Politics Aside, These Stocks Look Good

04/15/2013 7:15 am EST

Focus: GLOBAL

Jack Adamo

Editor, Jack Adamo's Insiders Plus

The US market continues to look fairly attractive, despite political machinations. The same can be said for energy stocks in China, writes Jack Adamo of Insiders Plus.

Overall, I'm more optimistic on the market now. My problem is that while there is "relative" value in the income stocks, their absolute value is stretched. They can stretch more, as REITs did a few years back, but I don't like buying assets simply because they're less overpriced than others.

We are told that stocks are very undervalued, using the Fed Model—which values stocks compared to "risk-free" Treasuries—but we know that Treasury rates are artificially low.

Maybe that doesn't matter. Maybe stocks will continue to rise regardless of whether there is any true economic basis for Treasury rates—they certainly have so far—but we saw in the Internet and housing crashes that these Fed-induced bubbles find a top sooner or later; then it gets ugly.

Margin debt is getting a little scary. However, there's no sign of a market slump on a technical basis.

The RSI started weakening almost a year before the market topped in late 2007. (The Relative Strength Index is an oscillator that measures the natural ebb a flow of strength within a stock's primary trend.) It's obvious that there's nothing similar to that at the moment.

However, there is almost always a short-term top in the market in April, followed by a noticeable drop for a few months. It is only the magnitude that is in question. In the last ten years, only 2005 skipped this pattern.

Hence, I don't see any point in chasing the market now, when there's a high probability we can buy stocks cheaper in the next few months. I hope there will be some that are good absolute values, not just good relative values.

Both of our Chinese energy companies reported earnings this week. CNOOC (CEO) had a 10% drop in earnings on a 3% rise in revenues. A 73% rise in exploration costs was the chief culprit in the underperformance.

Despite this, the stock actually had a good week, due to a large acquisition that the market is excited about. I'm reserving judgment on it for now. CNOOC remains a buy.

PetroChina (PTR) posted a 14% drop in earnings on a 9.6% rise in revenues. The reason for the slide at PetroChina is the government's interference in its operations for its political agenda.

Gasoline and other end products of refining are subject to price controls, while the company's cost of produced or purchased inputs into those products, like crude oil and natural gas, are subject to free-market pricing.

The stock has shown improvement recently anyway, due to rumors that the PRC's new leadership is going to let prices move more freely. So PetroChina is a buy.

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