Investors Beware: 4 Chinese Companies of Questionable Value

This past Sunday I watched the premier of HBO’s Too Big to Fail, the story of the collapse of Lehman Brothers and the subsequent bailout of AIG (AIG) and the creation of the Troubled Asset Relief Program (TARP).

While most of the movie seemed like a rather simplified version of events, one thing did resonate with me: the inability of many financial professionals to realize the true value of the “assets” in their portfolios. If the likes of Dick Fuld, with all his acumen and resources, lacked the perspective to realize he was standing on a pile of garbage, what chance is there the normal, everyday investor would correctly assess his or her own portfolio?

To that end, let’s play devil's advocate and take a look at some equities of questionable value.

On April 26 and 27 of this year, Longtop Financial Technologies (LFT) dropped nearly 50% following a report of fraudulent financial statements from Citron Research. How could the average investor have protected himself or herself better, you ask? Simple: Appropriate riskmanagement. By always having an eye on the risk, investors could have protected profits and at the very least prevented the eventual outcome -- possibly losing 100% of their investment when the stock was halted last week.

If the fundamentals of a company are flawed or outright fraud, how is it possible to assess the true worth of a company? All you can do is mitigate your risk and make sure you have the right shoes on when you wade through those “muddy” waters.

AsiaInfo-Linkage (ASIA) is one of the plethora of Chinese software companies that have come seeking investors in US markets, for example. The stock began to really plummet toward the beginning of April when accusations of fraud began to circulate and then cut through the 210-day moving average with conviction. After a brief bounce back to the 210, it has continued its dive and may seek the low single digits from whence it came. Smartstops has the short-term stop at $16.68 and the long-term stop a scant $0.40 away at $16.21. In the unlikely event the stock reverses course, our reentry price is $20.49.

Another company to beware of is VanceInfo (VIT). Oppenheimer beat me to the punch when they downgraded it this morning. According to Oppenheimer, “The firm downgraded the stock because it has limited confidence in financial statements for Chinese IT services companies that have been audited by Deloitte, after the SEC launched an inquiry into Longtop Financial.” VIT, too, looks to return single digits if not to zero as it follows its current trajectory. It is close to 10 points below the 210-day moving average. Smartstops has the short-term stop at $20.56 and the long-term stop is $18.65

Another company that may be attractive for would-be Chinese real estate investors is E-House Holdings Limited (EJ). For those of you who think they know better than Jim Chanos, think again. If this stock is a leading indicator of a Chinese real estate bubble, the world is in for some rocky times ahead. The stock is trading below its 55- and 210-day moving averages. Some part of this phenomenon is related to the Chinese government's desire to reduce speculation in the market. Smartstops has the short-term stop at $9.85 and the long-term stop is at $9.59

It may be tempting to stay in these companies if you own their stock, or even enter here if you feel like rolling the dice. But remember the lessons of 2008; the speculators at Lehman Brothers, Bear Stearns, and AIG brought down those venerable names by ignoring risk management.

Rarely is the juice worth the squeeze.

Editor's Note: This content was originally posted on SmartStops.net.

Will LinkedIn's IPO Confirm Internet Bubble 2.0?

Three years ago, at the peak of the financial crisis, Jamie Dimon’s daughter reportedly asked him, “Dad, what’s a financial crisis?” His reply, “Something that happens every seven years.”

The crisis that preceded the current one was caused by hyper-inflated valuations of Internet companies that made no profit, and about whom investors knew little or anything about. Sound familiar?

Yes, we could be talking about numerous companies that have hogged recent headlines: Facebook, Zygna, Twitter and LinkedIn, for example. All are purveyors of what's known as “social media.” All have been the subject of intense speculation and rather opaque trading in the private stock trading markets. But now one is about to depart the safety of those illiquid markets and is venturing out into the public.

LinkedIn goes public this morning with as much hype as can be expected of the vanguard of social media. Despite its $45 price, many observers, myself included can only wonder if its fate will resemble that of Renren (RENN). The self styled "Facebook of China”, Renren has had a very rocky reception in the market since its own IPO. It's now trading at little more than half of its public offer price.

My gut tells me LinkedIn’s IPO may be more of the same. There's a lot of excitement, regarding this company. Smart traders and investors sell when the market is excited. I would wait until some of the fervor dies down before entering this trade.

Now if you're interested in web-based companies but seek those positive checks smart investors seek, such as profits and market share, you will not have to wait for a possible Facebook IPO. The cloud space has several established players but none is bigger than Salesforce.com (CRM). Salesforce is the market leader in customer relationship management software and is growing consistently. Its current valuation at 10 times sales may seem steep, but given the vast array of analysts who believe its price should be around $155-$170, it may be turn out to be a value growth play if the market continues yesterday’s upward bounce. SmartStops.net has a short-term stop at $125.79 and the long-term stop at $121.66.

If cloud computing seems a little far-fetched for you, what about business-to-business networking, otherwise known as social media for businesses? Now imagine it coming to the web. I’m talking about potential $12 trillion in business. Did that start up your saliva glands? Ariba (ARBA) is the leader in this space. They are a way ahead of their competition. And the market has appreciated its subscription-based revenue model, pushing the stock up 400% in the past four years. So, is Ariba undervalued, or is LinkedIn overvalued? The market will tell us. According to SmartStops.net Ariba’s short-term stop is at $29.67 and the long-term stop is at $28.49.

Editor's Note: This content was originally posted on SmartStops.net.

Are Molycorp, Newmont, and Other Miners Too Risky Now?

I don't like telling people, “I told you so." But when it comes to the crash in commodity prices, especially the rare earth sector... well, I told you so.

Given the recent rumbling in commodities as a whole, this may come off as a time-machine call-out. But I can honestly say I’ve been talking about this for days. I shared my opinion with all of you on May 10 in my article Is the Rare Earth Bubble Ready to Pop?

This is a great lesson in risk management.Molycorp (MCP), the leader in the sector, had nothing less than a stunning run-over the past year, increasing more than 500%, fueled by news from China, speculation in the industry, speculation in other metals, and low margin costs. The stock just a week ago looked like it was priming for another run, possibly all the way to $100.



It’s at times like these, when the rest of the investing world gets frothy at the mouth, that the smart money starts looking for the exits. It’s a poor cliché but to paraphrase it, “the rich don’t go broke taking profits.” The first catalyst to kick off the rapid downtrend was the poor earnings report issued on the morning of May 11 and then the weakness of the overall sector and commodity market.

Yet if you were following SmartStops, then your first exit trigger occurred on May 11 at $62.45 which lead you to protecting your profits. The latest and third exit trigger in this series occurred on May 16 at $58.69.

The stock may continue downward seeking heavy support. My firm's current short-term stop is at $56.96 and the long-term stop is at $50.17.

Molycorp’s mining peers have not fared much better. If miners truly are a leading indicator of what is to come, it may be well past time to exit any short- and medium-term positions in a slew of metals.

Freeport McMoRan (FCX), Newmont Mining (NEM) and Silver Wheaton (SLW) to name a prominent few are all flagged in “above normal risk." FCX has a short-term stop at $45.66 and the long-term stop is $44.52. NEM’s short-term stop is $50.97 and long-term stop is $49.75. SLW’s short-term stop is $31.47 and the long-term stop is $30.31.

If the S&P continues yesterday's down move and breaks the 50-day moving average at 1325, the index could very well find 1300 soon after. This market is shaking out most of the speculators and will soon allow value investors who practice good risk management an opportunity to enter growth stocks at advantageous prices.

The Bubble Has Popped -- Now What?

A rare halt in oil trading Wednesday triggered a sharp selloff in commodities and equities in markets afraid of an encore of last week’s commodity plunge. The last halt in oil trading occurred in September 2008, a week after the collapse of Lehman Brothers.

Sliver lost 9% in the selloff, erasing gains in the previous couple days and was down another 6% as of this writing. It has yet to find a bottom -- or as Bob Barker of "The Price is Right" might say, “Down, down it goes -- where it stops no one knows.”

Now with the increased margin requirements driving a number of speculators out of the market, the precious metal may seek out price levels more in keeping with historical norms. Those prices are calculated by seeing how many ounces of silver are needed to buy an ounce of gold. Over the past 10 years the ratio has been roughly 60:1. If silver were to return to a similar ratio, it could go down as far as $25 an ounce. iShares Silver Trust(SLV), the proxy we use in lieu of silver at Smartstops.net, has the short-term stop at $31.97 and the long-term stop at $29.37.

If that wasn’t enough to make you reconsider being long commodities, the Powershares DB Commodity Index Tracking ETF (DBC) has formed a head-and-shoulders. A pattern associated with a change in trend direction. The neckline/support of the pattern coincides with the Smartstops.net short-term stop at $28.16 and the long-term stop at $27.30.

SmartStops provides effective, easy-to-implement risk monitoring for investment professionals and individual investors to optimize profits and minimize losses.

The Four Horsemen of the Tech Sector: Leaders to Watch in Volatile Markets

Over eight months the market has steadily climbed upward. This ascent has been guided by the technology sector, and four explosive companies have led the charge.

Apple (AAPL) has been a leader, but as of late, its momentum has stalled. This slowdown in forward momentum is reminiscent of price action last summer. From a technical perspective, the stock has been forming a bull flag and has been holding above its 55 & 210 ema. I would be hesitant to invest more than a feeler at this point until it more clearly resolves to the upside and starts to break above resistance at $360. SmartStops.net indicates the short-term stop is $341.06 and the long-term stop is $339.49

Google (GOOG) has been the laggard in this group for some time now. Lower than expected earnings and the market’s disdain for new CEO Larry Page have led it down. And while it may be tempting to buy on recent news, the technicals don’t bear it out. The stock is trailing the 55 and 210 ema. Smartstop.net projects the short-term stop is $527.77 and the long-term stop is $525.04

IBM (IBM) has shown relative strength, leading the 55 and 210 ema. After a brief pullback the stock looks like it may make new highs. Smartstops.net has the short-term stop at $165.73 and the long-term stop at $158.75

Amazon (AMZN) has been the recent leader in this group after nearly bouncing off it 210 ema. The stock is showing a lot of relative strength and looks to continue to make new highs. Smartstops.net has the short-term stop at $187.85 and the long-term stop at 168.24

The four horsemen were leading indicators of doom. Keep an eye on leaders to protect yourself from volatile markets. Market leaders are known to drop 72% from their peak per Investor's Business Daily.
Editor's Note: This content was originally posted on SmartStops.net.

Is the Rare Earth Bubble Ready to Pop?

The weakening dollar has helped erase some of last week’s weakness in commodities.

Silver lost nearly 30% and gold 10% of their respective values, leading many experts to believe the commodity bubble has popped. But after a rather tumultuous week, the precious metals have started their upward trend again. Many could argue that the gold bubble has been building for nearly 10 years now and that silver’s explosive recent growth was a result of the high cost of gold and the strong industrial implications of the metal.

This leads us to ask if the bubble includes all commodities. The rare earths sector has seen incredible growth over the past year.  Molycorp (MCP), which has earnings after the close today, has gone from $15 to as high $79 all in the past year. Many investors are no doubt wary of entering such an extended and possibly overbought company, especially given the drubbing many people took with silver (SLV) in the past week. It's good to be cautious but try not to let your fear override your ability to make sound judgments. MCP has had several strong run ups over the past year and then pulled back, allowing the stock to rest before its next surge up. If you take into account the measured move, it could possibly rise another $20 in the next surge.

If you keep yourself protected, you can always take on higher-risk stocks. Now that MCP has enough history, my firm has added it. We have the short-term stop for MCP at $62.98 and the long-term stop at $57.58. Make sure to always keep your exit strategy in play even if you aren't yet ready to set proactive stops.
Editor's Note: This content was originally posted on SmartStops.net.

Russian Roulette Anyone?

By Raghu Gullapalli 



After an extremely volatile week, what can we expect from silver in the week ahead? If you’ve read some of the same reports in the blogosphere as I have, you may want to try your chances at Russian Roulette -- your odds of success are higher.

There are a couple of metaphors I especially enjoyed:

• “Dead Cat Bounce”
• “Gap and Crap”
• “Silver takes the stairs up and the elevator down”

At the end of its move up, silver was on a rocket. The entire world was in a frenzy, from the taxi drivers to my mother. That was the big clue.

“Sell on excitement”

That’s exactly what George Soros and Carlos Slim -- among the most notable -- did. They started exiting their silver position when it made new all time highs. In some ways the death of Osama bin Laden may have been the catalyst many experienced investors sought. One last spark to bring the market to a fever pitch.

Now what?

Well after a week where silver lost almost 25% of its value, it's hard not to take the value of Risk Management seriously.

This morning Silver Wheaton (SLW), the miner, came out with its quarterly earnings. According to SmartStops.net, the short-term stop is $33.81 and the long-term stop is $31.73.

iShares Silver Trust (SLV) may experience the aforementioned “Dead Cat Bounce” wherein the price bounces up from last week’s lows, making a woeful attempt to break the downtrend and then continue downward.

Editor's Note: This content was originally posted on SmartStops.net.