Editor's Note

Howard Gold Founder & President, GoldenEgg Investing

November 8, 2007

This week PetroChina’s (NYSE: PTR) public offering in Shanghai made it by some measures the world’s first $1-trillion company. And the Chinese e-commerce purveyor Alibaba.com nearly tripled in price during its first day of trading in Hong Kong.

But at the very same time, two longtime bulls on China have pulled in their horns.

Jim Trippon and Robert Hsu, who write competing investment newsletters focusing on Chinese stocks, have both told subscribers to take profits. They are both concerned about the big runup in Chinese shares so far this year and the sudden delay in a plan to let mainland Chinese invest directly in Hong Kong.

Two weeks ago Trippon, who publishes China Stock Digest out of Austin, Texas, advised subscribers to put in stop-loss orders on all 20 of the stocks in his recommended portfolio. That would trigger automatic sales when those stocks fell below certain set levels, as they did when Hong Kong’s Hang Seng index tumbled from last week’s peak.

Result: seven stocks are no longer in his portfolio, all big names like Aluminum Corp. of China (NYSE: ACH)—also known as Chalco—China Life (NYSE: LFC), China Netcom (NYSE: CN), Yanzhou Coal Mining (NYSE: YZC) and, of course, PetroChina itself.

“Through last Friday we were up 85% year to date,” says Trippon. “Any time you have that kind of a runup, you have to protect your profits.”

On Monday, Hsu put out an alert to subscribers of his China Strategy reacting to the weekend announcement by Premier Wen Jiabao that the Chinese government would postpone its widely publicized plan to let mainland investors buy stocks in Hong Kong.

He told subscribers to sell Chalco and Huaneng Power (NYSE: HNP) and half their positions in China Life, China Mobile (NYSE: CHL), Sinopec Shanghai Petrochemical (NYSE: SNP) and CNOOC (NYSE: CEO).

“Given that our stocks are up 50% in the last two to three months, I thought it would be prudent,” he explains. “I’m looking for a correction in China and Hong Kong.”

How deep? He won’t give an exact number, although Trippon says Shanghai “easily could lose a third of its value.”

A third? That qualifies as a genuine bear market in my book. And what would be the catalyst? Ironically, Trippon thinks it will be the eventual approval of the so-called Hong Kong “through express,” which could prompt mainland Chinese to dump their overpriced Shanghai shares and buy Hong Kong instead. When might that occur? Over the next six to nine months, Trippon says.

But a selloff may be happening already. Overnight Thursday, the Hang Seng index was pummeled again, leaving it 5% off its October 30th all-time closing high of 31,638. The Shanghai Composite index is down 8% from its October 16th peak of 6092.06.

(Two days earlier this column recommended “that no investor put another dime into high-flying China-based mutual funds, ADRs, or ETFs at this time. And if you were smart or lucky enough to invest in China before, you should promptly lock in at least half of your hefty gains.”)

Since Shanghai has more than doubled this year and Hong Kong has surged more than 50%—largely on speculation that the “through express” of mainland money was a runaway freight train—even big pullbacks shouldn’t be surprising.

“Markets don’t go up 100% every year,” Hsu says.

He thinks that the real danger is a “global dislocation” based on a weak US economy that he fears could lead to a bear market here. “The Hong Kong market is very much connected to the US market,” Hsu says.

Further declines in Hong Kong especially (both of them recommend Hong Kong- or New York-listed companies, not the more ephemeral Shanghai shares) could trigger more automatic sales in his recommended portfolio, Trippon says. He’s now 35% in cash and thinks that percentage could go higher.

Hsu, who was born in Taiwan and came to America as a child, has been lightening up on the big state-owned companies but is still invested in more entrepreneurial Chinese stocks and offshore China plays like Brazil’s Companhia Vale do Rio Doce (NYSE: RIO).

Both remain fervent believers in the China Economic Miracle and are bullish for the long term. They expect to find good buying opportunities when the current correction—or whatever it is—runs its course. (Both Hsu and Trippon are regular speakers at Money Shows, and Hsu’s publisher, InvestorPlace Media LLC, has extensive business dealings with InterShow, our parent company.)

But for now they’re cautious. “I’d rather have my profit and come back to fight another day,” says Trippon.

Indeed, when PetroChina is worth more than ExxonMobil and General Electric combined and AliBaba.com trades at 320x projected 2007 earnings, it’s quite striking that two rival China bulls with very different investment philosophies are both telling their customers to take the money and run. 

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Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed here do not necessarily reflect the views of InterShow.