JL: So, Cash. How about this wacky market environment, eh? Gold at $950, oil at $100, and the Fed is still saying “What, me worry?” when it comes to inflation.

CASH: Yep. You macro types talk lots of crazy, but conditions are so wild out there now you actually sound sane.

JL: Hey, thanks! (I think.) And how about you? Making any adjustments to the game plan?

CASH: You know me. Flexibility is my middle name. But now that you mention it, yeah. This year definitely has me using a different set of skills versus last year.

JL: How so?

CASH: Well, not to get all Guns & Ammo on you, but 2007 was a little bit of a shotgun period. You could just get out there and spray capital at all kinds of IPOs. Returns were good and risk was moderate -- the kind of environment where you worry less about aim and more about reloading quickly.

JL: Gotcha. And this environment is a little less trigger-happy?

CASH: Without a doubt. My little corner of the market universe -- IPOs and new issues -- is seeing more volatility and less liquidity than last year. My underwriter buddies have gone from steak and martini lunches to peanut butter and jelly. Or at least downgrading the Beemer lease from a 7 series to a 5 series.

JL: Aww. Poor them.

CASH: Heh. They’ll be okay. The point is that there are more landmines and pitfalls out there now. So, while the opportunities are actually better than last year, the approach has to be much more refined.

JL: Whoa. Did I hear that right? Did you say “better” or “butter”?

CASH: You heard me, wise guy. Opportunities in new issue land are better now for traders like me. It’s all about the swings and gyrations. You know how us traders love to shuck and jive.

JL: So even though there are fewer opportunities overall, you see more opportunity to milk the vol. [Vol is trader slang for “volatility,” for those of you following along.]

CASH: Nice lingo lesson. But yeah, that’s exactly it. The big up and down moves in this type of market environment can translate to gains of 30, 40 or even 50% in a few short weeks with a well-timed position.

In a more typical environment -- like what we saw last year -- there are more plays but the action is muted. Returns are more stable in rolling bull markets, but the opportunity to double or triple your money in a short space of time isn’t there. You need the vol for that.

JL: I hear you. So getting back to your trading adjustments. If you’ve packed away the shotgun, what’s your new weapon of choice? I assume we’re still rolling with the Guns & Ammo thing?

CASH: The analogy works; don’t knock it. You’ve been hunting before, right?

JL: Only once. I tagged along for the experience and didn’t actually shoot anything. I do like skeet shooting, though. What can I say? I was an urban kid.

CASH: All right then, see if this makes sense. Last year was a little bit like duck hunting, where the skies were just filled with birds. You could pop up from the blinds and -- kaboom! This year is a little bit more like big game hunting. The name of the game is waiting patiently, homing in on your target, and taking very careful aim.

JL: So you take fewer shots and aim more carefully, but in return you’ve got the chance to bag an eight-point buck instead of a few game birds – the aforementioned double or triple versus the small gains of last year.

CASH: You catch on fast for a city boy. Don’t get me wrong -- we still have a “target rich” environment in 2008. It’s just that fewer shots are worth taking. I don’t want to give away my position, or put my capital at risk, unless the target is truly worthwhile. That’s why I’m zeroed in on the big payoffs this year -- focusing on that triple-digit upside.

JL: And how about the short side? Same logic there, or is it different?

CASH: On the short side, I want to target stocks that have lots of hype and optimism built in. The short names I look for are so weighted down with expectations, just a small earnings miss or a short-term price decline can set off a selling panic.

Riding the high flyers back to earth is how you make the big bucks going short. In fact, some of my favorite shorts of all time were once my favorite longs! Nothing like riding a new issue for big gains on the way up, then turning around and killing it again on the way back down.

JL: Lots of investors fall in love with their big winners. But not you. I guess I’m the same way. No loyalty for us traders, eh?

CASH: I’m loyal to my family, my friends and my clients. But my positions? Fuhgedaboudit.

JL: Well said. Switching topics now… last week we talked about Mastercard (MA:NYSE) as a potential short once it starts breaking down. For this week, how about something you’re watching from the long side? Anything profitable in the crosshairs?

CASH: You bet. There’s a little company I’m following that’s in the same business as Remax and Century 21. Basically they’re a residential property broker. They partner with home builders to sell houses to individuals, and they collect commissions for each sale.

This company came public in August of last year, had a successful IPO with strong demand, and has recently pulled back to a pretty attractive price level. I think demand could kick off a strong run. There’s potential for a double or triple here in the next 12 months.

JL: Sounds juicy, but I think I’m having trouble with my hearing again. I could swear you said “residential property broker.” In case you haven’t noticed, real estate isn’t so hot these days. In fact, big chunks of the real estate market are in free-fall decline! And you want to be long? There’s got to be a punch line. Either that or I need a Q-Tip.

CASH: Heh. You’re on top of the macro picture as usual. Just one problem… you’re flying over the wrong battlefield!

JL: Huh?

CASH: I’m not talking about a U.S.-based property broker. I’m talking about China. The company in question is E-House China (EJ:NYSE). They’re a Chinese property brokerage. They make most of their profits selling new home developments to Chinese buyers. The market over there is vastly different than the scenario playing out here.

Home ownership is a relatively new phenomenon in China -- similar to America back in the ‘50s. Shortly after World War II, Americans began realizing the dream of owning their own home, and the movement touched off a two decade bull market in property prices. China has a similar situation today. Incomes are rising faster than property values, making it more affordable for individuals to own their own home.

JL: Interesting. No doubt the Chinese real-estate market is vastly different from what we’ve seen in the U.S. But aren’t there real-estate issues there, too?

China recently booked the highest inflation numbers in 11 years. Do you worry at all about the possibility of monetary tightening hitting Chinese home buyers, maybe making it more difficult to get mortgages?

CASH: This is where my boots-on-the-ground research style pays off. You’ve got a point with China’s “tier 1” cities -- the top markets like Beijing and Shanghai. Those cities have seen some heavy-duty price increases. The valuations are still nowhere near America’s excesses at the height of the housing bubble, but caution is still warranted. So you could say Beijing and Shanghai are “frothy,” to use a Greenspan term…

JL: Oh man, don’t get me started on that guy.

CASH: Oops. I forgot “Greenspan” is a swear word for you gold bugs. Anyway, if I may continue…

JL: By all means.

CASH: So the Beijing and Shanghai real estate markets are fr-, er, warrant caution. But the many “tier 2” and “tier 3” Chinese cities, which don’t get as much press or attention, are a different story entirely.

Beijing and Shanghai hog all the press. China is one of the few countries in the world where an industrial metropolis of 10 million can qualify as a Podunk backwater. There are plenty of these lesser-known cities where the government is just beginning to release land for private ownership. And while starting prices are very low, they’re seeing serious demand as income levels rise and more families are able to participate. Home ownership is a dream for them, just like it used to be for Americans.

JL: Ah yes, simpler times. So getting back to the pick… What makes E-House China a compelling play? I notice it’s more than 50% down from its October 2007 high. How did it get here, and what’s driving it going forward?

CASH: As you say, EJ has come nearly full circle from its IPO. It priced at $14 last August, topped out around $36 last October, and trades around $17 as of this discussion.

There are two main reasons for the sharp decline. The first revolves around the overall state of Chinese equity markets. Looking at the China 25 index (FXI:AMEX), you can see a decline in the neighborhood of 30% over the same time span in which EJ got hit. Overall market sentiment will have an effect on any emerging market growth stock -- but that can be a good thing, especially if the negative sentiment is overdone. Remember, you need the volatility, and the opportunity created by volatility, to get the big gains.

JL: And the second reason?

CASH: The company offered additional stock to the market two weeks or so ago in order to raise additional capital. Some investors were probably concerned about dilution -- the effect that putting out more shares can have on supply and demand -- and sold ahead of the offering.

JL: So why did the company need to raise additional capital? Do they have a lot of expenses? I never thought of real estate brokerage as a capital-intensive type of business.

CASH: You’re right, it generally it isn’t a capital-intensive business. But I actually like the fact that EJ is raising more capital here, because they’re putting it to extremely good use.

The details are a little complicated, but the bottom line is that EJ has the opportunity to rapidly expand, build strong relationships with developers, and make things tough for future competitors all at the same time. All those factors will be excellent drivers for future earnings. Sometimes a secondary offering is a negative sign, but in this case the logic is very strong.

JL: So what advice would you give to readers interested in this name. Is it worth buying today, or is there some kind of catalyst investors should be looking for?

CASH: The stock looks like it has solid support in its current range. Other smart money managers -- and traders like me -- are seeing the chance to accumulate EJ for a great price down here. But just to be double sure, I want to make sure that the buyers are fully in control before putting my money to work. That’s just good trading discipline.

JL: You want to see a little more strength to confirm the timing.

CASH: Yep. In that respect, EJ looks the most attractive to me if it can retake the $20 level. At that point, it becomes clear that more investors are recognizing the value and institutional managers are piling back in.

I’m looking for triple-digit gains here, not pocket change. And this name has the potential to be another home run. So once again, I’m willing to miss the first few points in order to be confident the big move is underway.

JL: My hearing seems to be clearing up. That makes perfect sense.

CASH: Speaking of which, I think I hear my phone ringing. Gotta hop.

JL: A trader’s work is never done. Catch you next week.

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