To OTC Journal Members: 
 

Still Holding My Nose

I'm still holding my nose- just holding my nose and holding my many positions in highly profitable US listed, China based companies. The last two months have been simply brutal on the high beta China stocks.

For now it's worth noting there's really nothing to do but hold your nose. China remains controversial in the US financial media - Real Estate Bubble, or no big deal? I believe the stock market has Post Traumatic Stock Syndrome relative to a China real estate bubble. Sure, the prices of high end residential real estate in China have gone up a bit out of control. And yes, there will be a correction. Will it be anything remotely like the 2008 melt down in the US? No- simply because our US based residential real estate melt down was driven by extremely high levels of leveraged debt which was resold many times over to global investors. When the market collapsed, it had a Tsunami like ripple effect through the entire banking system. There's nothing even remotely close to that kind of leverage in China. Talk to anyone who's been to China lately and you'll here the same thing- the prosperity is prolific and wide spread.

Here's the big picture. 20 years ago 99.8% of 1.3 billion Chinese had nothing. 5 years ago, about 5% of the population moved into the ranks of consumers of goods and services- that's about 65 million people. Today, 5 years later, 10% of the population, or 130 million citizens have joined the consumer class- still only half the US population.

It took 20 years for 5% of the population to become consumers in China. It took 5 more years for 10% to have Western style stuff. It's not going to take another 5 years for 20% to become consumers- more like 2.5 to 3 years.  Consumption is going to accelerate on a massive scale, and there's gobs of money to be made in the equities of the companies benefiting from this trend.

On Friday the Chinese government announced it was removing some favorable tax considerations for commodity exporters- thereby signaling the world the Chinese economy was becoming less export dependent, and the government knows it. This is huge for the Chinese economy, as it "decouples" China's future from global problem areas like Europe.

We've had a rough time with these highly profitable names, but I have no trouble sleeping at night owning them. The balance sheets are all strong. Most have tons of cash. I know earnings will eventually drive prices. Right now, the market is entirely focused on global macro issues, which is why these stocks have all gone down as a group.

I believe the "green shoots" of improving  buy side volume will start to materialize post July 4 weekend as the market remembers to start looking at Q2 earnings. Most of the China companies won't report until at least August 1, but I wouldn't be surprised to see some of the stocks start to behave better out in front of the earnings releases.

It's worth looking back at the summer of 2009. While the market made its post Ameggedon low in March of 2009, it didn't really start to get momentum until the Fall. On the small stock side, it was the absurdly oversold China stocks that got the momentum going in August. Once they turn back up, these stocks are so oversold there will be 20% easy money in the first surge.
 

Penny Stocks: Yes or No?

In the meantime, I pose this question to you: Penny Stocks- Yes or No? Here's what I mean.

In down market times I look all over the place for new ideas. The crazier the better. At times I'll come up with some doozies. For example- I've uncovered one little penny stock trading at $.12- There's only 80 million shares I&O, and I believe the company could generate $80 million in revs this year and be profitable.

I've also uncovered one trading at less than 2 cents doing about $45 million in annual revs.

I'm also interested in oil and gas exploration stories in the US. The BP situation in the gulf, aside from the obvious short term horrific costs to the environment, the local economies, and BP itself, sends a message about the sources for our long term energy needs.

Clearly, deep water drilling is going to be shelved for the foreseeable future, and that's the primary source of new oil discoveries. Therefore, the short term elimination of that future supply will lead to lots of alternative exploration, and likely higher energy prices.

To that end, I'm looking at one penny stock natural gas drilling situation I could bring you as early as next week. 

So, I pose this question to you- do you want to read these stories? I don't mind presenting them. They will be risky- these stories might simply be good for a trade, or might not work out at all. I do have a history of finding these little trading gems (see SITO of late).

Send me an email: editor@otcjournal.com - let me know yea or nea. Just put yes or no in the subject line. If you want 'em, I'll deliver. This is the kind of stuff that can keep us entertained and might just put some trading profits in our pockets while we're waiting for the highly profitable China stocks to get their mojo back. 

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