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The Best of Kass

But back in September I embraced the Chinese market and I now hold on to a 5% long weighting in the FXI , with an average cost of about $36/share.

Since then, the economic data out of China has clearly improved .

Little Second-Level Thinking About China Two Months Ago

At that time, I wrote that too many were worrying and embracing the technical breakdown. But there was no second-level thinking regarding how poorly Chinese stocks were being valued (in absolute terms and relative to other emerging and developed markets (like U.S. stocks). Three months ago, the current valuation metrics for Chinese companies were growing cheaper by the day, with forward P/E multiples of only 7.8x, an average dividend yield 3.9% and with a lowly price-to-book of 1.3x.

The Chinese stock market has risen by only about 5% since then, so the stocks still appear dirt cheap in both absolute and relative terms. By contrast, the S&P 500 trades today at a bit over 14x earnings, has an average dividend yield of 1.9% and price-to-book value is 2.1x. As I wrote previously, there remains a lot of distance/daylight between the valuation of Chinese stocks and U.S. stocks.

My question is if China is indeed the growth driver of the world's economic community, doesn't this highlight how cheap stocks can get when growth is in question? But now that the growth prospects are mending in China, I suspect the sharp undercut to value months ago for Chinese stocks will be followed by the potential for a surprising rally over the next few quarters.

The fundamental improvement in Chinese stocks has now been accompanied by a sharp reversal in improving technical backdrop for equities over there. (This is something Sir Denny Gartman recently highlighted in his daily newsletter).

Several highly-regarded technicians have joined the FXI train in recent days and I expect the rally in Chinese stocks in 2013 will be one of next year's biggest surprises.

Position: Long FXI

Chasing the Dragon (Part Deux)
Originally published on Monday, Dec. 10 at 1:40 p.m. EST.
  • Goldman Sachs weighs in.

Apropos to my China post this morning, this from Goldman Sachs just now:

"Our Equity Trading Strategies group is recommending a tactical long position in the MSCI Emerging Market equity index (MXEF), (with) a target of 1125 and a stop of 985, following some incrementally supportive China data over the weekend and ahead of the earliest bits of the December data set."

One thing I didn't mention earlier is not only are we seeing a quickening pace of economic activity in China but the share prices are still at a 20% discount to the emerging markets benchmark.

Position: Long FXI

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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