Sentiment

Stocks are trading lower, as investor sentiment remains cautious heading into tomorrow's FOMC announcement. With the earnings calendar slowing down and a light economic calendar (productivity and wholesale inventories = yawn), there wasn't a lot of news to guide the market action Tuesday morning. Instead, focus seems to shifting to tomorrow's FOMC announcement and retail sales data on Thursday.

The financials are seeing relative weakness. CIT (CIT) is down 16.2 percent after delaying the release of its earnings report. BofA (BAC), GE (GE), JPMorgan (JPM), and Traveler's (TRV) are the biggest losers in the Dow Jones Industrial Average. However, the weakness isn't limited to the financials. 359 S&P 500 stocks are lower. 133 trading higher.

Following on my recent post that revealed the rise in American consumption predicated in large part on ever-rising healthcare costs, I decided to question my own view that US consumers would drastically retrench. Contrarian thinking is key to making good investment decisions -- we should apply it to our own views once in a while.

My latest screen, conducted via the Morningstar website, focused on companies in the consumer goods sector. Specifically I used the following criteria:

Sentiment

Stocks struggled at the open, but found a floor in morning trading and bounced higher after the latest data on consumer confidence surprised to the upside. According to data released 30 minutes into the trading session, the Conference Board's Index of consumer confidence jumped to 54.9 in May, up from 40.8 the month before and much better than economist estimates of 42.6.

The news triggered a reaction across a number of different asset classes. Bonds, which were showing modest gains ahead of the news, sank into the red. Crude oil had fallen below $60 a barrel, but battled back to close up 64 cents to $62.32 a barrel. Meanwhile, stocks surged and never looked back.

Earlier this month, we heard a similar story from Deere (DE), which has seen orders for agricultural equipment drop sharply.

You know things are hot and heavy when the blast off of Chinese smallcap stocks returns. These names many times put on 30-50% daily moves in October 2007, as traders rotated from one name to another, driving them up - and then moving to the next name. This happened a few times in 2008 as well [Feb 4, 2008: China Small Cap Speculation is Back] ,and the names really never change. This same behavior is now repeating...


And many more in the 15-20%+ type of gain range.

Those who know me well know that I look for value. I strongly believe that markets are inefficient and that investors are emotional creatures driven by fear and greed regardless of the fundamentals. As a matter of fact, I even developed a theory called the Cyclical Efficient Market Hypothesis (CEMH) to help me, as well as help fellow investors, better profit from market inefficiencies.

However in this article I will not deal with CEMH, but I will look at stocks which are deeply undervalued or perhaps “insanely” undervalued; If you are looking for companies trading for 50c on the dollar, fast growth companies trading at under 2 P/E or companies with 0.5 or lower PEG, in this article you will learn about them, and you will see that there is a whole lot of them: they are called the Chinese Micro Caps.

Scrooge visits Chinese equity holders

Happy New Year indeed! Holders of AgFeed (FEED) and A-Power (APWR) were greeted with belated Christmas presents this year and quite expensive ones at that. To recap, on Monday FEED greeted investors, at least those who stuck around post the lowered earnings guidance of last month, with even more painful news; dilution at levels below the market. Tuesday brought the - not completely unexpected - news that APWR would be coming in light of its recently endorsed guidance. Both stocks suffered dramatic declines on the news, yet the damage to APWR is temporary while FEED’s is irreparable.

This is the Third Quarter 2008 edition of our ongoing hedge fund tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F's here.

The other funds we've already covered include:

The major sell-off following AgFeed's (FEED) last quarter results has created an opportunity to buy the stock, currently trading at 2.5xPE '08 (Bloomberg estimates).

Company overview:

Wall Street has its share of axioms. Two fairly well known ones are "the trend is your friend", and "winners keep winning". Both of these are applicable to momentum based investing, a field of technical analysis. However, the Magic Formula Investing screen is strictly a quality at low prices strategy, a decidedly value based approach.

However, we've applied alternate statistics to the MagicDiligence universe of stocks before. For the record, that's two Magic Formula Investing screens: the top 100 stocks over 50 million market cap, and the top 50 over 2 billion market cap. But we want to make sure that these alternate statistics have been proven to add value in choosing stocks. After all, there is little reason to list all Magic Formula stocks with a 4-letter ticker if that filter has not been shown to add value in the form of better returns!

AgFeed (FEED) is a small cap Chinese company that today took an unusual step. Its stock is up 17%. Now someone might say this is due to their reiterating guidance, but as we have seen in this market, that means nothing. They bought four pig farms - again, I find that highly doubtful for a pop of that magnitude. But they put the naked short sellers on notice, and as those locusts scrambled away the stock is popping.

It is quite a sad statement really - again I don't mind, nor should any investor mind, when they make a bad stock selection or bad news comes out and their stock drops. But as I watch some of these stocks on the regulation SHO list sit hammered for months on end, and then I watch when a company actually drops a warning shot against the naked short sellers - to see how violently the stock reacts - this shows you how 'rigged' things are, in the small cap world especially. (although naked short selling can be done anywhere to any stock - it affects smaller names disproportionally) If you don't have institutional support on the long side you are just a plaything for certain "pools of capital".

Agriculture has been one of the hottest industries for an investor to be in. However, a majority of the market has already had significant gains. And although I do have positions in the large agriculture companies; as a value investor, I feel somewhat uncomfortable buying into companies that have already had tremendous returns.

I’m still very bullish on agriculture, and I’ve been trying to find value plays, particularly in China’s emerging market. In this article, I will introduce a few of the companies that I’m interested in and high-level rationale behind why they might be good investments in the coming months. But first, let us explore the agricultural landscape in China.

Three weeks ago I posted the first part of a series of articles discussing the importance of making long term investment decisions based on the fact that we are living in a resource constrained world, due to rapid depletion of many non-renewable natural resources. If you look at the hot sectors in recent years, most of those that were "hot" are related to depleting natural resources one way or another. That includes oil, natural gas, coal, base metals, and precious metals. And of course, relating to the depletion of fossil fuels, the development of alternative energy is booming and the stocks are hot.

Palladium has been my most favorite metal. I have previously discussed the unusual characteristics of palladium. It is the only metal that defied the well established over-supply condition, with price rallied higher in the last 5 years, proving all metal analysts wrong in their bearish predictions. That surprising fact alone should catch people's attention, and encourage them to study what's unusual about this metal. I see booming demands of palladium from auto catalyst converters, jewelry, fuel cell, catalyst in biofuel synthesize and oil refinery, and misc. applications. Most astonishingly, palladium could be used in cold fusion and bring about a perfect solution to our current energy crisis. With even the authoritative American Physical Society [APS] now publicly endorsing cold fusion as a real science, by sponsoring cold fusion conferences, who is to say cold fusion is not proven? A Russian scientist already promised to demo a 100KW working device by August, 2008. We will soon see if he keeps his promise. If cold fusion becomes a commercial reality, I predict palladium price could reach 100 to 1000 times more expensive than gold.

The last few weeks may have signaled a possible top looming in Chinese ADRs and our zealous impulse to own them. I believe this because of the recent emergence of China related stocks that are the product of reverse mergers.

BARRON'S also mentions these companies this week and the astonishing fact that they are up a combined 25% since Sept. 18. These stocks are coming in droves onto the Nasdaq and AMEX and with plenty of high flying moves, enough volatility to lure even the most disciplined investor into nibbling just for a chance at a quick 100% daily gain.

Considerable interest has been generated on Seeking Alpha on how to capitalize on China’s shortage of pork, leading to suggestions of investment in Smithfield Food’s (SFD) to Zhongpin (ZHNP), a meatpacker and retailer. However, there may be another play that takes advantage of the increase in pork demand without the risk of higher pig prices that Zhongpin (ZHNP) might experience which could dampen its revenue growth.

On August 29, Agfeed Industries (FEED) commenced NASDAQ trading under its new symbol, FEED. Given China’s pork demand, I am profiling the company as a potential investment opportunity .