Monday, December 17, 2012

Chinese Stocks Abandoning the Stock Market—There’s a Lot More to Come

Mergers and acquisitions are now taking place among U.S.-listed Chinese stocks, mostly because of their valuations. It was only a matter of time before this started to happen among the “good” businesses; countless Chinese stocks are now entertaining management-led takeover bids.
One company that I feel was never fairly recognized on the stock market was Fushi Copperweld, Inc. (NASDAQ/FSIN). You might even say that among Chinese stocks, the company’s share price just followed the rest of the crowd on the stock market.

Fushi Copperweld manufactures copper-clad bimetallic wire products among other things, offering the industrial Chinese market cheaper alternatives to traditional copper products. On the stock market, the company’s shares were highly successful (and volatile) in 2007 and 2008, hitting $25.00 a share up from $5.00. Then, the stock market declined due to the subprime financial crisis, and the stock was never able to recover, despite the company continuing to grow its revenues and earnings. The company’s stock market chart is below:

Fushi International Inc Chart
Chart courtesy of
This week, Fushi Copperweld will be taken over by Green Dynasty Limited, and delisted from the stock market. Shareholders will get $9.50 a share in cash, as the company’s chairman and CEO takes the company private. This is a trend we are going to see a lot more of in 2013.

We’ve looked in this column at a number of Chinese stocks currently considering management-led takeovers. One potential candidate for this kind of transaction is Lihua International, Inc. 
(NASDAQ/LIWA), which also just so happens to be in the business of copper replacement products in China.

According to the company, its revenues for the third quarter of 2012 grew 54% to $238.8 million, up from revenues of $155.6 million generated in the third quarter of 2011. The company noted that it experienced growth in all product categories, with increased sales volume partially offset by a decline in copper prices. Earnings for the third quarter were $17.2 million, or $0.58 per share, compared to $13.5 million, or $0.45 per share. The company finished the third quarter of 2012 with $130.5 million in cash and cash equivalents, representing $4.37 per diluted share in cash. The company has no debt on its balance sheet.

And yet, on the stock market, the position isn’t doing anything. Lihua’s stock market chart is featured below:
Lihua International Inc Chart
Chart courtesy of
And thus, we have the quandary that is U.S.-listed Chinese stocks. Is the reason that Lihua, and many other Chinese stocks, isn’t doing well on the stock market, due to a lack of confidence in the numbers? For the most part, yes. Institutional investors are gun shy on Chinese stocks, because they’ve been burned before. Therefore, as a group, many U.S.-listed Chinese stocks are substantially undervalued, and this is why management teams are considering taking these companies private.

So far, the marketplace has proven that it takes a lot of courage for speculative investors to participate in Chinese stocks. It’s been a bit of a Wild West environment for the entire group. I do think it’s highly likely that we’ll see a lot more going private transactions among these companies, as their stock market experience hasn’t worked out so well for management or investors. There is a small amount of room in a speculative portfolio to consider Chinese stocks now, especially those that are bouncing off their stock market lows. Diversifying among a small basket would probably be a good idea.

Chart of the Day - Hershey Foods (HSY)

The "Chart of the Day" is Hershey Foods (HSY), which showed up on Thursday's Barchart "All-Time High" list. Hershey Foods posted an all-time Thursday at $74.02 and closed up +0.53%. TrendSpotter has been long since Nov 13 at $71.81. In recent news on the stock, Miller Tabak said last Monday that Hershey is "worth a look" for a year-end rally with a target of $78 a share as the consumer staples sector shows "relative strength on increasing momentum." Hershey Foods, with a market cap of $16.3 billion, is a leading snack food company and the largest North American manufacturer of quality chocolate and non-chocolate confectionery products. Hershey markets such well-known brands as Hershey's, Reese's, Hershey's Kisses, Kit Kat, Almond Joy, Mounds, York, Jolly Rancher, Twizzlers, and Ice Breakers as well as innovative new products such as Swoops and Hershey's S'mores.

A Look at Junior Gold Producers

GDX is our favored index or ETF for tracking the gold stocks but it only tracks the large cap unhedged companies. In the world of gold mining and exploration, there are several sub sectors below the largest producers which comprise GDX, the HUI and the XAU. In recent weeks we have charted GDX to death. We know the market has initial support at $46, secondary support at $43 and very strong support at $41. That being said, I wanted to check the junior producers to see if they gave us a different read on the market or if they are in a similar boat as the large producers.

Below is a chart from an equal-weighted index we put together. It contains 20 companies which are gold producers. The median market cap is $900M, which is quite large. For the most part, these are the junior producers who were successful from the 2008-2010 bull market. After all, if a junior producer is successful during a cycle, then it’s no longer a true junior!

The price action in 2012 is remarkably similar to that of GDX. The large gold stocks made a double bottom and then rebounded strongly. Like GDX, the junior producers have shed most of the gains and very well could test those two support levels. There is 10% downside to the first support level and 15% downside to the double bottom support level.

The 5% and 50% are breadth indicators (which we discussed last week). They refer to the percentage of the index (20 stocks) which is trading above its 200-day moving average. Currently, the 50% is quite high and shows strong breadth. Even if the index falls another 10%, breadth should remain comfortably higher than at the double bottom. This is what we expect at secondary lows following a major bottom.

Ultimately, this is still a very bullish long-term chart provided the market makes another low and resumes its fledgling cyclical bull market. In that case, in 2013 both large and junior producers will attempt to rally through the overhead resistance and retest the 2010-2011 highs. We could see the next major breakout at the end of 2013 or early 2014. Now is the time to be vigilant as large and junior producers are likely to bottom in the coming month. Speculators and investors are advised to carefully seek out the large or small companies which are poised for the best rebound.

Is Coal The Next Big Mover?

The BIG BOARD – NYSE – Weekly Major Stock Market Trend

The New York Stock Exchange is the big board. This chart formed a reversal candle last week which points to lower prices. Its likely we see a 1-2 week dip before buyers step back in. Until then individual stocks should pause or form mini bull flags until the sellers are finished and buyers step back into risk on assets (equities).

Coal Sector ETF Showing Stage 1 Basing Pattern

Coal stocks have been bouncing bottom for some time and if you did not review the Stages Report using the link above then do so now so you know what to expect in detail.
KOL coal exchange traded fund is a basket of coal companies and is starting to show signs of a new bull market. A breakout and close above $26.00 should trigger strong buying with the potential of a 21% gain before it hits my first price target. This could go way past that but one target at a time folks.
Naturally I would like to see a bull flag or pause in KOL over the next couple weeks, then look to get long using the pivot low of that pause/bull flag as my protective stop. I’m not jumping in here as the broad market looks ready to correct and ¾ stocks follow the big board which will pull KOL down.

ANR – My Top Coal Stock Pick

I pointed out ANR at $7.50 at the beginning of December to followers as it was the best looking coal stock I could find. The two key indicators “Price” and “Volume” were clearly pointing to higher prices and the potential gain even if it was just played up to the Stage 1 Resistance Level still netted a 30% move. Crazy part is that there is the potential for a 100% rally to my first price target.


You want Gizmos or Coal in You’re Stocking???

In short, I really like the coal sector for the first quarter of 2013. I’m not too worried about the fiscal cliff as it’s not the end of the world and the US along with most other countries are all bankrupt together in my opinion. New rules and ideas will be implemented and life and business will continue… I am not to worried.
I am expecting stocks to continue sideways or higher into May at which time a serious correction could take place. But not to worry as we take things one week at time and will be adjusting my outlook accordingly.

The Dollar index is giving a fresh sell signal on the daily chart

The Dollar index is giving a fresh sell signal on the daily chart.The $ has been range bound and is nearing it's lows however I have a sell signal on the weekly chart and so far. I have a sell signal on the monthly chart This suggests that we could be finally breaking out stay tuned for updates


Swiss Franc Breaks Out Above 1.08

The big stories of today’s futures markets are the Euro and Swiss Franc currencies along with soybean futures. Fundamentally, we identify the following news items that are driving today’s markets: China relief (soft vs. hard landing scenario), above expectations industrial production data in US, and the continuing fiscal cliff uncertainty.

After a “buy the rumor, sell the fact” rally preceding the FOMC rate and policy announcement this week, the US stock futures have sold off quite a bit since the policy statement. DEC12 emini SP futures are back below our key pivot level of 1430. Our next key pivot level for this market is 1380. Positive US economic data seems to be continuing to hold this market up, while the fiscal cliff concern seems to be capping any bullish bursts of buying.

Precious metals, a market that seems to captivate and excite everyone, are fairly quiet today, with gold staying below $1700 and silver trading at almost unchanged levels from yesterday’s close. Interestingly palladium is up almost 1.5%.

One of the biggest movers in the commodities complex is the soybean futures contract. JAN13 soybeans are trading up 18 cents today, hitting $14.97 this morning. This is around 1 dollar above its levels hit to the downside just one month ago. We believe this market could start to consolidate in the low $15′s. Our next upside target is $15.80.

The Euro futures are up around 54 ticks today, with the DEC12 contract hitting a high of 131.42. This market is at the top of its recent range, and is likely rallying as an effect of US dollar selling from the enhanced QE policies. We focus on the Swiss Franc today. The Swiss Franc has broken above its recent top of the range level of 1.08. This market has been consolidating since November. Our next major resistance level is 1.11. We view the short term for the Swiss Franc as very bullish.

Swiss Franc chart

Chart of the Day - Varian Medical Systems (VAR)

The "Chart of the Day" is Varian Medical Systems (VAR), which showed up on Tuesday's Barchart "All-Time High" list. Varian on Tuesday posted a new all-time high of $72.48 and closed +1.32%. TrendSpotter has been long since Oct 26 at $66.93. In recent news on the stock, SunTrust on Nov 16 initiated coverage on Varian with a Buy and a target of $81. Benchmark on Nov 16 initiated coverage on Varian with a Buy and a target of $88. Varian Medical Systems, with a market cap of $7.7 billion, is the world's leading supplier of equipment and software for treating cancer.


US Weekly Economic Calendar

time (et) report period Actual forecast previous
8:30 am Empire state index Dec.   1.7 -5.2
8:30 am Currrent account deficit 3Q   -- -$117 bln
10 am Home builders' index Dec.   46 46
8:30 am Housing starts Nov.   864,000 894,.000
8:30 am  Weekly jobless claims  12-15
358,000 343,000
8:30 am GDP revision 3Q   2.9% 2.7%
10 am Existing home sales Nov.   4.90 mln 4.79 mln
10 am Leading indicators Nov.   -0.2% 0.2%
10 am Philly Fed Dec.   -7.0 -10.7
10 am FHFA home price index Oct.   -- 0.2%
8:30 am Personal income Nov.
0.3% 0.0%
8:30 am Consumer spending Nov.   0.4% -0.2%
8:30 am Durable goods orders Nov.   0.2% 0.5%
8:30 am Chicago Fed national index Nov.   -- 0.56%
9:55 am UMich consumer sentiment index Dec.   75.0 74.5
10 am State unemployment rates Nov.   -- --