Something that has been apparent lately is the weakness in small and mid-caps, masked by the relative strength in large caps. We can see this in the indexes; while we've corrected some in both NASDAQ and S&P 500, it is nothing like what I am seeing in individual stocks. I don't often post a chart of the Russell 2000 which is a much broader index, combining S&P 500 type of companies with a good selection of mid-cap and the larger stocks in the small-cap universe, but you can see what I am talking about in a picture. We're not even close to the 50 day moving average in this index - unlike NASDAQ and S&P 500.

As I scan through names of names we own, or of interest, I see the same pattern. Now of course in the "student body left" trading environment - all it takes is a bludgeoning of the U.S. dollar, and we can rally every stock in the universe up in one huge correlation trade, so this can change in a heartbeat. But thus far, it hasn't. In fact... with a tight stop... these are the type of charts I like to go short, rather than go long (EJ and ATHR look very appealing)

The complete list of Chinese ADRs traded on U.S. organized exchanges is listed below:

The housing market may be dead in the US, but in China there is still significant activity. As a massive population continues its transition to a higher standard of living, millions of rural Chinese citizens are moving to large cities and are in need of housing. A real estate bubble may be in the works, but it is certainly a long way from popping.

E-House Holdings (EJ) is a leading real-estate company serving this growing need. The firm currently operates a large real estate agency with brokerage services. It also has a consulting and information services business which allows clients to have access to a huge database of information. This information will be spun off to investors in a complicated transaction this week. The new IPO will be China Real Estate Information Corp (CRIC).

Since I am using a virtual portfolio, and I am not sure how it will handle a potentially complicated transaction, I am going to temporarily sell E-House Holdings (EJ) pending the spinoff / IPO of China Real Estate Information (CRIC) [Sep 30, 2009: China Real Estate Information Seeks US IPO Worth $200M]

• Now, real-estate broker E-House Holdings (NYSE:EJ - News), is preparing to sell off part of its information and consulting business this week. But the deal is a little different because it's doing a merger at the same time.
• Last year, the firm formed a joint venture with Sina Corp. (NasdaqGS:SINA - News), one of China's leading Internet portals. In July of this year, Sina agreed to sell its real estate division to E-House, which is combining it with the spun-off data business. The IPO, then, will consummate the merger.

Doing all the stuff for the blog, I have not had time to look to see how this deal works mechanically, but it sounds similar to what Sohu.com (SOHU) and Changyou.com (CYOU) did earlier this year. So just to keep it simple, I am going to sell Wednesday and buy back hopefully Friday or next Monday after the IPO. This is actually one of our largest positions at the time ... we'll be out in the $22.10s.

Semiconductors

• Elpida Memory Inc.’s (ELPDF.PK) venture with Taiwan's Powerchip Semiconductor Corp turned profitable in July-September on rising prices of DRAM. Taiwan firm Rexchip Electronics Corp, 52 percent owned by Elpida, has operating and net profits in five quarters as dynamic random-access memory prices declined 80 percent in 2008 in a battered chip sector. If the current recovery in chip prices continues, its profit will become more substantial. Elpida’s Tera Probe turned profitable in the quarter just ended, due to increase in demand for testing of mobile DRAM used in smartphones. Other investors in Tera Probe include Taiwan's Powertech Technology Inc, U.S. module maker Kingston Technology Co and Japanese tester maker Advantest Corp.

China Real Estate Information (CRIC), a spin-off of E-House China's (EJ) real estate information and consulting business. is expected to go public this week. According to the Wall Street Journal, "China Real Estate is in the process of acquiring the online real-estate business of Sina Corp. After that deal is completed, the company will begin generating online-advertising revenue." The deal size could reach $225.9 million.

Business Overview (from prospectus)

In 4 sessions this week, the market has almost completely obliterated the previous 2 weeks of losses. I am laughing at last Friday's employment report now - as if those things mattered. I proclaimed I'd be looking for a bounce and then be adding some short exposure as we got closer to S&P 1070 - I am mulling it here.

My strategy was to get short somewhere between 1070 to 1080, and then abandon ship on that side of the boat, if we break north of 1080 because that would mean a new leg up. It's actually very clean technically - textbook. Thus far it's played out perfectly, but I have deep hesitation to short here. We have the best of the banks reporting earnings next week and since the entire American system has been subjugated to make them filthy profitable, I can only imagine the cries of glee next week as Goldman Sachs (GS) and JPMorgan (JPM) raise the heads of the shorts on poles with their massive profits.

We just discussed this Tuesday in [E-House Holdings in Investors Business Daily] - looks like the SINA/EJ IPO is relatively close to fruition. On Wednesday morning in Reuters

• China Real Estate Information Corp, a provider of real estate information and consulting services, is planning to raise up to $200 million in a U.S.-listed initial public offering.
• The company, a Shanghai-based unit of real estate services company E-House China Holdings Ltd (EJ.N), operates a database that held information on about 38,200 developments or buildings and 24,200 parcels of land for development in 56 cities in China as of June 30, according to a prospectus filed with the U.S. Securities and Exchange Commission.
• The company plans to buy the online real estate business operated by Sina Corp, a Chinese media company which in turn would acquire a large stake in China Real Estate Information following the IPO. E-House will remain its parent company and controlling shareholder after the offering.
• China Real Estate plans to list its American depositary shares on the NASDAQ Global Market under the symbol "CRIC". No expected timing for the IPO was detailed in the filing.
• China Real Estate Information revenues rose 61.8 percent to $31.2 million in the first six months of 2009 from the year-earlier period, with net income of $11 million.

Not too shabby, 61% growth and profitable, net income at a staggering 30% of revenue.

This article is a bit dated as it comes from August, but it's a good summary of Chinese real estate company E-House Holdings (EJ). The risk with this company right now as I see it is it is in many ways a direct play on how the Chinese are pulling the strings on loan growth. [Aug 12, 2009: E-House Holdings (EJ) Benefitting from China Housing Bubble 2.0] I have no idea of their future plans, but for now they seem to have pulled back from an "enormous" loan growth rate in the 1st half of 2009, and ratcheted it back to something more akin to "huge" loan growth rate. But all things being equal, I'd rather own the Century 21 of China over the Century 21 of Bubblemerica.

I bought a little more of this name today with the stock down nearly 5%, with the same strategy laid out in the piece right before this: keep riding the horse until it breaks the 50 day moving average, at which point I'll stop out a good amount of the position. Of concern is the latest high is lower than the "spike high" of early August that came immediately after earnings. But nothing yells sell at this point. EJ is trading at roughly 23x 2009 estimates, so not cheap on an absolute basis but relative to its growth rate, it's not outrageous.

Hardware

• NEC Corp. (NELTY.PK), Hitachi Ltd. (HIT) and Casio Computer Co. (CSIOY.PK) plan to merge their mobile handset operations. This will create the country's second-largest cellphone maker by shipments after Sharp Corp. (SHCAY.PK). The Japanese cellphone makers aim to boost profitability by consolidating operations to save money in a domestic market nearing saturation. A consolidation of the three players would help lessen their spending on development costs and ride out the tough local market. This would also trigger an expansion overseas. That prospect encouraged the investors to snap up shares in the three companies.

After a post earnings spike last week, we began a position on the Monday swoon in E-House (China) Holdings (EJ). It's sitting right above support and we could be stopped out of a portion of the position, but I do believe I'll keep this in the longer term core portfolio. [Aug 12, 2009: E-House Holdings Benefiting from China Housing Bubble] [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears] It's a tricky position because we know China is doing some not unfamiliar to America things to stoke their real estate market, but it's a pretty impressive niche company. Much like many American companies nowadays, you are buying free handouts from the government and trying to ride the wave while understanding the implications of these handouts... but needing to ignore them. Until the music stops. Which might be happening today - or in 6 months or 18. Further, if the Shanghai market continues down, I don't expect U.S. listed Chinese stocks to be able to continue to pretend as if its not happening (as we are today) - so we'll have to monitor this closely.

Much of the story in China is actually the inverse of what is being attempted in the U.S. - they have had a reliance on exports and are trying to get the massive internal savings rate down and turn more into a self-reliant internal consumption economy. [Chinese Car Sales Jump 47% Year over Year on Subsidies] In theory, America is trying to do the opposite (although not in practice, as it still wants its citizens to shop via incentive after incentive). We spent a lot of time on what China needs to do at the turn of the year in pieces such as [Jan 8, 2009: NYT - As Trade Slows, China Rethinks Its Growth Strategy] and [Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists] Since the social safety net is weak in China, the savings rate is high as people are much more self-reliant. Further, there is no such thing as filing bankruptcy and getting off clear and free as in some Western countries. There is an interesting piece on the damage credit card growth is creating which I'll try to get out later in the week.

Not long ago, I was having a discussion with some friends about real estate when the focus drifted to Cape Cod housing prices, which had plunged in the 2007-2008 real estate collapse. The consensus among the group was that prices would eventually rebound, and that patient owners and investors would come out OK. And that was no surprise. Most people tend to extrapolate the future from the past … and for most of our lives, real estate prices have gone up.

Then up piped my brother-in-law the geologist, commenting, “10,000 years ago Cape Cod wasn’t there and in 10,000 years it’ll be gone again.”

I previously wrote on a trend following study done by Blackstar Funds. Blackstar's article in full can be found on Scribd, here.

The system is fairly simple,

Back in early June, we mentioned some of the housing data coming out of China that the massive loan growth was helping to stoke. [Jun 10, 2009: Chinese Economic Reports Supplant US Reports in Importance] For example, in 1 month alone [May] sales in Beijing matched the previous 4 months

4:15 PM, Aug 12, 2009 --

• NYSE up 75.3 (1.2%) to 6,538.87.
• DJIA up 120.2 (1.3%) to 9,362.
• S&P 500 up 11.5 (1.2%) to 1,006.
• Nasdaq up 28.9 (1.5%) to 1,999.

GLOBAL SENTIMENT

This must be at least the 10th time in the past 3 months the market has gapped up overnight based on a Chinese economic report. Tuesday, we touched on car sales [Chinese Car Sales Jump 47% Year over Year on Subsidies], but on Wednesday, the happiness across the globe comes from a positive property report. The problem with all these "gaps" is you have to be invested overnight to take advantage of them.

As we wrote in [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]

Q1 2009 Earnings Call

May 19, 2009 8:00 am ET

By Louis Basenese

It’s time to make a big bet and begin investing in China.

I know. It’s not exactly a popular stance. And the smart money is doing exactly the opposite. Or so it appears…

It seems like China won't stop at anything to keep its economy running full steam ahead: China announced a massive $586 billion stimulus package. There they go again, China's cutting interest rates again to 5.58% (the 4th time in the last 10 weeks).

This brings me to the question: How do you tell if a market has actually bottomed?