Egypt and Short Selling China

Egypt Unrest Revolution

First, I have to address the Egypt crisis. The Europe and USA stock markets took a hit last Friday on the unrest and or possible revolution going on in Egypt currently. Asia for the most part this early Monday morning is under pressure as Europe is now opening. It’s too early to make concrete decisions on how this situation will play out. My bet is that Hosni Mubarak leaves, an interim government is installed, with elections sometime this year . . . hopefully.

Learn from History

In 1986 when the Philippines was under-going unrest and the subsequent revolution to remove Ferdinand Marcos from power, President Reagan told Marcos it’s time to leave, and once Marcos made his choice, helped him vacate the Philippines to Hawaii before the angry mob put him on trial and or killed him. I suggest President Obama review this past history of the Philippines, and be on the side of history this time with how he and the rest of the world’s leaders deal with Mubarak. The Egyptian people have spoken loud and clear.

Short Selling China

It’s Monday, and I’m posting a new weekly stock pick this week with a sell short position on a big Chinese digital media company named Focus Media. You could regard this short sale as a possible buying opportunity at lower prices because long-term, I think this and most China stocks are all mostly going up.

Chinese New Year February 03, 2011

The Chinese New Year of the Rabbit starts on February 03, 2011. The Rabbit Year is said to be fortunate. Almost everything will come more easily in 2011. The year of the Metal Rabbit promises to bring peace, joy, calmness and many happy moments. Lets hope so.

The Chinese Economy

In the meantime, China monetary officials have been in the markets for many years now, taking steps to slow down and cool their red hot economy. I do not usually recommended shorting China stocks, but I think there may be a continued China slow-down somewhat lending to the good chance that this short sale will work out. If it doesn’t, implement your mental stop-loss, and or go long the stock in case of an upside breakout.

Jim Chanos Short Selling China

Legendary short seller hedge fund manager Jim Chanos started calling for a China crash of some kind in late 2009, early 2010. I don’t totally agree with him, but I do take into consideration what he has to say, and I don’t discount anything that has the potential for great unforeseen risk. Chanos may be right, and I don’t want to get caught holding the bag, and be ready and nimble to take advantage and benefit from the situation if Chanos is right.

What’s Real and What’s Not?

Chanos has warned that China’s mega-stimulated economy is headed for a crash instead of a sustained boom that many predict. I’m a China bull as much as anyone, but there are some disturbing things going on there we may never really know the truth about only until after they have happened. Like the fact that the Chinese banks are heavily invested in the stock market with money from the government, all the while China monetary officials are making their banks raise their reserve capital requirements is one major concern of mine. Also it’s exploding metropolitan real estate prices that Chanos says is “Dubai times 1,000 or worse”. Chanos has suggested that Beijing is possibly cooking the books on their huge growth rates of more than 8 percent. I don’t know about that. The only way to know for sure is to take a trip to China, and tour around and or live there awhile. After your trip, I don’t think you’ll be thinking they were lying about their past growth rates.

Real China Risk Fear

Chanos does have valid points to raise on the China risk fears. “Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” I totally agree with that statement which makes me pause and think. Look what the credit excesses of years and decades past did to the USA and Europe in 2007, and 2008. If China does have credit excesses as Chanos is suggesting, then buyer beware.

China Stocks PE Ratios

If you’ve even looked at and analyzed the China stock valuations, and also compared them to their Hong Kong market counterparts, you might think its late 1999 in the USA during the high-tech bubble blow-off. PE ratio valuations are big double digit, and a lot, triple digit in China. The same respective China share’s traded on the Hong Kong exchange are at more realistic PE ratio values. Why the big difference you might say?

News You Can Use and Bank On

Do the Chinese investor and traders know something which others who don’t live there know? Possibly? If so, what? I ask those questions everytime I analyze the China stocks. Why is the PE ratio of this China stock at 99 or even 199? And how long will that last in case I go long on it and then everything changes, and Chanos ends up possibly being right, and I can’t get my mental stop-loss order in before I’ve lost a significant amount of my capital?

Focus Media's Basic Fundamental Valuation

Focus Media’s current PE ratio is about 45, and the total capitalization is $3.5 billion. I would be a buyer if the PE ratio was half of what it is now, but it may not get there. We will have to wait while we speculate.

Sell Short Focus Media Holding – Ticker FMCN

Sell Entry: 24.91 to 23.93

Stop-Loss: 25.68

Take Profit Areas: 20.90 to 20.43, 19.96 to 19.50, 16.87 to 16.46, 13.02 to 12.73

Focus Media Holding China Company Profile

Focus Media Holding Limited, a multi- platform digital media company, operates out-of-home advertising network using audiovisual digital displays in China. It operates out-of-home advertising network based on the number of locations and flat-panel television displays in its network. The company, through its multi-platform digital advertising network, reaches urban consumers at locations and point-of-interests over various media formats, including audiovisual television displays in buildings and stores, advertising poster frames, outdoor light-emitting diode digital billboards, and Internet advertising platforms. As of June 30, 2010, its digital out-of-home advertising network had approximately 142,000 LCD displays in its LCD display network and approximately 275,000 advertising in-elevator poster and digital frames, installed in approximately 90 cities. The company also provides Internet marketing solutions; and sells software licenses and services, primarily including Adforward software. Focus Media Holding Limited was founded in 1997 and is based in Shanghai, the Peoples Republic of China.

Click the Focus Media stock chart below for a larger view.



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Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in FMCN over the next 72 hours.