MorningWord 8/6/13: Bulls in China Shop

by Dan August 6, 2013 9:25 am • Commentary

MorningWord 8/6/13:  In this space yesterday I discussed the relative out-performance of Web 2.0 stocks vs their brothers from another bubble (here), and what the frothy price action could mean at this stage of the rally.  The conclusion, very simply is that this group of stocks as a stand alone is basically irrelevant and the recent price action, while speculative, is fairly logical for a market that is up 20% on the year, in the 5th year of a bull market, investor risk appetite grows with every new high.

While four letter stocks going up in parabolic fashion should not immediately signal the impending doom of the recent leg of the rally, watching money flows can be important to get a sense for the quality of the continued gains.  For instance, there are other pockets of froth that are starting to grab some attention.  Despite Chinese stock markets’ poor showing this year (Hang Seng down 3.24% and Shanghai Comp -9.19% ytd), Chinese domiciled internet companies that have ADRs in the U.S. are on a massive tear, with much of the performance coming in just the  last couple months.  BIDU for instance is up 50% since the beginning of July, and now up 33% on the year, gaining more than $12 billion in market cap, SOHU is up 33%, SINA is up 48%, CTRP is up 87%, NTES is up 53% & QIHU is up 122%.  You get the point, Chinese factories may be operating below capacity, but it’s clear what their idle workers are doing with their free time.

Enis highlighted this morning that emerging market stocks might be more reasonably valued than their U.S. peers.  He also mentioned the Chinese internet companies as the “Oasis in the Desert” in a post in mid-June, so there is some fundamental justification for the move in Chinese tech.  But in the short-term, the overall price action is indicative of market participants reaching for beta wherever they can find it.  In the long run, the Web 2.0 stocks in the U.S. have much less fundamental support on a valuation basis than their Chinese counterparts.

While GOOG, EBAY & YHOO have failed to make a new high with the SPX, Web 2.0 stocks with small floats and large short interest have gone bezerk, and so have their Chinese brethren.  I think it is also important to note that some of the sectors that did a bit of the heavy lifting in the first part of 2013 have also failed to make new highs this week (XLP -consumer staples, XLE – energy, XLB – materials, XHB – homebuilders). To be fair the consolidations in all appear to be very healthy, and maybe just maybe they are setting up for another break-out similar to that of the XLY (consumer discretionary) & XRT (retails) to new all time highs this week.

My Main point I guess is the bulls don’t want to see a stall in what has been the pillars of the rally in 2013 and give way to more speculative sectors like Chinese Internet and Solar.  From where I sit I see a few signs of exhaustion, and investor infatuation with speculative sectors could merely be an interlude as buyers contemplate how much dry powder they have for what could be a runaway breakout.