The growing bubble in the Shanghai Index

I just found an interesting website, that probably says it all

BubbleXchange

I wonder if the formation of such websites signals a near term top, much like the infamous "magazine cover" indicator i.e. when you start seeing "How to Retire by Owning Real Estate" in 2006 or "It's Really Different This Time - How Dot Com Companies are Changing the World" in 2001 - on the cover of Time or Newsweek.

Again, this index (mainland A shares) trade in their own twilight zone as foreign investment is nearly impossible, and most mainland Chinese are only allowed to invest in this 1 index. 1 year ago the index stood at 1700, 1 MONTH ago it stood around 4000. Now it 5200.

1 year chart is here

Did I mentioned that a large portion of the "E" (earnings) in the P/E (of >50) are from investment gains and not operations?
Now bubbles can continue for much longer than we anticipate and the same arguements people are making now could of been made 2000 points ago. (and probably were) But these things never end well. It does not mean the Chinese economy is going to go south, as an economy and a market don't necessarily go hand in hand especially in such extremes. But at some point this will be very ugly for the actual market.

So keep speculating if you wish; but make sure you exit stage right or find one of the very few chairs that will be available when the music stops.

As an aside, the China economy is now suffering from both food inflation and impending wage inflation. Somehow 10% GDP growth is not so easy to manage (imagine that). How long before China becomes too expensive and capital moves to cheaper pastures like Vietnam. 2012? 2015? Remember in the mid 90s when Mexico was where all the factories were moving? How quickly they can turn on you....

Further analysis on Smithfield Food's (SFD) via Motley Fool

I had a post last weekend about Smithfield Food's (SFD) entry into China. Motley Fool followed up Friday with an article with some extra detail:

• Smithfield's team speculated that China's hog market could be slashed by a whopping 20% due to disease. Given the country's problems, China could become an enormous market for Smithfield to tap.
• After the conference call, Smithfield announced an official agreement with an "undisclosed" trading company to deliver 60 million pounds of Paylean-free pork to China through year-end. Sixty million pounds sure sounds like a lot of meat, but compared to the meat processor's typical yearly production, the number is fairly modest. However, management did indicate that more agreements could develop a long-term relationship with the unknown company.
• So just how important is the 60-million-pound contract to Smithfield? Well, in 2006, the company sold 3.1 billion pounds of fresh pork products. The contract represents just 1.9% of that.
• The deal might be modest now, but it indicates that Smithfield has a foot in the doorway of the hugely important Chinese market.
• There is the possibility China may not become a significant importer from the protein king, and you wouldn't -- and shouldn't -- base your valuation solely on a chance that the country will drive significant growth for Smithfield.
• Its (China's) industrialization has farmers dropping their pitchforks and abandoning their livestock for big city manufacturing jobs. And while the country has a large agriculture market, a lack of farmers cannot keep up with the demand of a rapidly growing population.

So this article picked up many of the themes I outlined the week before; but the point about more and more population moving from rural to urban is also a good one, and bodes well for food importers in the long run. This specific play is especially interesting, simply because pork is an especially favored food in China. Again, this is a very long term play and the stock is not going to spike due to financial results in the near term due to this China play (it could spike from contracts like it did last week). But definitely one to watch for continued progress into China.

As an aside, an astute reader emailed me with a small cap play on the pork growth story in China. It is an over the counter stock but apparently with plans to move to a major listing (application sent into NASDAQ July 19th). Stock name: Zhongpin (ZHNP) - the reader notified me of this stock @ $9.25, so let's keep a long term eye out on this one as well although it's a bit speculative at this point.

The financial results for ZHNP in its last earnings report are pretty outstanding:
* Revenues doubled to $64 million
* Gross profit +73% to $8.2 million
* Net income (not quite as impressive) +23% to $0.23/share

This is more of a consolidation and aggregration play of the local Chinese pork market by an emerging local player vs the SFD play which is new market entry of an established player. But again, we see this price inflation in China - pork prices for this company rose 37% year over year (it appears food prices worldwide are really shooting up) Gross margins dropped simply because inputs (cost of hogs themselves) are rising even faster. (part of this attributed to disease in the local herd in China) - this is a very thinly traded stock not appropriate at this time for the basis of the Marketocracy fund (nor available to it, due to the exchange it trades on) but another data point/source of info for this play into pork.

No positions in fund or personal account

I totally missed Crocs (CROX)

I'll admit it. I've totally missed out on this stock. Oh, I've heard about it daily since IPO but was always on the bandwagon of 'fad!'. I see them everywhere. I see knock offs at CVS for $2, so I wonder how it can have any pricing power, and how long before they become un-cool. While I got the Under Armour (UA) play from day 1 and have been on board there, Crocs never crossed my radar as a serious 'investment'.

Well, I've changed my mind due to a great early August article in RealMoney.com by Kristin Bentz (subscription required). Now generally it takes a lot more than an article to change my mind, but this was a comprehensive look at why the Crocs (CROX) story is real, expanding, and long lived. Since its a subscription service, I can't reprint anything but I encourage any RealMoney subscribers to read it. Especially Crocs haters (like I used to be).

Now in full disclosure I have no relationship with RealMoney other than I have been a subscriber for a looooooong time, I don't really know how long but the year started with 19** something, not 20** something. I was an avid reader back when JDS Uniphase (JDSU) was a stock every good housewife, and taxi driver had in their portfolio (pull up a 10 year chart on JDSU to see what I mean). For real time stories, analysis, and convergence of opinions from so many different good people, it can't be beat. Second disclosure is, they have a daily blogroll written by James Altucher, which I've been lucky enough to be featured on already. (Hi James) Third disclosure, is I really like to poke fun at Cramer :)

In today's blog roll I noticed the author, Kristin Bentz has her own website, Talented Blonde, where she has some smaller less detailed articles about Crocs.

Now with that said, back to Crocs itself. I've mentioned quite a few times already I am bearish on the domestic consumer, but Crocs is:

• a cheap enough product that it should be ok even in a downturn in the economy
• licensing itself like mad; heck I could get University of Michigan brand crocs if I wanted - and if there is one thing Americans are great for, it's paying XX% extra so they can buy the same product with an affiliation brand slapped on it - I believe that is MBNA's entire business model!
• International sales are already at 50% of revenue, and growing by leaps and bounds.
• Growth of a Crocs in 'wear to work' area - apparently this footwear is so comfortable, nurses, restaurant workers, et al.

So I've changed my mind. The growth opportunities still seem huge, although the shoes just look plain silly to me. But money doesn't look silly to me, so I will ignore the fashion. ;)

I don't feel so bad about missing this stock thus far, because analysts have been very wrong on the growth potential as well. Just 60 days ago the consensus was EPS for 2007 of $1.55 and 2008 of $1.97. Now? $1.96 and $2.53, respectively - increase of 26% and 28% respectively.

At $59, this gives forward PE of 30 (2007) and 23 (2008). Now I don't purport to know what a good valuation is for this company, since I am not sure what exactly to compare it to. But it's growth rate in the recent past is certainly WELL in excess of 50%, and I'd argue the near future could continue to see 30-40% growth.

Let's compare it to Under Armour for example - Under Armour is actually a smaller company than Crocs by revenue (surprised me too), with very similar growth rates on the top line. At $65, it's valued at 65x 2007 estimates and 50x 2008 estimates. Very expensive. Hence I have been out of the name for a while. But shorts constantly get burnt in it, so I wouldn't bet against it either due to that huge short position. Now why the difference in valuation between the two? Probably because most people are thinking like me before I read Kristin's article - we all like Under Armour because we can see a clear path to a Nike (NKE) / Adidas type company in a decade. With Crocs we see fad and no long term growth out over say 3 years. But based on the drivers mentioned above and in the article, I have to say this could be the wrong thesis. And if they are correct in 8-10 years when Crocs sputters out, doesn't that mean we still have a good 5 years ahead of us before the market starts to discount the slowing growth? I don't know the exact timeline of this slowdown in growth but it does not appear imminent. And this is where I will throw in the tried and true financial blog rhetoric of "just imagine 1.3 billion Chinese in Crocs footwear!" ;)

Now I have been waiting for some pullback in the shares the past 2 weeks, but Crocs has remained range bound in the $56-$60 area. Only on the waterfall panic selling of mid August did we see a spike down to the 50 day moving average (at the time $49) and for a few short hours it dropped to the mid $40s. With my general distrust of the long side of the market right now I don't want to over commit capital, but I definitely want to build up my smallish Crocs position here in the near/mid term as a multi-year play.

Long Crocs, Under Armour in fund; no personal positions

Where in the world is Eric Bolling?

I guess I was late to the party but my favorite Fast Money guy, Eric Bolling has apparently left the building according to '1440 Wall Street' blog. Now, that's a huge blow for the show, which is a favorite of mine. Bolling was the best of this crew, by a mile, in my opinion. Even though he was a technical trader by nature, whereas mine are more fundamental calls, his accuracy was awesome.

I also really liked Tim Strazzini, who disappeared in early summer. I liked him because he was very different from the other guys on the show, more introspective and long term thinking, so he offered a contrast to the other guys. I wonder if the flip flop nature of the show with the constant buys and sells didn't suit his style. Also he had the most unflappable hair, along with Jimmy Johnson formerly of the Cowboys....

How dissapointing; it appears this great show has already jumped the shark. Bolling *was* the reason to watch. I guess I await Fox Business channel now; this is a coup for them.

Long Bolling

Et tu, September?

Amazingly, the indexes were (drumroll) up for the month of August. After all that craziness. Go to this page and hit the button to the far right of the 2nd row "Hallelujah" (yes I wish I had one of these in my house)

Now for the road ahead. While October has historically had some of the scariest 1 day market events ... by "events" I mean down days so severe it will make parts of August 2007 look like child's play, September is actually historically the worst month of the year. 'Investment Postcards From Cape Town' blog shows this in graphical form with an entry here. When I see that, I want to hit the top 2 buttons to the far right of row 1 of the Cramer sound board.

Generally I put little stock in these things such as, the 2nd summer of a presidential cycle when an AFC team wins the Super Bowl, is a great time to buy. Blah blah. But the underperformance of September versus every other month of the calendar year is... interesting.

The more I chew on things the more I am worried about a market 'event' that won't make us trading on the long side too happy. Maybe this is the constant worry wart inside all people who have been in the market for more than 3 years.

But this is the ledger as I see it, and the roadmap ahead:

The Bad
* We are in inning 2? 3? of a housing correction
* Home prices are sticky; as homes are illiquid. We are just now seeing the first serious falls, and these drops so far, seem minor versus what should be coming down the pike in the most overheated of markets, as prices are so out of whack with income it's silly.
* The supply of buyers is constrained by much tighter mortgage standards - leading to pure economic theory, less supply of buyers, increasing supply of inventory = not good for prices. I mean really, who can afford a $500K mortgage in CA with a fixed rate of 6.25% fixed? That's a $3100 payment, before property taxes. There are only so many people in this country who can afford that. I'd argue a very small amount. Oh and did I mention jumbo rates are north of 7%? I am being generous with the 6.25% rate. The same example applies to the $400K mortgage in Seattle and northern Virginia, New Jersey, Hawaii, Boston, the $350K mortgage in Arizona, Nevada, Maryland, Chicago, Portland, Denver. Where will these people come from? When they cannot resort to interest only 2/28s?
* And after we bail these people out (not with Bush's plan, but with the next generation of Bush's plan that will need to be created), who is going to be able to afford to buy those homes when these bailed out owners want to sell? Or after the bailout will they be content to sell for $150K less?
* When people even in good financial shape see weakness in housing they also naturally get cautious and retrench on their plans to buy, and this feeds on itself (you go first... no you go first... no you... someone buy this house!)
* The retail "my house is my ATM" play, seems to be over. Retailers already foretelling this; remember stocks are discount mechanisms for the near future (6+ months out). Yes people have been calling this for years, but our consumption culture has always made them look like fools. But with the spigot of the ATM as a house now truly gone, people won't be able to refinance their credit card debt into a new mortgage. (and keep repeating every 2-3 years)
* Even those people who have no plans to sell their home, feel poorer on paper, and hence have natural tendency to tighten spending when feeling less flush in cash, even on paper.
* Same point above but in regards to stock market gains - how will they feel with a potential 15% correction in stocks? More retrenchment?
* Grocery inflation as this ill begotten push for ethanol (using inefficient corn) is rifling through feedstock, corn syrup and any of the thousands of items which use corn as a basis, and now seeping to the end consumer.
* Commercial paper market still extremely dysfunctional
* Bush's aid plan is going to help less than 100K out of millions who will be suffering in the home market
* The fact that free market Bush is even alarmed enough to come up with any sort of plan. Free markets are great... until something goes bad, I guess. Even for Republicans.
* Construction jobs - they are going to be accelerating into an abyss. Granted, some portion is illegal workers who were never on payrolls (official ones, that is) in the first place. But this is a trailing indicator. Who needs more homes when inventory is >9 months, on the way to ? 12?
* Mortgage jobs - huge cutbacks already announced and will be filtering through the future unemployment reports
* Financial jobs - we should start seeing lay off notices soon enough (next week?) I already read that across the pond there are cuts in credit departments already hitting. If we go back to pre 2004 levels of 'credit' (revert to the mean?) what does that mean?
* For those that remain, their year end bonuses will suffer. This year will be down, but NEXT year looks to be really down, as entire departments will no longer be needed/existing. What does this mean for the NYC and affiliated areas high end real estate market? I know, I know, those poor millionaires...
* Earnings cuts in the financials - just started getting downgraded this week by the analysts - how are they even going to be able to provide guidance in October when the location of all this credit risk is in many ways unknowable (how do you tell what % of loans in a CDO you own is going to default in the next 2 years?) We are probably looking at earnings revisions down #1 of a multi step downgrade program in these names.
* Internet ad spending down as financial companies provide a large bulk of it. Could Google disappoint? Psychological blow of all blows - the teflon stock of our era missing?
* China looking like an exact mirror to NASDAQ 1999-2001? New bubble? The Shanghia Index over 5000, was only 4000 just over a month ago, and almost 100% up in 6 months? 50 PE on an index? Oh and a large portion of those earnings are investment gains, not operational earnings. With a country full of newbie investors who have never been through any bear market? Remember what happened when China fell just 7% in Feb 2007.

I could go on, but I am getting depressed....

The Good
* Big Ben has a mighty white horse and has been shining his armor and is ready to arrive and with a simple few cuts, will solve all problems
* Presidential candidates will be jostling to propose bailout after bailout, inciting moral hazard issues up the wazoo. (It was a stretch to put this on the good side but I needed at least 2 items to consider this an official list)

And I think that's about it for that side. I guess you can throw out the 'natural resiliency of the US financial markets and economy' but will that really be a salve in next 6 months?

Conclusions
Now I like Ben; in fact so far, I like Ben a lot. I think "come to the rescue" Al would of cut at least twice by now and maybe even a 50 basis thrown in there for 1 of the cuts for good measure. Heck, the market could of been at 15K by now if Al was still around. But that would not erase what is going on behind the scenes.

The one pillar that has been the bullish bedrock is employment. It's still at a high level; the unemployment rate still is low (granted many people are underemployed and working 2 jobs to pay for groceries and energy costs), but this is the number in my book to watch. With the financial industry from mortgages, to construction, to fancy investment bankers all at risk now.... hmmm. And with every lost job is a small ripple effect on other parts of their local economies.

So I guess it comes down to:
101 reasons things that could cause downward dislocation and potential 08 recession or at least dramatic slowdown

vs

Ben on a white horse along with government bailouts by frantic politicos who keep asking why does something like this happen every 5 years (answer: because the people buying you... err paying for your election drives generally profit from these excesses, and hence we never get preventative measures, just reactive and far more expensive 'solutions' after the fact).

Did I mention September is historically not a great month? Aye!
I hope this is not us in a few months

Continued building my ETF shorts today....

If you think I am a worry wart and all this is hot air, tell me why in comments and why you think this will all blow over in a few months.....

Enjoy the weekend, and time to buckle up for the months ahead....

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Whose not participating today? A Top 10 list

Although this is a light volume rally with most of Wall Street away to the Hamptons... let's see who from the watch list is not participating very much in the rally. Note of course, 1 day does not make a trend but some of these have extended periods of weakness or 'flatness' despite a general up market the past 10 days. These are the 10 that are down to flat for the day.

Akamai Technologies (AKAM) - CDN/networking -> discussed here
Google (GOOG) - internet search -> discussed here
Bolt Technology (BTJ) - oil service
Yingli Green Energy (YGE) - Chinese solar power -> discussed here
China Sunenergy (CSUN) - Chinese solar power -> discussed here
F5 Networks (FFIV) - networking
Juniper Networks (JNPR) - networking
Riverbed Technology (RVBD) - networking -> discussed here
Limelight Networks (LLNW) - CDN/networking -> discussed here
CME Group (CME) - exchanges -> perplexed this one is so stagnant

Again this is 1 day, and a "white noise" light volume sort of day at that, but most of the group above has been pretty stagnant despite some serious rally attempts the past 10 days. The links provided for most have discussions on their potential for weakness at this time. JNPR, CME, and BTJ are the only names surprising me with their lack of movement, but extended/hefty valuations could be their issues.

Long AKAM, GOOG, BTJ, FFIV, JNPR, RVBD, CME in fund; no personal positions

A bit of a remarkable quirk

At this moment, 52 of the 53 long fund positions in the fund are in the green. And the 53rd, DHIL is flat (but it's a low volume stock, only trading 8000 shares so far today). That's a first.

All 3 short ETFs are obviously down. :)

Now, we await Bush...

Advance declines on NYSE are 8 to 2, and NASDAQ 7 to 3, so breadth is solid on a very light volume day.

Speaking of the technical analysis from beginning of the week - after all these gyrations this week; we are right back where we started. DJIA, SP500 right back at resistance, right below 50 day moving average, NASDAQ is a bit above, and Russell 2000 is unable to clear the 200 day moving average. So really we are right back where we started the week.

"Surprise event": Bush bailout

Well here is an external type of surprise event that can alter ones portfolio. Bush is supposed to speak this AM about proposals for bailing out homeowners in subprime. I am sort of shocked that it already has come to this, and will keep my opinions about this type of action by the federal government to myself.

News sources say this will only affect 80,000 homeowners, but with that said, the psychological effect off this should be very positive for financials, at least in the near term.

Investor's Business Daily Interview with Blue Coat Systems (BCSI) CEO

Here is an interview just published on Yahoo Finance with Blue Coat Systems (BCSI) CEO. Some of the basics for those new to BCSI.

• One thing its appliances do is called WAN (wide area network) optimization. This helps computer users in different places reach remote applications quickly and seamlessly, as if the programs were running on their local network.
  
  

• IBD: Can you explain a little bit about what your products do and who buys them?

  NeSmith: It's mainly large enterprises that buy the products. The focus is around two things: One is how (via WAN optimization) you can accelerate business applications (for instance, so employees can easily use Oracle and SAP software that's running in a data center far from corporate offices). They (enterprises) want to get improvement in overall performance.

  We also focus on Internet access control and what you can do to protect users. Both of those things are really (our) basic capabilities.

• NeSmith: The market we're seeing is probably a bit more hot than we originally expected. We're seeing a lot of activity. But I don't think it's so much change as (being) more intense than probably anybody originally expected.
  
  

• IBD: What drives this and your other markets?

  NeSmith: Several things. There's remote data centers that you're consolidating into a few data centers. You're seeing the Webification of applications. You're seeing security problems around how people are using their networks. All these are actually the root drivers of our business.

• IBD: What do you mean by a proxy?

  NeSmith: We call our product a proxy appliance. It sits between the user and the server. It acts like the server to the user, and acts like the user to the server. So we actually act on behalf of the user.

• IBD: You nearly tripled your profit last quarter. What were the main reasons?

  NeSmith: The biggest driver is, we acquired the NetCache business a little over a year ago (from Network Appliance (NasdaqGS:NTAP - News)) and that's been a big contributor to growing revenue. And we've been making a lot of investments around WAN optimization functionality -- some of the acceleration benefits that we provide on the proxy appliance to help drive it.

• IBD: Who are some of your larger clients?

  NeSmith: Our largest customers are banks, insurance companies, oil companies, pharmaceuticals, a lot of business with the government.

  We announced (in mid-August) West Palm Beach schools (as a client). They have a 160-node network, which we think is one of the largest acceleration networks in the industry. We probably have a little over 6,000 customers and almost 40,000 of our appliances installed worldwide.

• IBD: Are you going into any other areas soon?

  NeSmith: We think the security/acceleration capability with the proxy appliance is enough, and we think there's a lot of room for us to grow in that market. So that's where we're going to stay focused for the near term.

*************
Got networkers? Obviously, I don't have enough Blue Coat Systems (BCSI). The stock is currently @ $82, after reaching a high of $87 a few days ago. So it's only retreated to its 5 day moving average. I'd love a move down to its 20 day moving average waaaaay down there at $68 and ramping up by the day; hopefully some meaningful pullback ensues.

To remind readers about BCSI's relatively 'cheap' valuation vs Riverbed Technology (RVBD) - or maybe to remind readers about Riverbed's overvaluation?

BCSI @ $82 has forward PE of 42 on 07 full year estimate (which ends in Apr 08), and forward PE of 32 on 08 full year estimate (which ends in Apr 09)

RVBD @ $44 has forward PE of 69 on 07 full year estimate, and forward PE of 56 on 08 year full year estimate.

Now keep in mind, most likely both companies estimates are conservative so the valuations are not quite as full as they look; but neither is cheap. Also, these companies overlap in their competition in the WAN space but differ in other ways (BCSI has the security features, RVBD moving into the storage space in the future) - so there is no direct comparison as these are unique companies. Also hard to compare them directly to slower growing Juniper Networks (JNPR) which has a lower valuation, but slower growth rates.

With that said, I hav