Uncommon Wisdom : Inflation, Asian Investment

One Region, 10 Countries — Infinite Profit Opportunities!

Tony Sagami — Fri, 06 Apr 2012 17:59:00 GMT

Chinese stocks started off with a bang this year, rallying by 10% in January and February, but struggling since Premier Wen Jiabao lowered China’s 2012 GDP growth forecast from 8% to 7.5% on March 5.

Since then, a growing number of analysts and China observers have turned cautious on China. The most recent naysayer was the Asian analyst from Bank Julius Baer & Co.:

“In the coming three months, the rally has ended. The economic slowdown will continue for a while and there are over-expectations on policy. It’s a fact that the economic slowdown in China is negative on profitability.”

This comment came on the heels of two pieces of worrisome data that came out of China last week.

Trouble Sign No. 1: The National Bureau of Statistics reported on March 27 that profits of Chinese industrial companies reported a composite loss of 5.2% in the first two months of 2012. That is a huge turnaround from a 34.3% gain a year earlier.

Trouble Sign No. 2: The year-over-year increase in profits from companies that have reported results so far has been 17% on average. That is 3.6% below expectations and way, way below the average 38% increase in the previous year.

Time will tell whether the above signs are the tip of the iceberg or just a short-term bump, but there are still lots of reasons to be optimistic.

For example, most China worrywarts are overlooking just how cheap Chinese stocks have become. On a valuation basis, Chinese stocks have become very attractive. The average Chinese stock is now selling for only 9.5 times earnings.

Perhaps more importantly, the all-time low price-to-earnings (P/E) valuation for Chinese stocks in 8.9 times earnings, so we may soon be staring at a great buying opportunity.

Compared to U.S. stocks, China looks even cheaper. Stocks in the S&P 500 are selling for an average of 13.5 times earnings, which means that Chinese stocks are 29% cheaper than U.S. stocks as measured by P/E ratios.

You tell me: Are Chinese stocks a better value than U.S. stocks?

Sure, the reasons to invest in China may be a bit less-compelling these days, and some investors may be reluctant to put new money in Chinese stocks. But whether you are a China bull or a China bear, you shouldn’t forget that there is a lot more to Asia than just China.

In fact, some of China’s neighbors are among the most-prosperous countries in the world, the fastest-growing economies in the world, and offer some of the most-attractive investment opportunities in the world.

No, I’m not talking about South Korea or Japan. I’m talking about the ASEAN nations.

One Region, 10 Countries —
Infinite Profit Opportunities!

Source: Alphaprofit.com

Few American investors have heard of the Association of Southeast Asian Nations, or ASEAN, but it is a powder keg of opportunity.

ASEAN is a geo-political and economic organization of 10 countries located in Southeast Asia that are working together to cross-promote each other’s economic and humanitarian growth.

ASEAN was formed in 1967 when the leaders of five countries — Indonesia, Malaysia, Philippines, Singapore and Thailand — joined forces in an effort to promote economic coordination and regional free trade.

Source: ETFdb.com

The membership base has changed over the year, adding Brunei, Burma/Myanmar, Cambodia, Laos and Vietnam.

With a population of almost 600 million people, the ASEAN region has an economy bigger than India. Plus, it has aggregate stock market capitalization of $1.8 billion, making it larger than both India and Brazil.

The ASEAN region is thriving thanks to low labor costs, rich natural resources, strong relationships with China and a wave of economic liberalizations that have encouraged foreign investment.

The ASEAN countries are a major force in international trade (hitting US$1.5 trillion last year). But its largest trading partner is China.

ASEAN did US$178 billion worth of trade with China last year, but that number jumps by another $68 billion if you include Hong Kong.

Is it Time to Follow
These Money Flows?

The so-called “smart money” — institutional and corporate money — is pouring into the region. Foreign direct investment (FDI) into ASEAN has tripled in the last three years.

If you want to follow that institutional money in ASEAN, it is easy with the Global X FTSE ASEAN 40 ETF (NYSE:ASEA), which is the first ETF to focus on this region.

This ETF aims to replicate the performance of the FTSE/ASEAN 40 Index, an index that is made up of the 40 largest companies in the original five ASEAN countries: Indonesia, Malaysia, Philippines, Singapore and Thailand.

Singapore has the largest weighting of the index with 41%, followed by Malaysia (33%), Indonesia (16%) and Thailand (9%). The Philippines makes up less than 1% of ASEA.

You should note that this ETF has zero exposure to Brunei, Burma/Myanmar, Cambodia, Laos and Vietnam. However, those markets are underdeveloped, shallow, extremely volatile and difficult for U.S. investors to buy into.

ASEA is heavily weighted with financial services and banks with 40% assets, followed by telecom (16%), industrials (15%), and consumer discretionary (11%) stocks. The largest individual holdings include DBS Group Holdings, Singapore Telecom and Oversea-Chinese Banking Corp.

Now, I’m not suggesting that you rush out and buy this ETF or any other stocks or funds that represent the ASEAN member regions individually. As always, timing is everything, so I recommend that you wait for my buy signal in Asia Stock Alert before jumping in.

However, the ASEAN countries are some of the most-vibrant economies in the world and a region that deserves some of your investment attention.

Best wishes,

Tony

P.S. Asia is bigger than just China, and that’s why the profit story unfolding in the ASEAN region is one I plan to follow closely in my Asia Stock Alert service. That’s why there's never been a better time to take my service for a risk-free test drive — join us today!

While the U.S. Exports Inflation, China Is Attacking It!

Tony Sagami — Fri, 09 Sep 2011 15:30:00 GMT

Let's not sugarcoat the state of our economy: Unemployment is stubbornly high, real estate prices are in the dumps, our nation is up to its eyeballs in debt, and we're teetering on the cusp of recession.

That's why two weeks ago Ben Bernanke and his Federal Reserve buddies promised to keep interest rates near zero ... at least until mid-2013.

Some Fed members "felt that the recent economic developments justified a more substantial move" beyond the two-year easy money promise. That could mean additional purchases of government bonds with a QE3, purchases of other assets like stocks, extending the maturity of the Fed's balance sheet, or some other insane monetary Frankenstein.

Obsessing about what the Fed might do is not what we investors should be watching. Instead, what really matters is what the Fed is not doing. And that is keeping to one of its primary, historical missions: Controlling inflation.

The Federal Reserve Act of 1913 created the central banking system of the U.S. and gave the Federal Reserve Bank the legal authority to issue paper money. The Fed would make emergency loans to member banks, print money, and act as the fiscal agent for the U.S. government.

The Act was amended in 1930 to create the Federal Open Market Committee (FOMC), consisting of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the Federal Reserve banks. The FOMC is chartered "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Like Mr. Magoo, Bernanke stubbornly refuses to admit there is a problem.

The Fed, under Alan Greenspan and now Ben Bernanke, has completely ignored the part about moderate long-term interest rates and stable prices. Today, the Federal Reserve Bank only cares about propping up the asset prices (stocks and real estate) and has done more to blow more air into our ready-to-pop debt bubble than even our spendthrift politicians!

My perspective is different than most observers because I devote most of my time to following Asian economies and markets. So I see the contrast between our central bankers and Asian central bankers.

The comparison that surprises and worries me the most: The one between our Federal Reserve Bank and the People's Bank of China.

China's Central Bank Beating the Fed ...
Hands Down!

When it comes to economic growth, you would think that the United States, the bastion of freedom and capitalism, would make a bunch of communist bureaucrats from China look like fools. Instead, it is the Chinese central planners that make Ben Bernanke and his Fed buddies look like a bunch of bumbling Keystone Cops!

I'm ashamed to tell you that the Chinese central bankers are doing much better as stewards of their economy than our Federal Reserve Bank is with ours. Here's what I mean:

China recently raised the bank reserve requirement to 21.5% of their deposits. This is the ninth time China's central bank has increased the reserve requirement since the second half of 2010.
China's key lending rate has been increased five times since the start of 2010.
Down payments requirements and mortgage rates have also been raised.

Despite those tightening measures, M2 (a broad measure of money supply) was 20% in 2010 and on track to rise by another 15% to 16% this year.

China's leaders are more worried about inflation than propping up assets prices like Bernanke is. The National Development and Reform Commission, China's lead planning body, understands that the rise in commodities prices is fueling consumer inflation in China.

Interestingly, the National Development and Reform Commission says,

"The loose global liquidity condition is unlikely to change in the short term and the global commodity prices are still high, so the impact from imported inflation has not eased."

In other words, commodity prices around the world are high because desperate western countries are using loose monetary policies to stimulate their economies.

China has set an annual inflation ceiling at 4%. But its consumer price index hit a three-year high of 6.5% in July.

The incomes for taxi drivers in China are getting squeezed by higher gas prices and government-controlled taxi fares.

Some commodities, especially food, are rising at even a faster pace. In just the last 30 days, the price of spinach has shot up by 31% and lettuce by 27%. Over the last year, eggs are up 16% and edible cooking oil is now 21.8% higher.

Inflation isn't the only byproduct of Bernanke's printing press ...

One of China's top officials warned: "Not only is the European debt problem worsening and spreading, the U.S. and Japan's debt problems are also worsening" and that the debt crisis in the euro zone is "deteriorating and spreading."

What Does All this
Mean to Investors?

Despite China's best efforts, it is fighting a losing battle because Bernanke is as blind as Mr. Magoo when it comes to inflation. And unless you think that American policymakers will suddenly act responsibly, you need to invest accordingly.

Here are four steps you should consider taking now:

#1 Raise Cash

In February, I instructed my Asia Stock Alert subscribers to reduce equity allocation and build up a 38% safety net of sleep-at-night cash. How much cash is a very individual decision but 'significant' is the right answer for everyone.

#2 Find a Safe Place to Park

My favorite parking place is the Merck Hard Currency fund (MERKX) which invests in the short-term AAA debt of the world's economies with the strongest economies and monetary policies. This fund is essentially a non-dollar money market fund with very low volatility.

#3 Bet Against the Dollar

If you are more aggressive and want to profit from the ineptness of the Federal Reserve, take a look at PowerShares Deutsche Bank U.S. Dollar Bear ETF (NYSE:UDN). This is an ETF that is designed to track the Deutsche Bank Short U.S. Dollar Index (UDSX) Futures Index, a benchmark composed solely of short U.S. dollar futures contracts. These futures contracts are designed to replicate the performance of being short the U.S. dollar against a basket of six major currencies.

#4 Bet on Gold

Inflation + incompetent U.S. policymakers = higher gold prices. I currently am not recommending gold to my Asia Stock Alert subscribers. But the long-term trend for gold is certainly higher. So you should add some haywire insurance to your portfolio when gold goes on sale.

[Editor's note: Tony travels throughout Asia, looking for profit-packed opportunities for his Asia Stock Alert members. Click here to see how you can join them, risk free!]

Lastly, I'm not suggesting you sell EVERY stock you own. Stocks in the natural resource/commodity industries have very bright futures. And overweighting your portfolio with stocks that are denominated in currencies such as the yuan, yen, won, ringgit, rupiah, and baht could be your best equity bets going forward.

Best wishes,

Tony

China's Transformation Into A Consumer-Driven Economy

Tony Sagami — Fri, 29 Jul 2011 17:23:00 GMT

It is an old statistic but one that investors should never forget: Roughly 70% of the U.S. economy is comprised of consumer spending. That is the money that you and I spend at the grocery store, the shopping mall, at car dealerships, and at our favorite restaurants.

The problem for the U.S. economy is that 'we' aren't spending much.

Retail sales in June were $387.8 billion, according to the Commerce Department. That's a pathetic 0.1% increase from the previous month.

Six of 13 major categories showed a decline in sales last month. Gas stations led the way, falling 1.3% ... furniture/home furnishing, dropping by 0.8% ... leisure goods (sporting, book, music stores), decreasing by 0.7% ... and restaurants, losing 0.4%.

That lack of spending is the result of a combination of weak housing prices and the unemployment rate remaining stubbornly above 9%.

The latest Bloomberg Consumer Comfort Index shows that only 8% of Americans characterized the economy as positive. Even Ben Bernanke recently admitted to the Senate Banking Committee that "confidence is pretty low" among consumers.

The Wall Street crowd and CNBC experts keep telling you that things are going to get better, but I sure don't see it.

But maybe I'm wrong. Maybe the Obama administration will stop spending money it doesn't have, Ben Bernanke will stop printing money, and the U.S. economy will bounce like a Super Ball.

The Asian Investment No-Brainer

The way I look at it, you can cross your fingers and hope that our consumer-lead economy rebounds ... OR ... you can invest someplace where the consumers are happy, confident and spending.

I'm talking about Asia in general and China is particular.

Here is a short video clip I took last week at the downtown Kuala Lumpur Sogo store, a popular, Asian high-end department store. As you can see, it is PACKED with shoppers!

That same spendathon can be found all over Asia, including China.

FACT: China's retail sales increased 16.8% in the first six months of 2011 and by 17.7% in the month of June.

There is simply no comparison to the measly 0.1% increase in the United States. Obama and Bernanke would do CARTWHEELS if the United States were enjoying a fraction of that prosperity.

The confirming signs of prosperity in China are easy to find. In just the last couple of days:

Sure Sign #1: Apple has been on a big-time roll, and a large part of its success is booming sales in China. Apple just reported that its greater China (China + Hong Kong + Taiwan) sales increased by more than 600% in the last quarter to $3.3 billion.

Here's what Apple COO Tim Cook said about his company's sales in China:

"China was very key to results. The region now contributes roughly 13.3% of Apple's total third-quarter revenue of $28.57 billion, compared to less than 4% in the year ago quarter.

"This has been a substantial opportunity for Apple, and I firmly believe we are just scratching the surface right now."

Sure Sign #2: CapitaMalls, the retail arm of Southeast Asia's biggest developer CapitaLand, reported a 100% increase in quarterly profits, jumping from $82.1 million (Singapore dollars) to $164.9 million. How? From rising traffic and sales at its shopping malls in China.

Sure Sign #3: Luxury goods company Burberry reported a 34% sales increase for its most recent quarter thanks to a 60% jump in Asia-Pacific sales. Burberry opened 50 new retail stores in China in the last 12 months.

Sure Sign #4: General Motors reported a new all-time high of 1.27 million autos sold in China for the first six months of this year.

Sure Sign #5: Yum! Brands, the operator of Pizza Hut and KFC restaurants, has more than 18,000 locations outside the United States.

The company attributed its 18% increase in China sales as the reason it beat the pants off of its quarterly profit forecasts. Business in China is so good that Yum! Brands opened 90 new restaurants in the last 90 days.

I could tick off another dozen examples, but I think you get the point. More importantly, the strong consumer spending in China, if anything, is going to get even better.

A recent Boston Consulting Group report forecasts China's fashion market to triple in size to more than $200 BILLION over the next 10 years.

"Per capita consumer spending in China is still in the early part of the penetration curve compared with that in mature markets, giving China the potential to become an even more significant fashion market," the report said.

China's Consumer Revolution
Isn't An Accident

The Chinese economy is undergoing an intentional MONUMENTAL transformation from an export-dependent manufacturer of low-margin trinkets to a consumption-driven economy powered by its own internal growth.

China's leaders don't like being dependent on the west for its exports, so it is intentionally focusing on growing its internal domestic demand.

China's 12th Five-Year Plan (2011-2015) prioritized more equitable wealth distribution, increased domestic consumption, improved social infrastructure, and social safety nets. The plan is representative of China's efforts to shift its emphasis toward domestic consumption.

You see, wages in China have been growing by around 12% a year in real terms over the last decade. That is making Chinese exports more expensive, especially compared to other lower-wage Asian neighbors like Vietnam and Cambodia.

Just like the United States lost factories to lower-wage China, China is now losing some of that low-margin, labor-intensive, export-oriented manufacturing that had been the base of its economic growth over the last 20 years.

I saw the proof with my own eyes during my last visit to Yue Yuen Industrial Holdings, the largest branded athletic shoe manufacturer in the world. It produces tennis and casual shoes for Nike, Adidas, Reebok, Asics, New Balance, Rockport, Timberland, and Puma.

I learned that this Chinese company was moving some of its manufacturing facilities to Vietnam to save on labor costs.

The Wall Street Crowd
Doesn't Get It

The Wall Street crowd doesn't get this shift. For example, when the HSBC China Manufacturing Purchasing Managers Index fell to 48.9 in July, my clueless competitors assumed that this was a sure sign that the Chinese economy was headed for a painful fall.

Wrong! The manufacturing sector is slowing down, but the consumer sector is more than making up the difference. If you understand that simple yet key concept, you won't have any trouble finding great stocks to invest in.

What you need to do is get 'long' whatever the Chinese are buying. And when it comes to Chinese consumers, all it takes is a walk down any major street to see what's hot.

I see more Louis Vuitton handbags in Beijing than I do in Boston. I see more Apple iPhones glued to ears in Shanghai than in Seattle. And I see more customers lined up at KFC stores in Hong Kong than in Houston.

Those are just a few of the examples of western companies that are doing gangbuster business in Asia and carting wheelbarrows of profits to the bank.

If you're more of an exchange traded fund (ETF) kind of investor, here's one worth your consideration: The Global X China Consumer ETF (CHIQ). CHIQ is packed with China's most successful retailers.

Don't make the mistake of investing in any stocks that are dependent on the U.S. consumer to bail them out. It ain't going to happen.

What you need to do is invest where the shopping malls are packed and the consumers are confident, happy, and spending. That, my friend, is across the Pacific Ocean.

Best wishes,

Tony

P.S. If you haven't seen my video event on hidden Asian profit opportunities, then you're doing yourself and your loved ones a disservice. The investment analysis, strategies and reasons I give you in the video are invaluable, and quite simply, they could make your entire year for you.

Click here and it will begin playing immediately.

2 ETFs to Play China's Inflation Problem

Tony Sagami — Fri, 18 Mar 2011 16:00:08 GMT

On March 2, I wrote about the uncomfortably rapid increase in food prices and how you could profit from the forthcoming food inflation boom. I said:

“Over the last year, global food prices have increased by 29% partially due to weather shocks such as the Russian drought and floods in China. The real culprit is just old fashioned booming demand as the growing middle class in emerging markets, like India and China, simply are eating more and better.”

Stock market investing is always a moving target, so you have to regularly re-check your investment thesis to make sure that the fundamental drivers behind your strategy remain in force.

So let’s look at China’s newest inflation numbers, see if they are a problem and if they are getting worse.

The Chinese National Bureau of Statistics reported that its consumer price index rose 4.9% in February. That was a little worse than expected and it is identical to the January number. The details behind that headline number, however, paint a more ominous picture.

The government’s target rate is 4%, so the current figure means you can expect more foot stomping on the inflation brakes.

The Producer Price Index, or wholesale inflation rate, jumped to 7.2% in February. For the first two months of this year, PPI is increasing at a 6.9% annualized rate.

Food prices surged 11% on an annualized basis in February. That’s way above the comfort zone and high enough to cause some serious hardship.

Food isn’t the only commodity going nuts. Non-ferrous metals and fuel were up 14.8% and 8.9%, respectively.

I think the most-alarming news was that the government of China lowered its GDP growth target down to 7% for 2011. That is well below 2010’s 10.3% growth, and more importantly, tells me that China’s leaders are going to take some drastic and perhaps even painful action to kill off inflation.

Chart: The Wall Street Journal

Don’t take my word for it. Listen to what two Chinese leaders had to say:

HINT #1: “Following our economy’s successful recovery from the global economic crisis, inflation has also risen. In this situation, interest-rate policy is definitely an important tool that needs to be used,” said People’s Bank of China Governor Zhou Xiaochuan.

ACTION #1: China has already raised interest rates three times since October and steadily ratcheted up the share of deposits banks must hold in reserve to 19.5%.

But Mr. Zhou is pretty clear that more interest-rate hikes are on the way. Do you remember that old Wall Street adage about three steps and a stumble OR don’t fight the Fed?

For decades, academics and investment experts warned that the stock market was headed for trouble once the Fed embarks on a restrictive interest rate policy.

China isn't the only country worried about inflation.

It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term. The governing council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialize.

— European Central Bank President Jean-Claude Trichet

There is no doubt that inflation is the most important issue which is to be addressed adequately.

— India Finance Minister Pranab Mukherjee

The increase in inflation that Russia has seen since the middle of last year has gone beyond the supply-side shock driven by the drought. We are currently updating our macro projections for Russia, and it is likely that the 2011 inflation projection will be revised upwards.

— International Monetary Fund

HINT #2: In a speech to open the annual National People’s Congress, Premier Wen Jiabao said the government would “make it our top priority in macroeconomic control to keep overall price levels stable.”

ACTION #2: On top of raising interest rates, China has raised down-payment requirements and instituted new property taxes. It has yet to use the biggest arrow in its quiver, which is to start using price controls.

You see, the Communist party runs a command economy and can do whatever it pleases. The fastest way to kill inflation is to make it illegal to raise prices.

The situation in China is pretty clear. Inflation is indeed a problem and China’s leaders are ready to take some serious action. I expect two things to happen as a result: (1) the Chinese economy is going to slow down and (2) China’s leaders may be able to slow inflation down a little but it won’t be able to stop it.

If those two scenarios are correct, there are two exchange traded funds that could do very well.
Lowering the 2011 GDP forecast to 7% already confirms that the Chinese economy is slowing, but if is slows significantly more than that, the Chinese stock market could be headed for a rough patch.

The ProShares Short FTSE Xinhua China 25 (YXI) is an ETF that’s designed to deliver the inverse of the daily performance of the FTSE China 25 Index. If China stocks slide, this ETF makes money.

Investing in inverse ETFs is a risky strategy, and betting against the Chinese economy has proven to be a dangerous bet. Therefore, this ETF isn’t appropriate for everyone. Heck, it isn’t appropriate for MOST investors, so think twice before you climb into this fund.
We live in a global economy, and even though China is trying to cool down its economy/inflation, most western countries are trying to inflate themselves out of their economic funk. Most European economies are struggling, and the spendthrifts running our country seem to have an unlimited capacity to print money.

The Global X China Materials ETF (CHIM) invests in companies that provide materials and commodities such as Zhaojin Mining, Jiangxi Copper, Shanghai Petroleum, Yingde Gases, Zijin Mining, Real Gold Mining, Sinofert Holdings, and Angang New Steel.

As you know, timing is everything when it comes to investing, and I am not suggesting that you rush out and buy either of these ETFs tomorrow morning. Do your homework and decide for yourself if these are appropriate for your personal situation, tolerance for risk, and especially whether or not you see inflation becoming a problem or not.

Best wishes,

Tony