So far this year, the S&P 500 has dropped 3% or more in one session 3 different times. The two previous times, it clawed back some of the losses over the following week. We’ll have to wait and see of there is any upside after yesterday’s big drop.   

The S&P 500 is now testing the lows from the “flash crash” on May 6. This is interesting because it was assumed that trading that day was something of a fluke as computer trading programs went haywire. But now that stocks are back to those levels, we must consider that the drop may not have been a fluke.  

The question now is: can stocks find some strength? Or perhaps a better way to ask the question is: are the sellers done?   

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

In my opinion, this line of thinking is completely unrealistic.   

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM). 

From all appearances, Xinhua Finance Media (Nasdaq: XFML) seems like the ideal opportunity for small-cap investors looking to profit from China’s lucrative media industry. However, with its string of recent management troubles and unclear acquisition strategy, investors might be wise to look elsewhere.

For sure, China’s media industry would be a great sector to get into. The television, print and Internet segment is definitely booming as firms rake in the cash from advertising revenues. The country’s 2006 total advertising revenue in radio, film and television reached US$14.43 billion, a growth of US$2.63 billion, or 33%, from 2005, according to a recent report by China’s State Administration of Radio, Film and Television. iResearch Consulting Group, an Internet research firm based in Shanghai, estimated Chinese online advertising sales for last year to be around US$555 million, a jump of US$150 million or a 48% increase from 2005. Meanwhile, annual revenues from print-media are at least US$6 billion, with a growth rate of around 6%. 

This growth is fueled by the explosive Chinese economy as advertisers try to tap into the country’s growing middle class, which is now estimated to be at 80 million, an increase of 14.5 million, or 22%, since January 2005. With the prospects of millions in ad revenues, entrepreneurs see enormous business opportunities and have been investing heavily in Chinese media groups for the past few years. Two of the biggest media groups include the Southern Daily Group, based in the southern city of Guangzhou, and the Shanghai Media Group.

So where does that put Xinhua Finance Media? Based simply on its name, it would seem the firm is in a prime position to seize the bounties. As a spin-off from the Chinese government’s official media mouthpiece Xinhua, the company could ideally leverage this unique relationship to navigate through China's archaic bureaucratic hurdles and government controls on the media to seize on emerging opportunities.  For example, it could quickly get government approvals for the opening of new print magazines and acquisitions of media companies, which often take years of waiting, with the application often rejected. There is also definitely a demand for English and Chinese financial news, particularly among the growing hordes of Chinese investors trying to cash in on the current Chinese stock market boom. According to the China Securities Depository and Clearing Corp, the number of individual trading accounts has soared by 30% over the past year, to 95 million.