3,2,1..... CHINA!

We love China. Why? The Chinese stock market is making new high everyday. And if you were invested in Chinese equity in any way in the last couple of years, you should have done quite well.

Now, I have personally developed this stock market indicator. This indicator is quite accurate. It has accurately predicted the Tech Bubble of 2000. The indicator is called, my dad indicator. The best thing is, the indicator is free.

I remembered that my pop got very vocal about the market in 1999. He was complaining to my mom about selling stocks out too early, and not buying the next best stock. So, he took control of the family savings soon after. He bought some awesome companies. First, he bought Yahoo (Nasdaq: YHOO) at $200 a piece. Then he bought Lucent (Nasdaq: ALU) for about $60 a share. This was, of course, in the early 2000. Well, needless to say, not too soon after he made those trades, everything crumbled into pieces.



All of this bring me back to last couple days where my pop got very vocal again. He was constantly arguing with my mom. They usually argue about b.s. like most married couple, but these days, he was complaining about my mom management of the family savings (which is, for the most part, invested in Chinese equity through H-shares listed Chinese companies). He started to grill stock quotes every night. And he would flip through the finance pages of Chinese newspaper. He would make believe that he is the Chinese Warren Buffett.

I've recently suggested to my mom to buy into a Chinese railroad company (NYSE: GSH HKEX: 0525.HK). So she bought it and it went up about 12-15% since she bought it. It was a nice profit in a short period of time. Yesterday, my pop, would go through his usual routine and checks his stock quotes, and he would complain to me about how bad my pick had lagged the best performers (such as PetroChina NYSE: PTR HK: 0857.HK). I would simply ignore him and tell him to sell it and buy something else. Which he did.

Last Sunday, my pop read about a Chinese coal producer in a Chinese newspaper. The company name is China Shenhua (HK: 1088.HK) and the article in the paper mentioned UBS has just upgraded the stock and gave it a target price of 2x from where it is trading right now. My pop came into my room and inquired about the company. I pulled up the info. on the company real quick on Yahoo Finance and saw that the stock is trading at a P/E of 50. Immediately I said, "expensive, Google is only trading at 30-35 P/E, I would rather have Google if I want to pay that much." He would go on and complain about low P/E stocks never moves.

However, his question in the Chinese coal company got me thinking. As a commodity producer, your top-line revenue growth comes from the price you charge for the commodity you are selling. And the price is determine by the market/demand for the commodity. So it makes sense that a coal producer in China can be very well off because of China's rising demand for energy. Then it hit me like a brick: at a certain price point, it would become cheaper for coal consumers to import coal from other part of the world- this would limit the demand and price paid for Chinese coal. I'm no expert on coal, but the coal in China can't be THAT much better than coal from the U.S. right? So why would anyone pay a premium for a Chinese coal producer over a U.S. coal producer?

The poor Chinese citizens in China are only allow to buy Chinese stocks (A-share and recently H-share). So they don't have access to the U.S. stock market. Poor folks.

And looking at my pop and his recent behavior, I would say the Chinese stock market is closing in on a top (even if it's just a correction).