To OTC Journal Members: 

Here's a quick update on the new service devoted entirely to China based companies with US listings. First of all, it's been a great week for China stocks- the breakouts are finally showing up on the charts. There's still plenty of time on the less liquid ideas, but some of the stocks that trade higher volumes are flying. Of course they are- this is the most undervalued group of stocks globally, and it's October.

I'm going to be ready to launch the new service next week. I feel bad- we posted the portfolio as of October 1st, and a couple of stocks- one in particular, have taken off this past week. I already bought and sold some call options for a near double, but I feel there's still plenty of room in a lot of these names.

Right now, everything is ready to go, but I'm at the mercy of web designers. I get them the words, but they seem to take forever to get it back so it's ready for Prime Time. We'll probably launch the middle of next week, so please continue to stand by.
 

Macro China News

Lots of China stocks have been, metaphorically speaking, in jail for the past six months. They've had no freedom to roam about the charts, and they certainly haven't been working for anyone. They've been unemployed prisoners of a risk paranoid market. It's like they disappeared from the society of the stock market.

This past week there's been a jail break, and I'm seeing breakouts all over the place. The higher volume stocks are leading, and the better value low volume stocks are going to follow over the next few months.

While Warren Buffett's positive comments helped last week, there's been a far more interesting development. Moody's placed the Chinese Government Bond Rating on a "positive outlook", indicating an upgrade was near at hand.

Currently, Chinese Government bonds are rated A1- not even close to the AAA rating US Government bonds have always enjoyed. The Moody's move is suggesting to the global investment community the Chinese economy is in good shape for the near to mid term. DUH!!!! I believe it was Warren Buffett who said even a 3rd grader could see what's going on there (he recently dumped a pile of Moody's).

Here's what I find sad and hysterical at the same time. Moody's still has higher ratings on the sovereign debt of some of the troubled European countries than it does on China's debt. For example, Spain's debt has an Aa1 rating, better than China's.

I had a chance to read Merrill Lynch's comments on the move by Moody's. Their analysts believe China deserves a much higher rating than Spain or any other European country for that matter. Their analysts see China continue to grow single to double digits for years to come, and they see no big risk in the fiscal picture or the banking system.

It's worth noting- the poor judgment and dare I say dereliction of duty by the Rating Services was a major contributing factor in the US debt crisis. Our rating agencies have little or no credibility, and their judgment is questionable at best. Come on guys- Spain's debt is safer than China's? You've got to be kidding me. One country has a giant budget surplus and is holding Trillions in global debt (see US treasuries), and the other is embarking on an austerity program thanks to the desperate condition of their economy. Come on.

The impending upgrade put a charge in China stocks this week.
 

The China Jail Break

All kinds of China stocks staged jail breaks this week, and here's a few charts worth looking at. Talk about jail breaks:
 

So- what do these four stocks have in common? First of all, they are all on my top 10 China stocks list published earlier in the summer.  Second, they've all had great moves off the bottom of late. Here's some notes- one by one:

• CBEH- China Integrated Energy- I have this one forecast to deliver $1.15 in EPS this year on $411 million in revs- the company is a wholesale distributor of oil and owns retail gas stations as well. No public news today to explain the huge one day surge in price and volume. Either someone believes it's a take over target, or some sort of forced buy in of short sellers happened today.
• LPH-Longwei Petroleum- Similar company to CBEH- oil refiner that owns gas stations. $.5 billion in revs this fiscal year, and $.70+ in EPS- one analyst has a $6.50 price forecast on the stock.
• CEU- China Education Alliance- Stupid undervalued with about $2.80 per share in cash and zero debt. Looking for $.62 in EPS this year on $58 million in revs. I'm having breakfast with the CFO next week. Offers online courses to help prepare high school students for standardized tests, and vocational in room classes for post high school students. Merrill Lynch brought out a similar IPO Friday- GEDU- priced at $9.50 and closed at $12.20. Same size company. CEU by far the better buy.
• CCME- China MediaExpress- places digital TV screens in municipal and airport buses all over China, then serves up programming and generates revenues from advertising. Their numbers are so strong and growth has been so rapid the market can't believe it. $140 million in cash as of last quarter. Huge short interest- over 3 million shares as of Sept 15- I've always felt this one could virtually "melt up" if the shorts are forced to cover, but I've always assumed the shorts have some sort of smear campaign planned for this company. Fully diluted likely to earn $2.25 per share in 2011. Analysts forecasting $22.50 on the stock.

Here's a couple of less known and a little more under followed stocks. You should know about both of them. There's a trade here in either or both. 

• RM.VC- Rodina Minerals. This one trades on the Canadian Venture Exchange. Rodina Minerals traded a cool 2.4 million shares today and made another huge burst to the upside. You can trade this stock in your US brokerage firm under the symbol RDNAF- which is how I bought it today for my own account. This is a Canadian based resource company, and based on the way its trading, you might think a Junior Gold stock. Nope- it's a Lithium play. And- where's perceived demand for Lithium coming from? - the next generation of batteries in electric cars. China is developing electric cars on a fast pace- so there's your China angle.
• WKBT- Weikang Bio-Technology. This is a TCM company (traditional Chinese Medicine). $34 million in sales the 1st 9 months of '09- $11.1 million net- $.44 in EPS for 3 quarters, so likely to earn $.55 to $.60 this year. Great product line, and the stock is all of a sudden trading up to levels where it should go. Check the chart yourself. The price and volume have gone up nearly every day this past week. Today was the highest volume day at about 150,00 shares, and the stock traded sideways. Likely headed for $3.50 next week.

This is just the beginning. The timing couldn't be better for the launch of the new service. Next week- coming your way. 

Disclosure: Long LPH, CEU, CCME, RM.VC, and WKBT

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