A bear market rally loses steam and China clears the air
May’s market correction was just the start of a long bear market, says this U.S. advisory, which sees a breath of hope in one Chinese stock.
We haven’t taken a formal count, but the bears appear to have a slight lead.
Among the advisories we consult, some insist we are in the midst of a long, or secular, bull market, punctuated with bearish downturns.
But the edge goes to those who are convinced that the long stock market rally that started in March 2009 is a bull trapped in a bear.
When the markets corrected sharply in May, these observers say, they were showing their true colours.
In general, the pessimists don’t think we will see a brighter future until the world lightens its massive load of bad debt.
Today we hear from a bearish advisory that specializes in fundamental analysis and low-priced stocks.
The KonLin Letter regards debt as a “contagion” sweeping across the world. The chief villains, as far as this U.S. advisory is concerned, are governments and their irresponsible spending habits.
On the other hand, it recommends a stock that will rely heavily on the government of China’s anti-pollution measures to advance its cause.
We will get to that in a moment. But first, a market going south.
The fear index
This advisory keeps a careful watch on a host of indicators that it uses as the foundation of its fundamental analysis.
For instance, the Chicago Board Option Exchange’s Volatility Index, or VIX, also known as the “fear index,” surged to a high of 40.7 per cent in May. That feverish increase in trading activity does not always predict a bear market, but it is enough to make most investors nervous.
Meanwhile, across the pond, Europe’s debt problems caused the London Interbank Offered Rate (LIBOR) to more than double.
Any type of government intervention, warns the advisory, “is only temporarily bullish. The market will ultimately resume its main trend, in this case south, until governments recognize and guarantee their debt.”
Fragile, lackluster recovery
Meanwhile, back in the U.S., the Economic Cycle Research Institute (ECRI) index that “correctly signaled the end of the Great Depression,” peaked in October before sinking to a one-year low in May.
While home sales rebounded thanks to the expiring tax credit for homeowners, building permits plunged by over 10 per cent. Housing demand fell and so did mortgage applications.
Those who claim that the housing market in America has bottomed “have been noticeably wrong,” the advisory states firmly.
The housing glut translates to 6.35 million vacant homes, the most in 10 years. And lumber prices sank 30 per cent in April.
The Index of Leading Economic Indicators fell for the first time in 13 months. Manufacturing growth is slowing and jobless claims have spiked, adds the advisory, so “the fragile, lackluster recovery may have peaked.”
The U.S. dollar continues to be a refuge, the advisory tells its readers, and so does gold. While stocks are “deeply oversold,” small and mid-cap stocks are stronger technically than their larger brethren.
Which takes us to a small stock that will help clear the air.
Most polluted cities
Two of the 10 most polluted cities of the world are in the People’s Republic of China. And the government is trying to do something about it.
The country has relied heavily on coal (almost 70 per cent) and oil (20 per cent), leaving only a small part of its power to hydroelectricity (7 per cent) and natural gas (3 per cent).
Now China “has aggressively moved to reduce coal usage” in favour of more environmentally friendly forms of fuel, says the advisory. In this climate, natural gas is getting a big boost.
Sino Gas International Holdings (OTC-SGAS), through its subsidiary Beijing Gas Co., has developed natural gas distribution systems in a number of small and medium-sized cities.
In all, it operates 39 natural gas distribution systems and is China’s first and largest supplier of compressed natural gas, which it can transport by truck, rail and pipeline at much lower costs than other systems.
The company’s revenues and net income both increased substantially in the last fiscal year and it has strong cash reserves.
For environmental, economic and social reasons, says the advisory, “it is anticipated that the use of natural gas will grow rapidly in the People’s Republic of China.” In this huge market, the growth potential is enormous, it adds. And Sino Gas should be the top beneficiary.
The advisory puts the ultimate price target at $5 to $6. The shares, which traded at $0.55 when this issue went to press, have moved up to $0.60. It pays no dividend.
If the market is headed south for a long time, as this advisory suggests, investors will need every breath of fresh air they can get.
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