Alan's Finance Blog

Reasons to Be Suspicious of this Market

by Claus Vogt

Dear Subscriber,

A healthy bull run for the stock market must come from rising prices and rising volume. This is an old and time-honored stock market analysis concept, and probably one of the most profound insights into market behavior.

Thus, a rally lacking volume is at least suspicious. And a rally with declining volume is a sign of a weak market and usually a harbinger of a correction if not an outright trend change.

Have a look at the S&P 500 chart below. As you can see, the whole rally off of the March 2009 low is characterized by low volume. Hence, I see a high probability that this bull run will finally end and prove to be just a huge bear market rally.

Especially Weak:
The Rally Since November 1

Now take a second look at the above chart. The rally since the late October low was especially weak. Volume was not only miniscule, it was also declining markedly. This tells me that the recent break out in prices to new highs for the year was on very thin ice.

Additional weakness comes from the advance-decline line and momentum indicators. Neither has confirmed these new market highs. In fact, they’re actually showing negative divergences! This is a typical sign of a weak market ready for a correction.

Finally, sentiment indicators got frothy when some of the major stock market indexes reached new highs for the year. The chart below shows advisory sentiment as published by Investors Intelligence …

As you can see, stock market bulls reached 50.6 percent of all newsletter writers, and the number of bears tumbled to a paltry 17.6 percent. Thus the bull-to-bear ratio jumped to 2.9. This is a very high figure, often associated with an interim stock market high.

All in all, the technical and sentiment indicators are in a position very typical for a market at risk. So I think we may soon get another marked correction, probably down to the October lows or even a bit lower.

And beyond the technical picture, there is also a major fundamental reason to be wary right now. Namely, that …

The Major Debt Problems
Have Not Been Solved

The news of the financial woes in Dubai should remind investors that the major debt problems associated with the global real estate bubble have not been solved. So over the next two years I expect that we’ll hear from many more defaulting borrowers in and outside the U.S.

The financial crisis in Dubai is sending a clear message.

And to make matters worse, governments’ reactions to the first act of this huge crisis has only aggravated the problems by shifting the risks from private entities to public ones.

It’s too early, however, for this second act to get started. I expect it’ll begin during the second half of 2010, when a new wave of mortgage resets starts hitting the U.S. banking system. And it will probably be as severe as the subprime reset wave was.

It’ll be very interesting to see how the governments around the globe react …

Some may still be strong enough to throw hundreds of billions of tax payers’ dollars at the problem again and start another round of insane and myopic policies. But others, the weaker ones, may find themselves trapped, not being able to absorb a new surge of losses.

Consequently, instead of only banks going bust we may well see banks plus some governments going bust!

But all that is in the future. Not yet. Dubai is just telling us not to forget the important things going on behind the scenes of this huge stock market and economic bounce thanks to the strongest peacetime stimulus in history.

And the technical picture is telling us that a correction could be in the cards, too.

For now, I would treat any potential stock market weakness as a buying opportunity since I don’t yet see an end to the medium-term up trend that started in March.

But we should never forget the long-term risks, either.

Best wishes,

Claus

The Most Valuable Business in the United States

The most valued company in the United States? If you guess Coca-Cola (NYSE: KO) or ExxonMobil (NYSE: XOM) or Berkshire Hathaway (NYSE: BRK-A), you’re way off. Hint: This company been around since 1851 and does business in nearly every town in the world. Another hint: A band called The Five Americans made it the subject of a hit song in 1967.

The biggest company in the United States by revenue, earnings and market cap is ExxonMobil. But even Exxon’s No. 1 position in the petroleum world doesn’t make it the most valued business in the United States.

That honor belongs, believe it or not, to Western Union Co. (NYSE: WU). Though the company’s market cap is only equal to about two weeks of Exxon’s revenue, its underlying financial-services business — the one that helps people send cash around the world — is valued more richly than Exxon’s oil exploration and production activities, lucrative though they are.

In this case, “richly” is determined by calculating net asset value and comparing it with market capitalization. That might sound complicated, but it’s not. Here’s how it works out in three easy steps.

1) Add up the company’s assets — anything that has value.

2) Subtract every debt. The resulting net asset value is known as “shareholder equity.” You’ll find shareholder equity on every balance sheet in the world. It’s the part of the company that belongs to the owners free and clear, just like the equity in your house.

3) Divide market cap by shareholder equity. If the number is 1.0 or less, investors can buy the company for less than the value of the company’s net assets. Anything above 1.0 is the value of the company’s underlying business. It’s the premium investors pay to own the future of a retail store, the oil business, or the soft-drink industry — whatever the sector.

In most cases, companies trade at a multiple of book value. That makes sense, of course, as a company certainly should be worth far more than merely the value of its headquarters, desks and inventories. The S&P 500 index, in fact, trades at an aggregate 2.21 times book value. In other words, if you take the average company in the S&P and multiply its book value by 2.21, you’ll get its market cap.

Western Union trades at 41 times the value of its net assets.

Which brings us to an important point: There are lies, damned lies, and statistics. The only reason Western Union trades at such a steep premium is that it has almost no shareholder equity. Its balance sheet shows $6.2 billion in assets but only $327 million in equity. As things stand, Western Union’s market cap is currently about $13 billion.

The question, of course, is why Western Union’s market value hasn’t fallen. If it were an “average” S&P company, after all, it would be trading at 2.21 times its equity, or $722 million, not even enough to merit it a spot on the benchmark index.

The answer is that investors are humans, not computers, and the market is not an efficient or accurate processor of information. Western Union’s price didn’t fall because investors really do place a high value on its business, which it will use to boost its balance sheet by either growing its assets or reducing its debt, or both. When that happens, its price-to-book ratio will happily regress to the mean.

Here is the list of the most valuable U.S. businesses. This screen omits companies worth less than $10 billion. Except for Amazon (Nasdaq: AMZN), UPS (NYSE: UPS), Southern Copper (NYSE: PCU) and perhaps IBM (NYSE: IBM), these are all defensive, countercyclical companies that will have customers in nearly any economic climate.

Are these stocks good investments? I’d be a proud owner of any of these shares except Lockheed Martin (NYSE: LMT). All but Lockheed have seen a positive return year-to-date, and 65% of these companies have beaten the S&P so far this year.

The biggest winners have been Amazon, +156%, and Southern Copper, +124%. Amazon and Southern Copper trade at not only a rich premium to book but also at a steep P/E ratio: AMZN sells for 76 times earnings, Southern Copper for 65. That strikes me as far too rich, given tepid demand for both copper and the prospects for the upcoming holiday shopping season, which is expected to underwhelm.

Of the companies with a positive return for the year, the best values, that is, the lowest earnings multiples, are Altria (NYSE: MO) (11), IBM (13) and Lorillard (NYSE: LO) (13).

Western Union — whose price/book is likely to fall — is attractively valued at only 14.4 times earnings. Western Union’s assets may be worth a pricey 18.4 times the S&P’s net asset value, but WU’s earnings can be had at a -34.5% discount to the index.

Companies with good businesses command a high book value. When those companies can be purchased at a fair price, it’s a good profit opportunity for long-term investors.

So with that in mind, can you guess which of the companies mentioned in the introduction have the highest price-to-book ratio?

Times are never too tough for a Coke. So if you said Coca-Cola, you’re right.

(Coca-Cola, 5.5, Berkshire, 1.3, Exxon, 3.3)

So have a Coke and a smile and enjoy this oldie.

Andy Obermueller
Chief Investment Strategist
Government-Driven Investing

Two Small Caps with Big Dividends

Most income investors ignore small companies. Conventional wisdom says that large, mature companies pay dividends and small companies don’t.

That’s hardly the case.

Nearly 10,000 small caps trade on U.S. exchanges. Of those, 3.3% carry a yield of 6% or more. Believe it or not, that’s roughly the same as the S&P 500 Index, where 3.6% of the companies on the index yield above 6%.

Overlooking small companies is a mistake. While many small firms retain their profits to reinvest in the business, others generate enough cash to fund growth and pay shareholder dividends.

It would be dangerous, of course, to assume that every small company is fast-growing and has a promising future. A little more vetting is required.

Let’s eliminate companies that are trading for less than $5 a share. These stocks are often being avoided because of a serious problem in the company’s business. We also want small companies whose shares are liquid: At least 100,000 shares should change hands daily.

These parameters bring the number of potential investments down to a manageable number. Here are two that stand out.

Capital Product Partners (Nasdaq: CPLP)
The circumstance that is playing in Greece-based Capital Partners’ favor could turn into a great opportunity.

Capital Partners owns and leases small and medium-sized oil tankers. Right now, its fleet numbers 18. Its long-term rental contracts for these vessels range from three to 10 years.

Nine of the company’s contracts expire in 2010. Where shipping rates end up when those contracts expire will shape the company’s future success. Shipping prices currently are lower than shippers would like, but pricing can change quickly. For instance, shipping rates have already risen more than +10% this month alone.

Capital Partners is reasonably valued right now. That’s likely attributable to the unknown future of international shipping rates. The company currently has a forward P/E of 10.5. The market sees some measure of hope in the future, though, as the company is selling for 1.5 times book value.Capital Partners currently yields 16.7%. Its 2008 earnings came in at $2.00; trailing 12-month EPS is $1.92, easily enough to cover the company’s $1.61 annual payout.

If you believe in a recovery and think it will lead to a rebound in global shipping, as I do, these shares are a steal. If you’re more pessimistic about the future, the next stock I’ve found might be just the ticket for you.

Regal Entertainment Group (NYSE: RGC)
The great thing about theater stocks is that economic conditions don’t really matter. People go to the movies even when times are tough because it’s relatively cheap entertainment.

What does matter to theater operators, however, is how good the movies are. While Regal doesn’t have any control over what Hollywood turns out, great movies people can’t wait to see drive traffic to the box office.

Regal operates more than 550 U.S theaters, about 7,000 screens. These theaters are regarded as among the best in the industry. About three-quarters have stadium-style seats, and each either has or is being upgraded with Sony 4K digital-projection systems that have out-of-this-world picture quality.

The company operates in 90% of the country’s top 50 markets and has an industry-leading 16% market share. Some 66 million people went to a movie at Regal in the second quarter, +12% more than the same period of 2008. Those customers also paid more, spending an average of $8.17 a ticket, up +7% from the previous year. This shot revenues up +17% for the quarter.

Regal earned has earned $0.54 per share during the past 12 months, a +15% gain from 2008′s results. At the stock’s current prices, that’s a trailing 12-month yield of just above 6%.

This stock can weather any economic storm, making it ideal for those who are worried about a prolonged downturn. However, a year filled with lackluster movies can really hurt this. Luckily, 2010 should be a banner year with names like Iron Man, Toy Story and Harry Potter gracing the marquee.

– Anthony Haddad
Staff Writer
StreetAuthority

The Secrets of Bill Gates’ Portfolio

Bill Gates owns about 700 million shares of Microsoft (Nasdaq: MSFT) — 713.1 million to be exact. His cache of Microsoft stock is worth a tidy $18.7 billion. Every time the price of Microsoft moves up a penny, Gates’ wealth grows by $7.1 million.

Well, big surprise there, right? You knew Bill had a pile of MSFT shares. So did I.

But Gates holds huge positions in other companies. Forbes, which recently pegged Gates’ wealth at $50 billion, alluded to some of these other holdings. I’m not going to gloss over the details. I’m going to tell you exactly what the richest man in the world owns.

By poring through SEC records for Gates — as well as his personal holding company, which manages his investments — I’ve come up with a list of 19 holdings in addition to Microsoft.

Some of them, like ethanol and coal companies, may interest you. The losers might surprise you. Some holdings, such as a $350 million stake in his close friend Warren Buffett’s Berkshire Hathaway, you might have been able to guess.

Let’s take a look:

The largest non-Microsoft holding is Canadian Railway (NYSE: CNI). The railroad’s tracks span Canada and Middle America, connecting the Atlantic, Pacific and Gulf coasts. Its customer base is geographically diverse and so are the products it moves, including petroleum, grain, fertilizer and coal. CNI made three recent acquisitions, operates at about a 22% margin and has seen its shares rise +41% this year.

Three other securities offer Gates a measure of international exposure. Two of them, Fomento Economico Mexicano (NYSE: FMX) and Coca-Cola FEMSA (NYSE: KOF), are beverage-related and overlap a little, as brewer Fomento (up nearly +50% this year) also owns part of Coca-Cola FEMSA, the company that sells Coke in Central and South American markets. The third internationally oriented position is Grupo Televisa (NYSE: TV), which is the leading Mexican broadcaster.

The most interesting data the SEC filings shows is what Bill Gates is buying.

Here are the four:

Republic Service (NYSE: RSG) is a trash company that collects garbage for residential, commercial, industrial and municipal customers in 21 states. The company has a market cap of 10.4 billion and trades at 33.5 times earnings, so the market evidently thinks its business is picking up.

The shares are up about +11% so far this year, but Gates added tons of shares to his portfolio in late February and early March when the market was at its ebb. The week of Feb. 23 he bought 500,000 shares a day, capping off the week with a 1.1 million share purchase and continuing his shopping spree March 2 and 3. The best price he got in that flurry of buys was $18.80 for a 731,700 share stake on March 2, which, at today’s price, is good for a nice +46% gain.

Gates’ current stake: 55.4 million shares.

Gates bought 500,000 shares of Grupo Televiso on the last day of 2008 at $14.94, about $10 a share lower than what he had been paying for the company. Those shares were a good buy, but even the richest man in the world can’t always time the market perfectly, and most of his shares are still in the red, bought for somewhere between $21.26 and $29.80. The stock closed at $19.30 Thursday.

Gates’ current stake: 20.7 million shares.

AutoNation (NYSE: AN) is one of the nation’s leading car dealers, and Gates (tidily) added 50,000 shares to his position in early January as the price hovered at $10. He should have bought more: AutoNation has gained +97% since he bought.

The Bill & Melinda Gates Foundation also owns 10 million shares, and uberinvestor Eddie Lampert holds a major stake in the company, too.

Shares are up +98.6% year to date and are within inches of the 52-week high.

Gates’ current stake: 11.4 million shares.

Gates’ last move has been to protect some of his shekels from inflation, and he added 425,130 shares of the Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (NYSE: WIW). Eighty percent of this exchanged-traded fund’s assets are in inflation-protected instruments. The fact that Gates owns this fund, which is up a modest +12.8% for the year, is evidence of the fact that no matter how much jack you got, it’s all worth protecting.

Gates’ current stake: 5.1 million shares.

– Andy Obermeuller
Chief Investment Strategist
Government-Driven Investing

The Safest 6%-Plus Yielding Stock in America

Not sure how to best judge the dividend safety of an investment?

Let Standard & Poor’s do it for you.

“AAA” credit ratings are hard to come by. The S&P sets the bar extraordinarily high for its top tier. These are the elite of the elite. S&P describes the tier saying, “An obligor rated ‘AAA’ has extremely strong capacity to meet its financial commitments,” a characterization that undersells the financial world’s unrivaled platinum standard.

Just five U.S. companies have earned S&P’s highest credit rating. They are: Payroll company Automatic Data Processing (Nasdaq: ADP), Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A), ExxonMobil (NYSE: XOM), Johnson & Johnson (NYSE: JNJ), and Microsoft (Nasdaq: MSFT).

S&P data for the past 28 years show that not one “AAA” company has defaulted on an obligation.

While these companies’ ability to satisfy creditors is stellar, none of these companies have particularly high yields. Automatic Data Processing’s 3.3% is the biggest of the bunch. Johnson and Johnson’s 3.2% is a close second, but after that, the pickings are slim. Berkshire Hathaway, in fact, has never paid a dividend and likely never will.

One category down, to “AA,” offers investors many more companies to choose from. A total of 27 companies have this rating, so it’s still a pretty exclusive club. This rating doesn’t seem to differ too much from the higher AAA category. S&P describes the AA tier by saying, “An obligor rated ‘AA’ has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.”

In other words, these companies are really solid, just not quite the cream of the crop.

Companies in this category rarely default on loans. S&P data for the past 28 years show defaults occurring in just 1999 and 2008.

The yields, however, still leave a little to be desired. Just two AA-rated companies yield above 5%. They’re both pharmaceutical companies: Eli Lilly (NYSE: LLY) and Bristol Myers Squibb (NYSE: BMY).

We have to look at companies with a rating of “A” to find stocks yielding 6%. S&P says, “An obligor rated ‘A’ has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.” S&P data for the past 28 years show defaults in this category occurring in eight of those years.

There are 168 companies in this category, or 1.0% of all U.S. stocks. Twelve have dividend yields above 5%, and five stocks yield above 6%. They are AT&T (NYSE: T), Verizon (NYSE: VZ), Duke Energy (NYSE: DUK), Valley National Bancorp (NYSE: VLY), and Mercury General (NYSE: MCY).

The largest of the group, AT&T, has the best growth and earnings potential. It’s the only one in the group that has grown its earnings per share over the past year — +11.3% this year. And it grew revenue at a quicker rate than the others.

It also sports the lowest P/E of the group at 11.6, the lowest P/E compared to its 5-year average of 17.6, and has the second lowest forward P/E after Verizon.

AT&T has increased its dividend +250% since 1984. Over the past five years, it has grown at the respectable rate of 7%. Right now it pays 41 cents quarterly, for $1.64 yearly. Earnings per share for the past 12 months came to $2.02, which more than covers the dividend.

You can’t find a more solid company with a 6% yield in the United States.

– Anthony Haddad
Staff Writer
StreetAuthority

My IPO Recommendation is Up +74% – Here’s What You Need to Know Now

I bought a pair of noise-canceling headphones from an airport vending machine.

When I put them on and turned the switch, the dim from the airport disappeared. After my flight took off, I put the headphones back on. The hum of the jet engines evaporated.

Every investor ought to own a pair, for one simple reason. There’s a ton of noise out there.

Turn on the financial channels. Turn on your computer. Look at the magazines and newspapers that cover the markets. Most of the coverage is meaningless clutter. The information might be immediate, but it isn’t that relevant or meaningful. It draws investors’ attention and keeps them from focusing on the truly important.

The danger arises when investment decisions are based on such noise. Investors see a piece of news or a price chart and they reflexively click the “buy” button before thinking things through. They rely on gut reaction, instinct — luck — instead of gathering critical information and objectively analyzing it.

It’s a great way to miss an opportunity. It’s not a very good way to make money.

Let me give you an example.

Last week A123 Systems (Nasdaq: AONE) debuted on Wall Street. The shares of this advanced auto-battery manufacturer were priced at $13.50 and, once they hit the market, immediately shot up. They surpassed the $20 mark and hit a high of $23.

All of that is good, factual information. But it’s noise.

You need something more substantial to decide whether A123 is a good stock to own.

That’s because what a company is selling for isn’t the primary concern of the focused investor. Day-to-day price fluctuations are noise, and smart investors choose to put on their noise-canceling headphones and focus on fundamentals. What really matters is not what the stock is selling for but what the business is worth, and, just as importantly, what it will be worth in the future. Certainly it’s where the focus should be with A123.

Some background:

The future of the automotive industry is the gradual adoption of the lithium-ion battery for plug-in cars. These vehicles are powered by electricity from batteries rather than gasoline from a tank. If the battery runs down, a gasoline-powered motor switches on to recharge it. Naysayers point out that charging up plug-in cars will cost too much, but that criticism is not borne out by the facts. Plug-in vehicles are cost-effective as long as the price of gasoline is above 75 cents a gallon, which is a pretty safe bet.

I’m not suggesting every car will be electric, but these vehicles will become extremely popular for urban commuters, most of whom make a daily round trip far less than the cars’ 40-mile range.

President Obama is an enthusiastic cheerleader for “green” cars like the Chevy Volt, which has yet to be released. Mr. Obama has allocated $2.4 billion to develop battery technology — $250 million of which went to A123 — and he has said he’d like to see a million plug-in vehicles on the road by 2015.

(That’s not a particularly ambitious goal: This nation typically sees 16 million new-car sales each year. Meeting Mr. Obama’s goal would mean that only 1 in 96 vehicles sold between 2010 and 2015 is a plug-in. One out of every 96 cars sold in this country is already a Toyota Prius.)

So the question an investor must ask is not whether A123 is worth $19 a share today but whether the company as a whole will be worth more than its current $1.34 billion market cap in the future.

Calculating A123′s Worth
First step: Put on our headphones and turn off the noise. Second step: Build a model.

For this we need to know the cost of the battery, the anticipated demand and a rough idea of the company’s profit margins.

Demand is the easiest: We’ll use the President’s figure of one million cars by 2015. That’s 166,666 cars a year.

As for cost, a recent Bloomberg article pegged the price of an A123 battery at between $5,000 and $10,000. We’ll err on the side of conservatism and use the lower figure, especially as high-tech costs tend to fall.

Lastly, we have to consider what the company can earn. For this we’ll borrow a net profit margin from a competing lithium-ion battery manufacturer: 3.8%.

Now we do the math.

166,666 vehicles times $5,000 equals $833 million in potential revenue.

3.8% of that — the net profit — is $31.7 million.

Next we must establish a valuation benchmark. That’s easy: A123 is worth $1.34 billion based on its current share price.

Price divided by earnings gives us the familiar metric known as the P/E ratio. And A123 is selling for roughly 42 times future potential earnings, assuming the company has a 100% share of the domestic lithium-ion battery market. (42 times $31.7 million is $1.34 billion.)

By this calculation, ignoring the noisy hype of the recent IPO, the stock looks pretty expensive. It takes a lot of profit growth to justify an earnings multiple that high.

It’s worth noting, however, that the competitor from which I drew the profit margin is trading at 112 times earnings. To meet that, A123 would only have to post 12-month earnings of $12 million, which is roughly the profit generated from about 63,200 batteries.

Now, one has to point out that this competitor is already producing the world’s leading batteries. It’s a profitable automaker in its own right, one that has grown its revue +317% in the past five years. And the company is positioned in China, one of the fastest-growing markets in the world, where A123 lacks even a toehold.

So the question remains: Is A123 a worthwhile stock to buy? Can an investor logically conclude that its future business will generate enough earnings to justify a stock price that would make buying the shares today worthwhile?

My answer: No.

I have four reasons.

The first is the model we built above.

Second, A123 has failed to secure major contracts. It’s not building the battery for the Chevy Volt, for instance. And recent tests with the Toyota Prius showed that A123′s technology — given its high cost — didn’t offer a significant increase in performance over the hybrid’s current battery.

Third, A123 faces serious competition, not only from foreign companies but also from domestic manufacturers. The Obama administration wants plug-in vehicles, but it’s not playing favorites with A123. It also made major awards to Ford (NYSE: F), General Motors, Chrysler and Johnson Controls (NYSE: JCI).

The fourth reason I think A123 isn’t a good buy is the global view. Scotiabank’s Global Auto Report forecasts worldwide demand for vehicles at 48.6 million in 2009, a level that’s clearly hampered by the recession. Assuming a modest worldwide growth projection of 3% a year, the world will see total vehicle sales of 58 million in 2015.

When electric-car technology catches on around the world — bolstered by consumers’ environmental concerns and direct government support — I think these vehicles will account for 3% to 5% of sales, or between 1.7 million and 2.9 million a year. Assuming A123 could capture a heady 25% market share, that would give it 2015 earning potential of $82.7 million, which, at 25 times earnings, implies a fair market value of $2.1 billion.

That amounts to an annualized +7.4% growth in market capitalization from 2010 to 2015, which could hardly be considered a successful growth-oriented investment.

When this IPO was announced, I recommended it. I saw potential. At the target price of $13.50 a share, I recommended investors try to lock in shares below $15 under the impression that they would, in time, rise to the $20 mark. I don’t think I undershot with this estimate. I think the market has overshot.

Far too many investors have bought A123 with rose-colored glasses on. What they really need is a pair of noise-canceling headphones.

If you bought A123 and made a nice gain, take your profits. If you want to trade the shares, good luck. But my prediction is that investors who buy these shares for the long term would be better served putting their money to work elsewhere.

– Andy Obermueller
Chief Investment Analyst
Government-Driven Investing

This Country’s Market Could Jump +33%, One 25% Yielding Fund Could Do Even Better

Published: October 6, 2009

The Chinese Civil War ended Oct. 1, 1949. The (winning) communists controlled Mainland China and the (losing) Chinese Nationalist Party was relegated to Taiwan.

The relations between the two governments since have generally been hostile. Each side hated the other and claimed they were the legitimate Chinese government. Now, after 60 stand-offish years, Taiwan’s leaders are trying a new — more conciliatory — approach.

In April, Taiwan began to allow Chinese investors to buy some Taiwanese stocks for the first time since the end of the civil war. In June, Taiwan expanded the areas where Chinese investors could put their money.

Taiwan’s market has soared +33% since April. The Shanghai index has managed about half that in the same period.

Now, many observers are saying that Taiwan still has plenty of room to run. Bloomberg reported that Lu Zheng-Ying, manager of the SinoPac Small & Medium Capital Fund, said that the rally would continue for the next two years. Lu predicted the rally will push the index to a record: Above 12,682, or about +70% higher than it is today.

I decided to ask Mike Turner, editor of Street Authority’s Trade of the Week, what he thought about Taiwan. Turner said his proprietary software was giving a Taiwan-focused ETF a “Strong Buy.” He thinks the iShares MSCI Taiwan Index Fund (NYSE: EWT) could gain another +33%.

Another Play
Another fund in a great position to continue to benefit from Taiwan’s growth is the China Fund (NYSE: CHN). This fund focuses on small and medium-sized companies in China, Taiwan and Hong Kong. These lesser-followed stocks have an average market cap of about $1.5 billion.

As of the end of July, the fund’s top holdings included investment firm Citic Securities, supermarket retailer Wumart Stores and the health-care company Shandong Weigao Group. Management visits more than 1,000 companies each year. The fund also can invest up to 25% of its assets in unlisted, over-the-counter companies, securities that tend to be overlooked by other managers.

So far this year, CHN is up more than +42%. Although it has lagged the Shanghai Index, the fund hasn’t experienced the pullback Shanghai has, either. Management says the fund is taking a conservative approach by investing in steadier consumer growth companies and staying clear of commodity and property stocks. As the Taiwan, China and Hong Kong gain value, CHN has an attractive strategy.

CHN has achieved tremendous long-term returns, averaging +20% a year during the past 10 years. Morningstar ranks the fund in the top 1% of funds in the Pacific/Asia ex-Japan category for the 10-year period. Despite stellar long-term returns, CHN sells at a -6% discount to its holdings’ net asset value.

Even better, CHN pays out one distribution each year in January. The last distribution was $5.82. That’s about a 25% yield.

– Anthony Haddad
Staff Writer
StreetAuthority.com

The Nasdaq cut open and broken down

Today we are going to be examining the NASDAQ Index. This market, which made its peak in 2000 at the height of the dot com bubble, remains in a secular bear market.

http://www.ino.com/info/437/CD3336/&dp=0&l=0&campaignid=3

After making a low in March of 2001, this market has had multiyear recovery which has rallied it very close to a 50% Fibonacci retracement level. After a nearly 50% recovery, this market now appears to be faltering.

The months of September and October are now with us and both of these months tend to be treacherous for the equity markets. We would not be surprised to see more of a two-way trading market before it eventually falls on its own weight and resumes a downward path. This is what we expect to happen, however, we are going to rely on our Trade Triangle technology to give us the perfect timing for that event.

In today’s video I will show you graphically what I expect to happen to the NASDAQ Index.

http://www.ino.com/info/437/CD3336/&dp=0&l=0&campaignid=3

All the best,

Adam Hewison
President, INO.com
Co-Creator, MarketClub