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Positioning for the second quarter of 2014

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economy_5 April, 2014 (Chinavestor) US stocks were mixed in March. The gap between the Dow and the NASDAQ significantly narrowed for the month. The Dow Jones Industrial Average (INDEXDJX:.DJI) advanced 1.8% and is back in the black YTD. The NASDAQ fell 1.8% In March but is still up 1.3% YTD. Leading NASDAQ stocks succumbed to profit taking in the second part of the month. Google Inc. (NASDAQ:GOOG), Netflix Inc. (NASDAQ:NFLX), Inc. (NASDAQ:AMZN), and (NASDAQ:PCLN) all fell hard as investors hedged their bets following concerns about how mobile applications will reshape the advertising space.

Apple Inc. (NASDAQ:AAPL) rose 2.4% in March due to rumors that its Apple TV unit will roll out a deal with Comcast. That threat was so real that Netflix Inc. (NASDAQ:NFLX) plunged as much as 19.2% in March.


If investors think US markets were not so friendly in March, think about alternative investments, like China. The Hang Seng Index (INDEXHANGSENG:HSI) fell

-1.6% for the month and is off –5.1% YTD. US listed Chinese stocks didn’t do any better. The China ADR Index, compiled by Chinavestor, slipped –1.0% for the month and is down –5.2% YTD.

NASDAQ listed technology stocks are primarily responsible for the weak showing of Chinese stocks in the U.S. Industry leader Baidu Inc. (NASDAQ:BIDU) lost 7.4% while second largest internet stock Sina Corp. (NASDAQ:SINA) plunged over 10% in March. Inc. (NASDAQ:SOHU), the fourth largest Chinese internet portal, lost 22.3% of its value in just one month.

Slow Chinese growth, lack of confidence, high valuation all contributed to the decline. But nothing contributed more than the worst IPO this year, King Digital Entertainment Plc. (NYSE:KING). This online game developer and operator firm, boasting 324 million monthly users, fell 15.7% in three successive days following a late March IPO. Investors took KING’s business model to bits and pieces and were all but convinced of future profitability. This in turn hurt business models of similar and related Chinese internet companies, wreaking havoc for Sohu’s profit driver, Ltd (NASDAQ:CYOU).

Slower economic growth and low orders sent Chinese solar companies tumbling. The combined decline of internet and solar stocks sealed the fate of the technology sector.

Investors were a lot more forgiving for US equities. Manufacturing growth, consumer confidence, improving payrolls, some housing stats all lifted investor sentiment in the U.S. Even FED’s new chairwoman, Mrs. Yellen’s, first official hint about winding down the quantitative easing had negligible effect on major equity indices. As a matter of fact, the S&P 500 hit an intraday record of 1,884 today following manufacturing and car sales data.

We are of a view that the market is not paying close attention to details. Take a look at non-farm payrolls data, for example. Jobs growth has been painfully slow in the first three months of the year yet most investors don’t think about it as a big deal. Some argue that lack of growth is attributed to an unusually cold winter and subdued economic activity. Unemployment numbers are coming down, and that’s all that matters for the mainstream. Yet there is a lot going on behind the numbers. First, unemployment doesn’t take into account people stopped looking for work. Second, despite a seemingly strong jobs creation of over 8 million jobs since the 2008 depression, the US labor market is far from healthy. Remember, the U.S. economy lost 8.67 million jobs in the wake of the 2008 economic meltdown and we need an additional 600k jobs just to get back what we lost. Not to mention that the workforce has grown in the last six years. All told, there is still a lot of work to be done on the unemployment front.


The long term effects of the QI and deep government debt levels are still to be felt.

Despite looming problems, most market participants ignore them or pretend to do so. Statistics have been on their side so far. Leading indicators of the stock market, the Dow and the S&P500, have hit one record after another for over a year. And the party might continue based on the fact that despite QI curtails, the market didn’t budge.

Under these circumstances, assuming that no major changes would occur in terms of US economic policy, the stock market may continue to advance for another year or so. Remember the Clinton area? The big run-up of the late 1900s didn’t come to an end until Pres. Bush took over. This may happen again. Pres. Obama’s successor is most likely to pay for the consequences of today’s policies. But until then the party may just go on.

Under these circumstances, let’s take a look at some hot technology stocks as well as some shale oil companies.

Netflix Inc. (NASDAQ:NFLX) is an interesting play. The stock fell from over $450 to under $350 in just two weeks at the end of March amid fears that Apple TV may eventually become a serious competitor in the marketplace. Apple Inc. (NASDAQ:AAPL) has the technology to distribute digital content but it needs content, something Comcast (NASDAQ:CMCSA) can provide, under the right terms. Shares of Netflix Inc. (NASDAQ:NFLX) became oversold and thus are ripe for a comeback, according to a technical analysis. See related chart on this page. While a technical bounce back is a real possibility, long-term outlook for Netflix Inc. (NASDAQ:NFLX) remain elusive at the moment. It all depends on the deal between Apple and Comcast. All told, investors have to exercise caution with the stock.


Tesla Motors (NASDAQ:TSLA) is another hot potato. The company reported its first quarterly profit and provided a highly optimistic outlook at the end of February. The stock surged from $190 to $260 in five successive trading days but has lost most of the gains in March. Now that the dealer network problem is easing, Tesla Motors (NASDAQ:TSLA) may turn north again.


US shale oil companies outperformed the broad market in March. Crude oil prices remained above $100 a barrel and production is back at full swing now that the polar vortex is subdued. Whiting Petroleum (NYSE:WLL) and Continental Resources (NYSE:CLR), two of the largest plays in North Dakota’s Bakken field, are trading under 30 times earnings and are considered not too expensive right now. However first quarter production may be a disappointment due to extreme cold in the mid-west. Investors better prepare for more drop in production than originally anticipated. Despite some hiccups, we remain optimistic about the outlook for the industry.

We continue to provide some alternative investment ideas from China. The Chinese technology sector took a beating in March just as we highlighted it earlier in the Newsletter. To see how technology stocks fared compared to the rest, take a look at the top chart of the page. Remember, size of bubble represents market cap.


Technology stocks not only underperformed the rest but continue to carry high risk. Take a look at the second chart on the page.

WBAI_march3114 Ltd. (NYSE:WBAI) suffered two record weekly losses in the month before making a comeback, highlighting extreme volatility that most Chinese stocks carry. Investors are well aware that high returns come with high risk. But investors have to ask themselves how much upside is there for Chinese listings after a disappointing 2013 and a weak 2014 so far. Equities in the U.S. may have upside left for the near future. But Chinese equities continue to lack momentum as evidence grows that the world’s second largest economy is slowing. U.S. equities are a better bet at the moment, we believe.

Wish you successful investing, Blaze Fabry.

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