To OTC Journal Members: 
 

Two Insane Factoids

Not too long ago I wrote bubbles were, by nature, mass shared speculative hallucinations. There's another side to that maxim. There is a mass shared hallucination the world's financial system is coming to an end. Unlike a bubble, this one could be viewed as a "Credit Black Hole". It will suck every ounce of leverage out of the system until the Black Hole simply implodes into itself. Who could forget the movie "Poltergeist" when the family's home simply gets sucked into the ground. The market is acting just like the last scene in that movie.

This week's obliteration of the markets takes every market technician into new, unchartered waters. This market sell off has officially become the worst sell off in history- far eclipsing both 1937 and 1987 is terms of the depth and breadth of the mania to raise cash at any cost.

This is not a bear market where investors are choosing to sell. This is a market of forced liquidations and irrational fears. Banks are seizing leveraged funds and dumping huge amounts of stock directly into the markets with no regard for cash. Investors are panicking and selling their mutual funds in favor of cash. Fund managers are getting slammed with redemptions, and they are shorting ahead of redemptions. It has been an irrational and unstoppable free fall. 

Now that the areas of support I covered last week have given way, here's your new targets for the S&P 500 and the DOW. I believe the S&P 500 could trade down as low as 875, and the DOW has a date with 7670. As you can see from the charts, these forecasts assume the DOW will give back 61.8% of the gains it took 15 years to notch.

Likewise for the S&P 500- it is likely to give up 61.8% of the hard earned gains over the past 15 years. This Bear Market is considerably different than those of the past. One of the biggest differences is the valuation issue. 

In the past, Bear Markets have been born during periods of stretched valuations. In 2000, the S&P 500 had traded to a PE Ratio in the 20 to 22 range. The most recent estimate I read for the Operating Earnings for the next 52 weeks in the S&P 500 was $98.85. Another words, based on Friday's closing price of 899, the S&P 500 is trading at 9 times forward looking earnings.  If the S&P were trading at a more traditional forward looking PE ratio of about 14, it would rebound to nearly 1400.

Clearly, the market anticipates those earnings estimates to come way down. Even a 30% reduction in earnings estimates with historical PE ratios of 14 would have the S&P 500 at about 1,000.

Here's a couple of whacky factoids from Friday's action.

• The venerable General Motors (NYSE: GM), fully adjusted for all splits and changes, is now trading below its 1950 IPO price. If your Grandfather had bought the IPO in 1950, and left the stock certificate in a drawer for 58 years, it would be worth less today than it was when purchased.
• On Friday, the DOW traded in a 1,000 point range within 30 minutes of trading. That is absolutely insane as well. The early free fall to 8,000 was met with a wall of buyers. It was a tug of war between Bears and Bulls the remainder of the day.

China Energy (OTC BB: CGYV): Previously Announced Numbers Worth A Look

Early Monday CGYV announced it has achieved $19 million in completed contracts in the first nine months of 2008- putting the company 20% beyond the entire year in 2007 with one big quarter left to go. Remarkable.

This number suggests monstrous continued growth. CGYV was at $9.8 million in revenues through the first half of 2008. Therefore, the press release suggest the company achieved $9.2 million in Q3- which would be 90% over the revenues achieved during the whole first half of the year. A year over year growth rate of that magnitude would be amazing- quarter over quarter is mind boggling. 

However, a closer look at the press release is warranted. The press release also discloses 5% to 10% of the revenues will be treated as "deferred", meaning the company won't get to book them for Q3. So, let's assume we're now down to $8.82 in revenues. 

Reading further, the press release also states there is a 17% value added tax. I don't understand this disclosure, will try to get some clarity. Let's suppose 17% comes right off the top- now we're down to $7.3 million in revenues for the quarter.

Even at $7.3 million, we're still looking at 40% quarter over quarter growth. That's an astounding growth rate. I would expect the 10Q for Q3 '08 would be out about mid November, at which time we'll see how these numbers- profits especially- really come through. In any case, I am absolutely certain you are going to see monster year over year growth.

At Friday's closing price of $1.40, the market is valuing the company at $42 million. This company is flat worth $100 million, even in a stingy valuation environment. Like so many others, this stock has been hammered with forced liquidations. Six months ago the company completed a financing of $8.5 million at $2.18 per share. A number of small institutional funds participated, and I am certain a number have been seized by banks and liquidations forced. 

In these conditions I can't predict exactly where the bottom will be, but the liquidations are finite, and there will be a turn in the near future. It's worth noting the benefit of their technology has come up in all the Presidential debates. Candidates on both sides have mentioned the growth of China's coal burning plants. CGYV solves that problem and saves the companies money at the same time. Hence, the monstrous growth rate. 

The market and the CGYV bottoms will both come in October. Either or both could be the opportunity of a lifetime.

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