Your Daily Profit
June 21, 2010
*****China: Revalues Yuan
*****What Yuan Revaluation Means for You
*****Don't Fight the Fed
Well, Friday's Daily Profit was certainly timely. In case you missed the piece titled Is China an Afterthought?, I said "I won’t be surprised to see China do both – raise rates and incrementally revalue the yuan."
Just two days later, China announced that it will completely remove the yuan from its dollar peg. That news sparked a global rally for stocks last night, and Chinese stocks in the U.S. are moving higher as well.
Even though China has dropped its U.S. dollar peg, which meant that one dollar was worth 6.83 yuan, China will now peg the yuan to a basket of currencies that includes the dollar.
In other words, the yuan is not trading freely. It is still pegged. But China is letting its currency appreciate against others. And that's good news for the U.S. economy, stock prices and commodities.
*****European stock markets posted +1% gains on the news of the yuan revaluation. Part of the reason for that is the potential for European (and U.S.) exports to be more competitive with China. But there's also a confidence angle.
China would not let the yuan appreciate and potentially hurt its export economy if it were not confident in its economy. And like I discussed on Friday, there has been plenty of concern expressed about China's economy.
So China's move should provide a confidence boost, especially for commodities investors. China is an important end market for iron ore, coal, oil, copper, etc.
Today, we are seeing a strong move for oil prices. And gold is selling off (if only temporarily). That is exactly how the market should be responding if investors are indeed seeing China's move as a show of confidence in its economy.
*****The best way top play the yuan revaluation is through commodities. And the best commodity to buy is oil. As you know, my energy policy is "buy oil stocks now".
Last week, I said I thought oil prices were heading back to the $80 range. Today's move certainly makes $80 a barrel look imminent.
I have three of the best oil stocks you can buy anywhere in the world in the Energy World Profits portfolio. These companies are all producing oil in America's foremost reserve -- the Bakken formation in North Dakota.
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*****Bloomberg ran a very interesting article this morning that makes the point that the most hated stocks have made the biggest moves higher during the economic recovery.
Case in point: Huntington Bancshares (Nasdaq:HBAN). Twice as many analysts rate it a "sell" as a "buy." And yet the shares are up 66% this year.
Barry James, chief executive officer for James Investment Research Inc. in Xenia, Ohio says “The crowd tends to get you off into the wrong area at the wrong time...When the analysts are all on board saying only good things can happen, it’s already built into the price. There’s not a lot of upside left.”
This is an important observation for investors. If you simply follow analysts' ratings, your investments will very likely underperform. And that's not because you made a bad choice, it's because stock prices usually reflect sentiment. If sentiment is overwhelmingly positive, then the valuation will almost certainly be high.
Conversely, you'll find the most upside potential in stocks when there is extreme pessimism. And that's why Daily Profit readers enjoyed such success with commercial real estate company Maguire Properties (NYSE:MPG).
Now, I'm not advising that you run out and buy the worst stocks in the stock market. Just that investors would do well to trust their own instincts and analysis, and don't be afraid to move off the well-travelled path.
*****Another aspect to the Bloomberg story concerns risk. Don't think of risk as a four-letter. Rather, think of it as opportunity. When the stock market is recovering from a recession induced crash, there is more opportunity for investors, and taking on risk means buying stock.
We can think of risk in terms of interest rates, too. When interest rates are low, it means money is cheap. It also means bond yields are low, and may not even be keeping up with inflation. So investors who borrow cheap will seek out risk so they can get an acceptable return on their money. In other words, they buy stock, because that's where they can literally get the biggest bang for their buck.
The Fed knows this, and that's why it maintains its pledge to keep rates low for an extended period of time. Money sitting in Treasuries doesn't help the U.S. economy. Money that supports asset valuations does help the economy.
I used to hammer this point home a lot in Daily Profit during the early stages of economic recovery. But it's still true and we should remain keenly aware that the Fed wants asset prices, including stock prices, to be stable at worst, and higher, at best. And remember, don't fight the Fed.
There is a floor to the stock market, and it's probably somewhere between 900-1,000 on the S&P 500. If the S&P 500 were to fall that low, the Fed will come up with new stimulus for the economy. It may seem risky to be a bull in the current environment, but it's more risky to be a bear.
06-21-2010 11:53 AM