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Stock Market Investing, Sell the West on Strength, Buy the East on Weakness

Stock-Markets / Chinese Stock Market Aug 18, 2010 - 07:14 AM GMT

By: Tony_Sagami

Stock-Markets

Best Financial Markets Analysis ArticleDouble-dip?

I’m not talking about an ice cream cone. I’m talking about economics.

And not the U.S. economy, either, because I unfortunately believe that another recession is signed, sealed, and delivered for us.


Ben Bernanke and his Federal Reserve buddies confirmed that last week: “The pace of recovery has slowed in recent months. Housing starts remain at a depressed level.”

Ya’ think? The July jobs report showed the U.S. lost ANOTHER 131,000 jobs, an unemployment rate of 9.5%, and the four-week average of first time jobless claims hit 473,000.

Plus, the ISM Manufacturing Index dropped to a seven-month low in July, pending home sales fell another 2.6% in June after a jaw-dropping 29.9% fall in May, and there was a 1.2% drop in factory orders.

No wonder the Fed left the Fed Funds Rate unchanged at 0% and repeated its promise to keep interest rates at “exceptionally low levels” for an “extended period” of time.

The Fed knows that our economy is going to get even worse and said that it will once again start buying government debt and respond with MORE stimulus efforts if needed.

How did investors react to that not-so-reassuring news? The Dow Jones got clobbered for a 265 points loss, a painful 2.5% drop.

While the U.S. economy is in sad shape, conditions couldn’t be more different across the Pacific Ocean in China. Just last week:

Production at Chinese factories is as strong as ever.
Production at Chinese factories is as strong as ever.
  • Production at Chinese factories jumped by 13.4% in July. That growth is on the heels of a 13.7% increase in June and ahead of the 13.2% consensus forecast.
  • Big institutional and business money continues to pour into China. Investment in fixed assets, like factories and real estate, is up 24.9% so far this year.
  • Chinese consumers are still spending. Retail sales in July were up by 17.9% compared to the same period last year. This isn’t an aberration either; retail sales in June were up by 18.3%.

A lot of that spending, by the way, is going into U.S. companies’ pockets. In July, China imports soared by 22.7% from the previous year. You can bet that American companies with popular brands — like Tiffany, Nike, Apple, and L’Oreal — are doing very well in China.

  • Unlike U.S. banks, Chinese banks are still lending. In the month of July, Chinese banks made US$79 billion of new loans.

Here’s a fast, easy, and accurate way to figure out which U.S. retailers are doing the most business in China. Check out Interbrand’s Top 100 Global Brands list. You’ll recognize just about every one of these names … and so does a typical Chinese consumer. That’s the reason it is such a good starting point for anybody investing in retail stocks.

Go to: http://www.interbrand.com/best_global_brands.aspx

Speaking of banks, Agricultural Bank of China went public last week and it raised a RECORD $22.1 BILLION, the largest IPO in history. The second largest IPO, by the way, was the Industrial and Commercial Bank of China at $21.9 BILLION in 2006.

Big institutional and business money continues to pour into China.
Big institutional and business money continues to pour into China.

The single most important statistic that I pay attention to is money supply growth. Money supply growth is to an economy like gasoline is to a car — without it, you’ll soon slow down to a standstill. M2, a broad measure of money supply, increased in China by 17.6% in July.

All those positive numbers have translated into strong economic growth. In the first two quarters of 2010, China’s economy grew by 11.9% and 10.3% respectively.

President Obama and Bernanke would do CARTWHEELS for even half that amount!

You could be doing cartwheels too if you include a large dose of Chinese spice into your investment portfolio. The easiest way is through exchange traded funds, but there are now more than 1,000 ETFs to choose from so make sure you are considering one that focuses on China. Here are a few of the most popular:

  • iShares FTSE China Index Fund (FCHI)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)
  • SPDR S&P China (GXC)
  • PowerShares Golden Dragon Halter USX China Portfolio (PGJ)

There are even more specialized Chinese sector funds, such as Claymore/AlphaShares China Small Cap Index ETF (HAO) and Claymore/AlphaShares China Real Estate ETF (TAO).

Of course, don’t forget about individual stocks. There are more than 100 Chinese stocks listed on U.S. exchanges, like the NYSE and Nasdaq, and I believe you can do even better with a portfolio containing a carefully selected basket of China’s best companies.

I say that because most China-focused ETFs are loaded with large, inefficient government-owned enterprises instead of the small, rapidly growing entrepreneurial companies founded and operated by China’s best businessmen, like New Oriental Education (EDU) and Mindray Medical (MR).

Or … maybe you think I am nuts and feel that China is the worst place in the world to invest. If so, there is an ETF called ProShares UltraShort FTSE/Xinhua China 25 (FXP) that is perfect for you. This is a leveraged inverse ETF. It is designed to move TWO TIMES in the OPPOSITE direction of the FTSE/Xinhua 25 index. For example, if the underlying index drops by 2%, FXP is calibrated to move twice as much in the other direction or up 4% in this example. If the Chinese stock market tumbles, this ETF will make a bundle.

I wouldn’t advise you to make that bet, though. The Chinese economy may lose a percent or two of its GDP growth rate when the U.S. slides into a recession but, there is no derailing the economic miracle going on in China.

In fact, I believe that China has at least another decade of strong economic growth ahead of it. Perhaps two or three decades.

Now, that doesn’t mean there won’t be corrections. Some of those corrections will be painful, but the long-term trend is up, up, up. If you’re my age or older, I believe you can expect China to be the most powerful, profitable investment trend you will see in your lifetime.

The best strategy that you can follow is take advantage of Dow Jones rallies to reduce your exposure to U.S. stocks and use any China corrections as a buying opportunity. Sell the West on strength, buy the East on weakness.

Best wishes,

Tony

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