The R word

Aren't we already in a recession? I mean if you take nominal GDP - CPI = real GDP. Which at this point is close to 0%- the economy already "recessing" from the more normal 3-4% long term GDP growth. Strong employment was the only thing that held up in this economy and that picture is looking bleak, figuratively and literally.

However, the international industrial companies are doing quite well. Honeywell, 3M, GE, United Technologies, Textron are all doing quite well. The weak dollar definitely help the exports and international business. Could it really be that the rest of the world are "decoupling" from the U.S.?

China has built quite a huge foreign reserve in the last couple years- now all of those reserve are being deployed in finding energy resources (look how aggressive the Chinese oil companies are in acquiring foreign oil companies- Sinopec/CNOOC) and infrastructure building- these are capital investment that flow back to the economy. Can it be that China and other developing economies can hold up (because of infrastructure investment) while U.S. is slacking?

China ripes for future growth

In with the new (capitalism), and out with the old (communism).

After reading Jim Rogers' book on China, I couldn't agree more.

China in its current state, is a producing country. Because of its vast cheap labor and geographic location, China became an ideal location for all types of manufacturing activities. The rise in economic activities brought urbanization to the country. I can't help but think that China in its current state is much like the U.S. back in 1920s. The U.S. then was producing cars, oils, steel, and other commodities. And after WWII, the U.S. slowly became a consumption based economy as everyone moved into the big cities, standard of living rises. And that is exactly what is happening in China now.

Urbanization and economic prosperity will create the new middle class in China. China will then turn into a consumption base economy. As the standard of living rise in China (which will cause a rise in workers' compensation), even the Chinese companies would have to look elsewhere for cheap labor (southeast Asia- Vietnam, Cambodia, or Eastern European countries). This type of economic activities will continue to pass on as companies continue to seek cheap labor. Countries with political stability will follow the footsteps of China- just as how China followed the U.S.

This economics "pass-thru" from country to country is nothing new. There was the Dutch before the period of colonization. Then there was the British during the period of colonization. After the British, it was the U.S.- I can't help but think China would be the next stop. This is a cycle, a capitalism cycle if you will. As companies seek cheap labor and resources to produce, they will go to the countries with the best conditions (political stability). And once the investment pours into that country, the country would prosper. As the country prospers, the standard of living rises- which will cause an upward swing in wages and prices for resources. That country will no longer be competitive for manufacturing activities and it would then turn into a consumption based economy- the manufacturing activities would then move to its next target- benefiting that country the same way it did for the previous country.

Get a slice of the China Madness

http://finance.yahoo.com/q?s=caf
MORGAN STANLEY CHINA (CAF)
Prospectus:
http://www.morganstanleyindividual.com/Markets/IPOCenter/Prospectus/?DocID=p_CAFMS

This close-end fund allow you to invest in the China A share market. Unlike many other funds that invest in China, which most of them are buying H share (Chinese companies that are listed on Hong Kong Exchange). Currently, only Chinese citizens and qualified institutional investors are allowed in investing in China A share. Be extremely careful, that the Chinese stock market (A share in particular) is extremely over-valued by traditional metrics. The fund is also very thinly traded (avg vol: 400k). This makes CAF a extreme risky trading instrument IMHO.

I personally think FXI is a better way to invest in the Chinese market.
Prospectus for FXI: http://www.ishares.com/content/stream.jsp?url=/content/repository/material/prospectus/ftse_xinhua.pdf&mimeType=application/pdf

Here are the reasons why:
1. FXI is a index tracking ETF- low expense and not as thinly traded (avg vol: 6m)
2. The valuation is way more reasonable due to the fact the fund invest in ADRs/H share.

3,2,1..... CHINA!

We love China. Why? The Chinese stock market is making new high everyday. And if you were invested in Chinese equity in any way in the last couple of years, you should have done quite well.

Now, I have personally developed this stock market indicator. This indicator is quite accurate. It has accurately predicted the Tech Bubble of 2000. The indicator is called, my dad indicator. The best thing is, the indicator is free.

I remembered that my pop got very vocal about the market in 1999. He was complaining to my mom about selling stocks out too early, and not buying the next best stock. So, he took control of the family savings soon after. He bought some awesome companies. First, he bought Yahoo (Nasdaq: YHOO) at $200 a piece. Then he bought Lucent (Nasdaq: ALU) for about $60 a share. This was, of course, in the early 2000. Well, needless to say, not too soon after he made those trades, everything crumbled into pieces.



All of this bring me back to last couple days where my pop got very vocal again. He was constantly arguing with my mom. They usually argue about b.s. like most married couple, but these days, he was complaining about my mom management of the family savings (which is, for the most part, invested in Chinese equity through H-shares listed Chinese companies). He started to grill stock quotes every night. And he would flip through the finance pages of Chinese newspaper. He would make believe that he is the Chinese Warren Buffett.

I've recently suggested to my mom to buy into a Chinese railroad company (NYSE: GSH HKEX: 0525.HK). So she bought it and it went up about 12-15% since she bought it. It was a nice profit in a short period of time. Yesterday, my pop, would go through his usual routine and checks his stock quotes, and he would complain to me about how bad my pick had lagged the best performers (such as PetroChina NYSE: PTR HK: 0857.HK). I would simply ignore him and tell him to sell it and buy something else. Which he did.

Last Sunday, my pop read about a Chinese coal producer in a Chinese newspaper. The company name is China Shenhua (HK: 1088.HK) and the article in the paper mentioned UBS has just upgraded the stock and gave it a target price of 2x from where it is trading right now. My pop came into my room and inquired about the company. I pulled up the info. on the company real quick on Yahoo Finance and saw that the stock is trading at a P/E of 50. Immediately I said, "expensive, Google is only trading at 30-35 P/E, I would rather have Google if I want to pay that much." He would go on and complain about low P/E stocks never moves.

However, his question in the Chinese coal company got me thinking. As a commodity producer, your top-line revenue growth comes from the price you charge for the commodity you are selling. And the price is determine by the market/demand for the commodity. So it makes sense that a coal producer in China can be very well off because of China's rising demand for energy. Then it hit me like a brick: at a certain price point, it would become cheaper for coal consumers to import coal from other part of the world- this would limit the demand and price paid for Chinese coal. I'm no expert on coal, but the coal in China can't be THAT much better than coal from the U.S. right? So why would anyone pay a premium for a Chinese coal producer over a U.S. coal producer?

The poor Chinese citizens in China are only allow to buy Chinese stocks (A-share and recently H-share). So they don't have access to the U.S. stock market. Poor folks.

And looking at my pop and his recent behavior, I would say the Chinese stock market is closing in on a top (even if it's just a correction).