IB Net Payout Yields Model

China Watch: Markets Surge Higher

As we've been writing for the last month, the China economy and hence the local markets continue to rule the world. See China Market Rules the World on June 30th. Last night, the Shanghai market surged over 2% and made a very impressive jump off the 50EMA showing signs of more gains coming in August.

Copper has also been surging and met coal prices remain steady so the commodity stocks such as Massey Energy (MEE), Alpha Natural Resources (ANR) and Freeport-McMoran (FCX) continue to be our favorite domestic stocks to play this theme.

Additionally, we continue to follow China based commodity plays and mainly 3 companies that are dramatically expanding operations but remain at show me valuations. Puda Coal (PUDA) is acquiring and consolidating numerous coal mines and trades at a 4x '11 estimates. China Armco (CNAM) recently started up a steel recycling facility that should lead to $200M in revenue for a stock trading for $50M. Lihua International (LIWA) recently doubled its copper smelter capacity, but the stock trades at only 4.5x '11 estimates.

All 3 stocks have huge growth potential completely discredited by the markets. The tricky part of investing in these stocks is the reaction to earnings reports around the start up of these operations. Any slight pushes in production from Q2 to Q3 could cause an initial selloff though a likely huge buying opportunity.

See the Shanghai graph below. So far the domestic plays have seen some similar jumps, but the Chinese specific plays that should see a magnified move have lagged. They are risky plays but should be well worth the risk. Otherwise, dive into domestic copper and met coal plays that will benefit from a rebound of growth in China.

Disclosure: Long ANR, MEE, FCX, LIWA, PUDA


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