Playing Games in China

The iShares iBoxx $ High Yield Corporate Bond (HYG) paid out a $.715 cent dividend per ETF share on June 1, and rose 2.1% to the $79 level this week. With this position yielding over 11%, I am still very positive on the prospects of HYG and continue to hold it in my client portfolios at my investment firm, Global Guru Capital. Nevertheless, with your Global Bull Market Alert portfolio bursting at the seams, I am going to move it out of the portfolio this week in favor of some potentially higher-return picks.

This week’s Global Bull Market Alert pick increases your already big bet on Asia through Shanghai-based Chinese gaming company, Shanda Interactive Entertainment Ltd. (SNDA). Here’s why I expect this small-cap stock to be a solid, risk-return trade, especially if you are willing to endure some volatility.

First, Shanda operates online games in the People’s Republic of China and is a pioneer in the hugely complex role-playing games that people play over the Internet. Shanda already has 7.2 million paying users involved in its cutting-edge MMORPG (massively multiplayer online role-playing games). That’s up more than 22% sequentially from the fourth quarter. China continues to be a hotbed for online gaming and, with the growth in active gaming from the under-18 and over-40 crowd, China is on track to overtake the United States as the largest online gaming market in the world by the end of 2009.  

Second, unlike many other online companies, Shanda is actually making money. Last week, Shanda announced better than expected financial results. Revenue rose 42% to $162 million, and earnings on a per-share basis rose 35% to $0.78 per ADS (American depositary share), topping the consensus by 8.3%. More importantly, next year’s estimates climbed to $3.53 per share, putting Shanda on a forward P/E of 17.6 — more than reasonable for a company growing at the rate it is.

So buy Shanda Interactive Entertainment Ltd. (SNDA) at market today and place your stop at $46.50. If you want to play the options, I recommend the September $65 calls (QKUIM).

Here’s a word of warning. Shanda combines three volatile elements. It is Nasdaq listed, a China play, and a small cap stock all rolled into one. That means potential for stellar returns, but at the cost of gut-wrenching volatility. As a momentum play, it also has the potential for sharp sell-offs. So you may want to take a smaller position than usual on this one.

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) ended the week slightly higher after soaring all the way to $38.30 last Monday as the big emerging economies “decouple” and are substantially outpacing the stock markets of developed countries. BKF remains a BUY.

PowerShares DB Commodity Double Long ETN (DYY) flirted with the $8.00 level before correcting slightly, and ending the week flat. Your leveraged bet on the commodities boom remains a BUY.

The iShares MSCI Chile Investable Market Index (ECH) rose another 1.7% this last week, closing just under the $45 mark. Backed by strong fundamentals, Chile remains a BUY.

The iShares MSCI Hong Kong Index (EWH) jumped another 3% last week, as the Asian markets continue to power ahead. EWH is a BUY.

The iShares MSCI Taiwan Index (EWT) fell last week and is now one of the most oversold ETFs among global markets, having closed lower for four consecutive trading days. This is a terrific time to add to your position. EWT remains a BUY.

Both the SPDR Gold Shares ETF (GLD) and the PowerShares DB Gold Double Long ETN (DGP) fell back this week as gold pulled back during its most recent upward trend. With the dollar under pressure and fiscal deficits soaring, both GLD and DGP remain a defensive BUY.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) has resumed its bull run, rising another 3.4% and heading back above the $32 level for the first time since October. This is a bullish sign for the global economy. “Dr. Copper” remains a BUY.

Russia’s Mechel (MTL) hit the $12.55 level last Monday before falling back. This will continue to soar as long as the outlook for emerging markets remains bullish. Mechel remains a BUY.

Your Rydex Inverse Government Long Bond Strategy Inverse (RYJUX) broke through the $16 level on Friday for the first time since November. The pressure of U.S. government deficits isn’t going to lessen in the future. Remember to tighten your stop to $14.25, per last week’s alert. RYJUX remains a BUY.

The Rydex Weakening Dollar 2x Strategy H (RYWBX) hit a high of $19.36 before correcting toward the end of the week. Sadly, I expect the U.S. dollar’s long-term downtrend to resume. This bet against the U.S. dollar remains a BUY.

Sincerely,