How to Profit From the Sinking US Economy and Rise of Emerging Markets
Stock-Markets / Emerging Markets Jun 10, 2008 - 08:08 AM GMT
Martin D. Weiss writes: Last Monday, my mission was to bring home the vital importance of The Great Dichotomy — the unprecedented contrast between the sinking ship of the U.S. economy and the rising tide of emerging markets.
Today, my mission is to show you ways to profit from both. And as the events this past Friday clearly illustrate, the timing couldn't be more critical:
- The record surge in U.S. unemployment — the worst in 22 years — signals a swifter slide into recession than any government indicator we've seen so far.
- The record surge in crude oil — the biggest of all time — promises to gut household budgets and squeeze the profit margins of thousands of U.S. manufacturers that use petrochemicals to produce their products.
- The nonstop plunge in home prices promises to deliver a deeper and longer lasting recession than virtually anyone on Wall Street dares admit in public. And ...
- Friday's 393-point nosedive in the Dow could be just the first salvo of a major attack on U.S. stock portfolios.
The most convenient vehicles to profit from this decline are inverse ETFs. Two examples:
- Short Dow30 ProShares (symbol DOG), designed to appreciate 10% for every 10% decline in the Dow Jones Industrial Average. On Friday, for example, while the Dow plummeted by 3.13%, DOG surged 3.15%.
- UltraShort Real Estate ProShares (SRS), designed to go up in value by 20% for every 10% decline in the Dow Jones Real Estate Index. This ETF's performance was far better than DOG's — up 8.62% on Friday alone.
Meanwhile, emerging markets are booming, with China acting as the lead locomotive. And fortunately, that's where our Asia expert Tony Sagami has been since June 1.
Last week, he called to give me an urgent briefing, and he also called again later to give me some more details. Here's an abbreviated transcript combining key portions of both calls.
Urgent China Briefing
by Tony Sagami
(Edited Transcript)
Tony Sagami: I just got back from visiting a major battery company. I was up bright and early, jumped on the Hong Kong Metro system, transferred to the old Kowloon-Canton Railroad, crossed the border into China, and hired a driver to take me out to one of the many industrial suburbs of Shenzhen. Even though it was bumpy, dusty and hot, it was well worth it.
I've been following very closely the sector I call "electronic doodads" — cell phones, MP3 players, Bluetooth devices, digital cameras, camcorders, laptop computers. The world is awash in these things, all of which need a battery to power them. So the company I just visited was one of the largest battery makers in China — and one of the most exciting opportunities I've run into in a long time.
Martin Weiss: Is that their bread-and-butter business?
Tony: Yes, it's kind of a pick-ax-and-shovel thing. You and I can argue about which is the best cell phone company to own or what's the best personal computer maker. But one thing they all need is that battery to power 'em. So just like the companies that sold pick axes and shovels to the forty-niners who were mining for gold, this company is selling batteries to the makers of all those electronics that our world can't live without.
And remember: In the gold rush, most prospectors never found gold. The true gold was made by companies like Levi Strauss who sold them supplies and made a fortune. This is the same thing.
Plus, most of the major battery makers in the world are in South Korea and Japan — countries with high wage bases, similar to what we have in the U.S. and Europe. But, as you well know, China has been stealing market share because of their low wages and low cost of production. In this case, it's no different. Japan and South Korea can't compete against the low- cost battery producers in China.
Martin: There's talk that wages in China are going up also. Will that have a negative impact?
Tony: At the turn of the century, a third of China's population was living on less than a dollar a day in income. Today, that number is down to below 20%. That's an improvement, but the wages here are still darn cheap. So you're really splitting hairs. Besides, companies like this one are combating that by moving their production facilities away from the expensive coastal cities into the cheaper interior of China, where wages are still dirt-cheap, the same as it was 10 to 15 years ago.
Martin: Tell us more about your visit.
Tony: My basic premise is I can look at financial statements from my home in Montana or the guys from Wharton can do it in Manhattan. But all that analysis does is to help you avoid making mistakes. It doesn't help much to find the big opportunities or to make the money. For that, you actually have to go there and kick the tires.
Martin: And that's what you did.
Tony: Yes. I got to this company a little early. So I walked around the office campus and poked around a bit. The first floor was packed with meeting rooms — and I was disappointed to see that every single one was packed with people. My first thought was, "Crap, everybody from Wall Street is already here."
Finally, my host took me up to meet the CFO, and I asked him about it. He laughed and said: "Oh, Mr. Sagami, those aren't people from Wall Street. Those are customers." That put a big smile on my face, because it meant I had found a company that has fallen underneath the Wall Street radar. More importantly, any company that has that many customers packed in its meeting rooms must be sitting on a landslide of business.
The CFO told me two of their competitors — LG Chemical, which is a South Korean company, and Sony — have had fires at their battery plants. LG was expected to come back online in a month or two, but he didn't think the Sony factory would open this year at all, resulting in a global shortage of batteries for laptop computers. And if you've read some of the research, you'd know the laptop market is outperforming the desktop PC market by leaps and bounds. So that acute shortage is a windfall of new business for Chinese battery makers that can quickly increase production.
Here's another example of something you would never see unless you were there: They took me on a tram tour of their campus, but they were bypassing Building #4. So I asked, "What's in Building #4?" He said, "You don't want to see that, Mr. Sagami. There is nothing in there but construction workers. Because of the fires at LG and Sony, we're ramping up our laptop battery production to double our capacity by the end of the year."
I insisted on taking a look, and sure enough, there they were — masons, electricians, drywall installers — all working like the devil to get this facility open and meet that big shortage of laptop batteries.
Bottom line: Three, four, five months down the road, I think you're looking at a big earning surprise.
Martin: I assume that when you get back to the U.S., you're going to issue a special report on it.
Tony: Absolutely. I'll be back next week and you will hear from me shortly with my recommendation after that. Plus, I'm going to write about another big driver of this battery business: The surging price of oil.
Martin: Please connect the dots.
Tony: Battery-powered electric vehicles — the hybrids — are going to be selling like crazy. And they have a new plant opening later this month that specializes in batteries for electric hybrid vehicles.
I knew they were in talks with one of the big three U.S. automakers. I also knew they've been talking to a Chinese auto manufacturer. But here's one thing that surprised me. They told me they're also talking to Japanese automakers; and if you take a look at the sales figures, you'll see that Japanese automakers are killing the U.S. makers.
If they can add one of the Japanese auto giants to their client list, they're going to do extraordinarily well in that hybrid vehicle market. I don't know which one it is, but I think it's only a matter of time. So if you're looking for a stealth play to get in on the energy boom, I think this battery company could really pay off in spades from these high energy prices.
Martin: A lot of people are talking about $150, even $200 oil.
Tony: The price of oil is going to bounce up and down just like the stock market does. But two, three, four and five years from now, will oil be higher than it is today? My answer is "Absolutely."
Martin: Tell us what other companies you're visiting this week in China.
Tony: The hard part is which companies not to see because the opportunities are that amazing. In the U.S., all we hear about are the subprime loans, house prices going down, weak corporate earnings, a decline of the dollar. So you get conditioned to think things are not so good.
But when you come here, you hear the exact opposite — booming retail sales, rising GDP, expanding capacity, economic growth, prosperity, rising wages. The only negative I run into is complaints about rising food prices. But not oil. They're more concerned about the price of a bushel of wheat than they are about a barrel of oil.
So in this environment, I see several additional opportunities:
Number one is the gaming industry. Until a few years ago, people were not allowed to freely roam around China. But now they can — and one of the places they're going in droves is Macau, the only place in China where gambling is legalized. And like in the U.S., the casino business is virtually a license to print money. There are four publicly traded casinos that operate in Macau, and I'm going to visit all four to find out exactly which one is the best opportunity.
Number two, I'm also going to visit one of the largest tennis shoe companies in the world. I'm not talking about Nike, Adidas or Reebok. This is a different company that does business with all of those, while also selling their own brand. And now, with the Beijing Olympics coming up, they have some very lucrative endorsement contracts, and I think this company could be one of the biggest winners there.
Martin: Very few people think about shoes these days.
Tony: My teenage kids sure do. I've bought enough $100 tennis shoes in my life to make me faint ... and it's the same thing over here. There are some things that teenage kids just love to buy, and brand-name shoes are one of them. The tennis shoe company is almost like the battery company. You're not betting on which big brand-name company is going to win the tennis show wars. They make tennis shoes for almost everybody.
Number three: In Shanghai, the two largest buildings are Pearl TV Tower and the Gamow Tower. And in-between them is a vacant piece of land that has been called the most valuable piece of real estate in Asia. I'm going to meet with the company which owns that land and then find out what they're going to do with it.
Given their track record of successful developments all around China, I suspect it's going to be a big winner, but I want to find out for myself. Recently because of some internal family turmoil, one of the siblings was kicked off the board of directors and that has depressed the stock price. I want to find out if that is a problem or an opportunity, and I'll know after I talk to the executives.
Martin: How have you done so far with these kinds of stocks?
Tony: Very well. In my Asia Stock Alert , we've recommended many that are up by double digits and a few that have gone up by triple digits. And I think it's just the tip of the iceberg.
Martin: But it's not a straight up situation, especially when you're looking at individual stocks. I assume you've also had some losers. Could you tell us about those as well?
Tony: Typically, the losers happen because of our disciplined stop-loss approach. The purpose of a stop loss is not to make you money. It's to help prevent a small loss from turning into a large loss.
Martin: Do you have a stop loss on every single recommendation?
Tony: On most of them. There are a few that I feel so strongly about that I don't want to get stopped on. For example, New Oriental Education — the Chinese company that teaches English to Chinese. I don't have a stop loss on that stock because I want to hold it for three, five, 10 years. Peter Lynch talked about 10-baggers, stocks that could go up by as much as 1,000%. I think New Oriental Education is that type of company.
Martin: Would you recommend going out and buying it immediately?
Tony: As my father used to say, buy your straw hats in January . In other words, wait for the price to come down. So I think your best bet is to wait for my next signal.
Martin: When are you going to be issuing your next signal?
Tony: Friday, June 13. In that issue, you'll get my newest recommendation plus an update on all my previous positions with specific buy targets.
Martin: OK. In addition, can you give us a sampling of something you've already recommended?
Tony: Sure. When you walk around on the streets of China, it often seems like people have a cell phone surgically attached to their ear. Everywhere you go, people are yacking on the phone or typing out text messages. As a matter of fact, text messaging is so popular in Asia, there's been a giant surge in carpal tunnel syndrome.
China Mobile is the leading provider. The company has more subscribers than the U.S. has citizens!
Most Chinese don't make enough to afford an individual computer. So their cell phone is their vehicle for accessing the Internet. Once you understand that very simple dynamic of the cell phone in Asia, you'll understand why China Mobile is such a great opportunity.
Martin: What about this one? Buy now or wait for your signal?
Tony: I have a specific buy target for new investors who are coming onboard. It hasn't hit my target yet. But if you're patient, I think you'll be able to buy it at a cheaper price and do extremely well.
Martin: Any others you're excited about?
Tony: This year, I recommended Yum Brands, which is the operator of KFC, Taco Bell and Pizza Hut. A lot of people don't realize it, but there are over 2,000 KFCs and Pizza Huts in China alone, and they expect that number to grow to 20,000 by 2015.
I don't buy the pizzas over here because they have some funky toppings on them, like sea eel, tuna fish, sushi and some other mystery meats I can't identify. But the Chinese love that. In contrast, McDonald's has not been as successful because it hasn't done as good a job localizing the menu.
Martin: So you're also looking at U.S. companies that have a big business or a big opportunity in Asia?
Tony: Yes, Yum Brands gets more than 50% of its revenues outside of North America. I think it's a good way to play the Chinese yuppie, or "Chuppie" boom.
Martin: Looking ahead now, where do you see the big future opportunities? Where is your Asian Stock Alert going to look where others have not?
Tony: As I see it, there are two types of companies in China. There are the old, stogy, state-owned enterprises often promoting the goals of the Communist party rather than those of shareholders. Many are corrupt, inefficient and bloated with middle and top management. For the most part, I think they're just the wrong companies to invest in. But because they're large and have a big capitalization, it's where Wall Street and mutual funds flock to.
These companies may still offer some nice trading opportunities. But the stocks you want to invest in for the long term are the ones operated and managed by the entrepreneurs working 60, 70, 80 hours a week to grow their business.
I also like the rest of the domestic manufacturing sector. That's where I see the great opportunity to tap into a Chinese middle class that's growing like crazy.
Martin: Is that the major theme you focus on?
Tony: No. Just one of three major themes. Another is the great real estate boom. Here's a fact that may shock you: Did you know that in 2007, 80% of all home purchases in China were paid for 100% in cash? No borrowing or mortgages whatsoever! That might sound unbelievable to Americans. But we're talking about a country where young people typically live with their parents until they can afford to buy a home outright. And we're talking about a country with a savings rate in excess of 25%.
So they don't have the same subprime real estate woes that we have. As a matter of fact, prices are still rising very handsomely because of one of the largest human migrations in history, which continues unabated: Thousands of new residents pouring into the coastal cities daily.
The third theme I highlight is this: You should buy what the Chinese are buying — gold, oil, natural gas, copper, and food. That's what they need to fuel their economic growth ... and that's also where you can make some of the best money, in my view.
Martin: How does an American investor buy Chinese companies?
Tony: A lot of people don't realize it, but over 100 Chinese companies are listed on the NYSE and the NASDAQ. You don't need to open an exotic trading account in some offshore country to invest in these opportunities. You can buy them from the comfort of your own PC and use your own discount broker. It's as easy as buying a share in IBM, Microsoft or General Electric.
Martin: But your service goes beyond China, right?
Tony: Yes, I cover all of Asia. For example, a lot of people forget about Taiwan. But in 1949, China's entrepreneurs, business leaders and professionals fled to Taiwan, which now has a strong entrepreneurial spirit woven into its DNA.
Taiwan is home to many prosperous technology companies, and what's especially encouraging is the recently elected new president who is very committed to improving relations with China, potentially unleashing one of the greatest peace dividends of all times.
I'm also very impressed with Singapore, the Switzerland of Asia — where rich Asians typically go for their private banking or to open offshore secret accounts. In fact, the privacy laws in Singapore are much stricter than those in Switzerland. Singapore is the financial capital of Asia, and it's growing like mad.
Martin: How long are you going to be in Asia this time and what are you going to do when you come back?
Tony: I'll be back next week. I'll talk to some suppliers, vendors and customers to make sure my observations in China are on target. Then I'll issue my recos on Friday, June 13, including my best ideas from this trip.
Look. In 2007, the Chinese economy grew by 11.9%. That's the fastest growth rate in a decade, and that's after five years in a row of double-digit growth. But we are still only in the third inning of a very prosperous 9-inning economic ball game.
Martin: What about the recession in the U.S.?
Tony: I'm in the camp that the U.S. is already in a recession and it's going to get worse. But whether you believe that or not, no one can deny that the U.S. economy is growing very, very slowly — a meager 0.9% in the most recent quarter. So even if you're among those who think the U.S. economy is not going to slow down any further, you're talking about at least ten times faster growth in China.
So if you really want to make some money in the market, I believe you've got to include some Asian spice in your portfolio, and that is why the opportunity is so great over here.
You know, every time I've gone to Asia, I've come back with one or two ideas that have been big home runs — and I don't expect this time to be any different. Like with any investment, the past is no guarantee of the future. But the market here has just undergone a correction and I think the timing couldn't be better.
Martin: Thank you very much, Tony. We look forward to getting the write-up as soon as you get back from China.
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