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There were many investment trends that we followed and profited from this year, and while some have run their course, others will continue through 2008. One of these just happens to be the 2008 Beijing Olympics, now less than a year away.
Of course the Chinese are working hard to make sure that everything is perfect for their debut in the world's spotlight. But recently, I've been listening to the news reports and bloggers go on and on about the Beijing Olympics and how the completion of the games will bring death to the Chinese economy. I couldn't disagree more and want to take this opportunity to put that argument under a microscope and see what's really in store for China's economy post-Olympics.
First of all, let's not forget that China's economy has been growing at about 10% for two decades. And believe it or not, this amazing growth spurt has little to do with the 2008 summer Olympics. The simple truth is that in China there is more innovation, technology, labor, financial capital and time (from people living longer) than ever before, and I expect these trends to continue regardless of how successful the Beijing Games are! China's booming economy is simply too hot to slow down after the Olympic flame is extinguished. There are just too many catalysts driving China's growth and few of them depend on next summer's games.
The Fed's decision last Tuesday to cut both the Fed Funds Rate and the Discount Rate by only 0.25% disappointed many investors who expected a more aggressive cut of 0.5%.
The rate cut announcement caused the market to sell off sharply. The Fed believes that inflation is still a threat, and as a result chose to be more conservative with rate cuts. Without a doubt, there's strong inflationary pressure in the U.S.—we found out last week that wholesale inflation increased by the largest amount in more than three decades.
After last Tuesday's rate cut disappointment, the Fed revealed a plan to team up with other central banks around the world to supply a coordinated liquidity injection that will provide a $40 billion swap line to U.S. banks. Given the severity of the credit problems we're experiencing right now, I believe that a liquidity injection alone won't enable banks to make the money they need to get back on a growth track. I think the Fed's conservative stance has halted the chance of a further year-end rally.
The market is looking murky at the moment, and in the next two weeks it could go either up or down.
Which country do you think will be the dominant economic superpower in the 21st century?
I ask this question a lot in my global investing seminars. The most popular answer is usually China, followed by the U.S., and India sometimes gets a few votes.
For much of the second half of the 20th century, the U.S. accounted for more than 40%—sometimes approaching 50%—of the world's total economic production. In other words, the U.S. economy was almost as big as the rest of the world combined. In the past five years, however, a 38% decline in the U.S. dollar and the superior growth of newly-emerging economies is changing the global distribution of economic power.
China and its neighbors, like Russia, Taiwan, South Korea, Singapore and Malaysia, will probably evolve into a new Asian economic bloc. It's likely that this fast-growing region will become the new global epicenter of wealth creation in the 21st century. There will be many investment opportunities throughout the region that are shielded from the economic problems of the U.S.
The stocks in our China Strategy portfolio fall into this category—many of them are already trading higher than they were before the November sell-off. Do you want to own companies that bounce back quickly?
Black Friday has been around since 1970s, but it hit the mainstream in a big way in 2002 and since then it has given institutional and private investors alike an important temperature reading on the market and what can be expected for the fourth quarter. Recently, another gauge has been added for investors—it's called Cyber Monday, and, for those who may not be familiar with it, this day falls on the Monday following Thanksgiving. While shoppers hit brick-and-mortar stores on the Friday after the holiday searching for deals, they go online on Monday to scour websites for further markdowns.
It was uncertain if shoppers would log on for "Cyber Monday," but they showed up in force and they opened their wallets to the tune of $733 million. Many analysts were closely watching retail sales from Black Friday and Cyber Monday to see what sort of mood consumers would be in this holiday season.
I'd like to talk about what these numbers, as well as a few others, are pointing to for the end of 2007. I think you'll be surprised by my conclusions, but hopefully you'll get a better idea of how the markets will perform through the end of the year—
I don't normally pay attention to commentary on U.S. economic trends from super models, but Gisele Bündchen made a statement recently that I couldn't agree with more.
Gisele announced that she will no longer accept U.S. dollars as payment for her modeling services. Most people would dismiss this remark as the latest celebrity attention-grabbing move, but this is actually similar to what I advise you to do as well. Now I doubt that your employer is willing to pay you in euros like Gisele, but you should be looking to invest in companies that have assets not valued in U.S. dollars.
To put into perspective how far the dollar has fallen, you have to compare it to other currencies. In October, something happened that hasn't occurred since 1976. That was the year that one "loonie," or Canadian dollar, was equal to one U.S. dollar. Just like last time, Canadians are finding that goods are much cheaper to buy in the U.S. because their loonie can buy so much more than it used to.
Since we're more focused on investments in China, let's see how the dollar stacks up there. The Chinese yuan has climbed more than 10% versus the U.S. dollar since the end of a fixed exchange rate in July 2005. This gives holders of companies with yuan-denominated assets an immediate 10% bonus because the value of their holdings didn't drop with the dollar. The China Strategy portfolio is loaded with companies that own yuan-denominated assets—
I recently heard someone compare investing in China to "the Wild West." This is actually a very accurate description. China is the new frontier of investing, and it's a dangerous place for people who don't know the financial landscape. But for those of us who know the financial terrain, the culture, and have spent years investing in the region, China is a gold rush for investors.
A major driving force behind the Wild West analogy is the booming IPO market. I get asked about these types of investments all the time. There have been quite a few of them over the last two years, and there's likely to be many more to come.
One of the questions that I get most often from investors is "How can we tell if a newly offered China stock is worth buying?"
Evaluating an IPO is probably more of an art than an exact science. Because I've been doing it for so long, I've developed a rigorous process of evaluating these new listings.
It means big profits—fast—for China Strategy subscribers. Interested in learning more about these winning IPOs delivering large and rapid gains?
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