djn21's  Instablog

I am of the belief that the current rally is unsustainable.  I don't know when a downturn will come, but I suspect it will be somewhat dramatic.  I suspect that Fed liquidity is trying to find a decent return and is pushing the markets higher.  I think within the next year, the current stimilus will be proven to have failed and new systemic problems will arise.  I don't anticipate a true "bottom" until 2011. 

That said, this much liquidity will create a bubble SOMEWHERE.  I do believe something will rise (probably dramatically in price) as all that liquidity chases return from somewhere.  It'll me pretty entertaining to see how it plays out.

I have made my living trading Chinese micro-caps for the last few years, and still like that as an area of focus.  Valuation remain very good and growth remains pretty strong.  They are nice, tradeable positions with a lot of volatility.  The space works perfectly for the limited amount of money that I want to invest.  Currently, I hold CEU, JGBO, LTUS and PUDC.  That said, I cycle through these pretty quickly and have held a wide variety of different stocks in that sector.  I do like those 4 though, and only CEU is on a major exchange, so I look forward to JGBO's uplisting and PUDC uplisting after a reverse split.  LTUS has a trailing P/E of under 2 and some nice growth prospects in its pipeline, so I don't mind holding that for years.

I remain heavily overweighted in cash for the moment, though I am consider various options (outside of equity) as a home for it.

I am a huge believer in micro-caps, and since 5 or so years ago that interest has focused on China.  This spring has been incredibly kind to those of us who focus our strategy on Chinese microcaps.  Many of the stocks that I own and follow (FEED, CEUA, PUDC, JGBO to name a few) have had huge run-ups this spring.  You could throw a dart at a wall full of Chinese microcaps and return 100% with just about any of them this spring - it seems like they have all run.  And many continue to offer compelling growth / value propositions, even after having run up in price.

That said, I believe the time has come to take those bets off - or at the very least, pare exposure.  Now, admittedly, I have been early selling just about everything that I've sold thus far as the micros have continued churning higher.  But as good as the valuations in this niche appear to be, it remains a highly speculative area.  And if the major indexes roll over to the downside, I believe they will take these issues down for the ride.  The temptation to lock in profits as the markets fall will outweigh the attractiveness of underlying fundamentals.

In the longer term, I have little doubt that this niche will outperform.  In fact, I suspect that there are obscene gains to be had from some of these companies in the coming decade.  But before any of that can be realized, I think the American economy (and stock market) will experience deeper pain than it has thus far.  I am fully in the bear camp (there are many who have stated the bear case much more clearly and comprehensively than I could, so I'll just leave it at that), and I believe that when the major indexes roll over - sometime between tomorrow and October - it will take even the best of these companies down with it.

I will be looking to re-enter full positions in many of these same microcaps at some point in the next 6 months, but I believe there will be more attractive entry prices than are currently offered.  And for those of us currently holding long, I think there is limited short term upside, making this a good time to lock in profits.