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Your Daily Profit

October 23, 2009

*****Still Communist

*****China’s Growth

*****123% and 71%

*****Using the TLT as an Indicator for Market Direction

Fellow investor,

I’ve helped investors make a lot of money buying and selling Chinese stocks.  And yet I often forget that China is still a Communist country, at least on paper.

I know - the Red Flag of the People’s Republic should constantly remind me otherwise. But with so many privately owned Chinese companies going public on the Shanghai stock exchange, as well as on U.S. exchanges, it is easy to forget.

That’s because China’s growth rate is not what you expect from a communist country. In the latest quarter, China has posted 8.9% growth, even as the rest of the world grapples with recession.

China has created a unique system that appears to function well for this huge country, at least for now. China is somehow able to maintain a state-controlled economy that allows for private development and entrepreneurship.

It seems that the government has agreed to allow the people to take more control of their financial future, but in exchange, they agree to go along with Communism. Or perhaps, one might describe it as capitalist authoritarianism.

*****For example, the government owns 100% of the land in this huge country, and grants 70 year leases on property.  The idea of private land ownership is somewhat foreign to the Chinese, and they seem content buying property that could be repossessed by the government down the road. Can you imagine a United States without the concept of private ownership of property?

As you know, the talking heads on CNBC have been warning investors away from the “China Recovery Bubble” for a couple of months now. The roughly trillion dollars of state-sponsored loans handed out in the first half of the year are seen as a de-stabilizing force.

While this may be a concern, I have only sold one Chinese stock from the SmallCapInvestor PRO portfolio. And I’ve even added a few in recent weeks. That’s because there’s a big difference between China’s stimulus efforts, and those put in action by the U.S. government. China has the cash on hand to back every penny of loans the country’s banks have made this year.

Not only that, but China’s consumer lending standards are actually far more stringent than what we have in the States. In Beijing, home buyers now need to put down 30% of the value of the home to qualify for a loan. During Beijing’s housing bubble days, it was 10%-20%, still well above the 0% that many Americans took on during the housing bubble. While prices fell last year, the government has been working with developers to keep prices stable, since higher prices also benefit the government (as well as sellers).

*****SmallCapInvestor PRO members have 123% and 71% on two of our Chinese stocks. And the most recent addition is up 24% in just 3 weeks. With a forward P/E of 13, a PEG ratio below 1, and 82% year-over-year growth, this one’s got a lot of room to run. Find out more HERE.

*****This will TradeMaster’s Jason Cimpl returns with a great charting video analysis on how he uses the TLT to help guide him to profit trades. It’s only arrow in his quiver, but it packs a wallop. Click HERE to watch the video now (it’s free).

*****Busy day of tourism here today, with a visit to the Great Wall. Now off to Courtyard Restaurant for dinner.  This restaurant was named one of the 50 best restaurants in the world by Conde Naste Traveler.  I’m looking forward to their menu.

Zai-jen,

Ian Wyatt

Editor

Daily Profit