they can't get the filing done. Now, they are behind on Q1 as well. Despite this atrocious lack of regard for their status as a public company, they were still in London at the Rodman Renshaw conference talking themselves up. Why?- I have no idea- what can you tell investors if you don't have numbers? Disgusting. No reason to keep this one on the home page any longer. As a result of all this pathetic behavior, they have lost their status as a fully reporting public company, and now trade in the relative obscurity on the OTC BB Pink Sheets. It's not the final chapter, so I'll report when the numbers finally come in. Frustrating situation. If you want more information, contact their IR guy- Adam Friedman- 212-918-2529 x18 or email: adam@adam-friedman.com.
• Tapimmune (OTC BB: TPIV): I mentioned this one earlier in the week as one to watch. Sure enough, volume came into the stock mid week and it tried to trade up. In answer to the volume, sellers appeared en masse, and sabotaged any chance the stock had to get going. Clearly, there is enormous overhang here. It's like hundreds of people trying to squeeze through a small opening at the same time. I don't see much upside here technically until it either becomes so cheap no one wants to sell it, or the sellers simply run out of stock. Avoid it. In short- it didn't work.
• Options Media Group (OTC BB: OPMG): Reader Bill P of beautiful Ontario, Canada reminded me this week about Options Media Group, a past idea. Bill asked me to look back, and is it turns out my memory was faulty. Back on January 20th I suggested getting back into the stock, and stated I'd be buying for my own account. As it turns out, I never retracted that statement. Truth be told, I never picked up any more shares, and have since abandoned the idea with no formal notification. They seem to be going the wrong way- revenues are going down while the number of shares i&o is going up. I have no plans of ever covering this again, although I do believe there could be some money to be made if it gets cheap enough. Every now and then the stock has a big volume and price spike, and you need to be ready to offload when it happens. My profuse apologies to anyone who participated for not disclosing my change of heart. I simply got absorbed in other ideas in the China theme. 

Santa's Coming Early, and I'm Making a List

Santa is coming early this year in the form of many valuation gifts across the China front. This market melt down presents the kind of oversold opportunities you aren't likely to see for some time to come. I don't know when the market will turn back up, but I want to be ready.

I don't believe 2010 will be nearly as ugly as 2008. I didn't get it in '08. I looked at the number of potential mortgage defaults at around 2 million, and didn't believe that number could destroy the US banking system. I didn't realize at that time that the financial industry had created an entire series of highly leveraged phony securities off this pool of mortgages that had been resold many times over, thereby magnifying the risks and potential losses significantly. I didn't realize the rating agencies had been so lax in their assessments.

It's possible the Eurozone meltdown has the same imbedded hidden risks, so it might be worse than I think, but not likely. Also, I believe many investors are still looking back at the 14 month move off the March '09 lows and wishing they had been in. This correction presents a "reboot" opportunity to those folks who missed the last big rally.

Stock market investors need to learn to live with volatility. It's not your Grandfather's stock market anymore. It's global, information travels much faster than it ever has, and trading is dominated by hot money fund managers who live and die by the monthly statement. 

I'll be reaching out to a number of the best resources in my China network and putting together my list for Santa. I'll have it for you by the end of next week. I'll be complying a list of China based companies with US listings trading at 5x or less '10 earnings with 30% plus growth rates, strong balance sheets, and good industry groups. None will be exporting manufacturers, and arena I plan to stay away from.

You will want to study this list and identify a few ideas you really like. These are the stocks that will come roaring back both first, and best.  There will be some new names, and some of the current followings. There were lots of doubles and triples coming off the bottom last year, and we might be looking at a similar opportunity.

The national balance sheet of China puts that country in the strongest position on the globe. China boasts about $2.4 trillion in reserves, while the US carries nearly $13 trillion in debt. No contest.

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