THE STEWART REPORT HOTLINE

March 8, 2007

Terrible Tuesday 
Whoever first said that, “East is East and West is West and never the twain shall meet,” must have said it a long, long time ago.  Certainly they said it before last Tuesday, February 27, when the sell-off in China snowballed throughout Asia and Europe until it slammed the North American markets with an avalanche of activity heavy enough to temporarily bury the NYSE’s most powerful computers.  Before day’s end, the machines had caught up with the trading volume, leaving investors with the remainder of the week to try and get a current handle on some new reality. 

Within days, volumes had been written on the subject.  Most of it was interesting, of course.  But pragmatically speaking, its greatest value was to those at the institutional level – e.g., people like economists, fund managers, arbitrageurs and to the remaining currency traders still alive to read it. 

Ironically, the tastiest bit of information that crossed my desk that week was a statistic I received from an unsavory stock promoter.  It was printed in an offshore tip sheet that had been faxed on the most massive scale I’ve ever witnessed.  In the fine print, it was disclosed that $250,000 had been paid to an outfit calling itself Cyber to distribute the “report” – which, these days, thanks to the Internet, can be accomplished for less than two cents per transmission.  Simple math told me that at least 12.5 million pieces of paper were pumped out of as many fax machines, all touting a Chinese copper company that, judging by the almost daily gaps in the stock chart, probably has fewer than a million shares in the float. 

In a deal like that, there’s no telling how many people might eventually get burned, but it would probably be the financial equivalent of Dresden.  Anyway, last week I received so many copies of the thing that, through sheer repetition, I very nearly memorized the first few sentences just by glancing at the top of the page each time I tossed it in the trash.  The last copy, I saved – and it begins with this:

“There’s a joke in China that says the country’s national bird is the construction crane.  But the joke rings true.  You see, China is in the midst of a massive urban expansion.  It created 688 cities in less than 20 years – among those 62 megalopolises of 2 million people or more.” 

Lets just say that the “report’s” urban-growth statistic is a good example of the unprecedented expansion in China, while the “report” itself is a perfect metaphor for the overblown speculation propelling its stock market.  

Monday, Reuters noted that, “The Morgan Stanley Index of World Markets was up 19 percent last year.”  Comparatively, the most recent issue of The Kiplinger Letter stated that Shanghai’s main index had risen 120 percent  during the same period. Presently, it’s up more than 50 percent since October – and that’s after its recent slide. 
 
There are obvious parallels between the leveraged speculation in the Chinese markets of the new millennium and much of what was played out on Wall Street in the 1920’s.  If I was still a kid and knew a good mechanic who was fluent in both Mandarin and Ferrari, I’d probably catch the next plane to Shanghai and dive into the thick of it.  There’s always big money to be made in times of unbridled growth – and greed.  Especially in a marketplace like China, that’s wild and crazy and lacking in modern securities regulation to the extent that it’s almost lawless.
 
The Price of Tea in China
Be that as it may, I don’t see too many lessons in all of this that have not been already learned.  More importantly, I don’t see a whole lot of thinking that I can actually take to the bank.  Not here, not now, not directly.  That’s not to say that I won’t continue to stay on top of what’s happening there.  How can I not when virtually every consumer non-durable I’ve purchased in the last two years with a price tag of $200 or less has had “Made in China” stamped somewhere on its surface?  China’s growing industrial output and rising economic prominence requires a certain acknowledgement among investors in America that the fortunes of our two nations can only become increasingly linked.  As for the recent investor misfortunes …

In theory, the general market will affect the price of individual stocks by as much as 30 percent. Beyond that, all that really remains is an acceptance of the fact that economies will continue to breathe in and breathe out, that money is always looking for a better home and that markets are inherently transitory beasts. 

So, if there’s a point to all of this, it’s that market watching is largely pointless.  Time spent pondering what the pundits are saying about world markets and the international economy is time that would be better spent analyzing backyard stuff – like specific companies you can more easily understand, appreciate and own.  Most of you have been around enough to know that, in every market, there are pockets of opportunity.  And, as readers of The Stewart Report, I think you’d also agree that we’ve presently got our hands in three of them: 

Amarillo Biosciences, Inc. (NASDAQ/BB: AMAR – $0.81)
Still a STRONG BUY for the near term – and especially the long term.  Although the stock is a little higher than where we left off (Feb. 9, 2007 – $0.74), I believe that, before the end of March, AMAR will easily re-attain the $1.08 share price it achieved just prior to the Feb. 27 sell-off.  The overall market’s activity has somewhat stunted AMAR’s pronounced momentum – but only very temporarily.

Emergency Filtration Products, Inc. (NASDAQ/BB: EMFP –  $0.63)
Continue to HOLD.  In the last HotLine, when the stock was priced at 75 cents, I said you could expect the stock to go lower and to BUY on weakness.  It’s entirely possible that we’ve seen the worst of the decline, but not the worst of the news.  Unless you are new to the stock and don’t own shares (yet), the drop from $0.75 to $0.63 is not enough to justify an additional purchase.

International Card Establishment, Inc. (NASDAQ/BB: ICRD – $0.22)
Good long-term BUY – and, percentage-wise, will likely do even better for you in the short term if the Q4 figures come in as strongly as I’m anticipating.

The Next HotLine Update:
Tentatively scheduled for Thursday, April 5, 2007 – sooner should events necessitate.

As always, thank you for subscribing! 

Analyst and Publisher, The Stewart Report

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Acting as an investor, and also as a consultant to the Company, David Stewart purchased 100,000 shares of AMAR restricted under Rule 144. The holding period expired in August 2006 making them free-trading, although he continues to hold 80,000. He also bought 100,000 shares of ICRD governed by Rule 144 and remain restricted, and recently purchased 10,000 additional in the open market. Affiliates of The Stewart Report may also have additional long or short positions in these and other securities discussed herein, including warrants and/or options, and may buy or sell same at their own discretion. This report contains or may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the US Private Securities Litigation Reform Act of 1995. This report is intended for informational purposes only and does not have regard for or take into consideration the reader's investment objective, financial situation or suitability for this security. Consult with your financial advisor and perform your own due diligence. Copyright © The Stewart Report 2007.